AMERISAFE, Inc. (AMSF) CEO Janelle Frost on Q1 2021 Results - Earnings Call Transcript

AMERISAFE, Inc. (NASDAQ:AMSF) Q1 2021 Earnings Conference Call April 30, 2021 10:30 AM ET

Company Participants

Vincent Gagliano - EVP and Chief Risk Officer

Janelle Frost - President and Chief Executive Officer

Neal Fuller - Chief Financial Officer

Conference Call Participants

Matt Carletti - JMP Securities

Mark Hughes - Truist Securities

Randy Binner - B. Riley Securities

Operator

Good day, everyone, and welcome to the AMERISAFE 2021 First Quarter Earnings Conference Call. [Operator Instruction] At this time, I would like to turn the conference over to Vincent Gagliano, Chief Risk Officer. Please go ahead.

Vincent Gagliano

Good morning. Welcome to the AMERISAFE 2021 First Quarter Investor Call. If you have not received the earnings release, it is available on our website at www.amerisafe.com. This call is being recorded. A replay of today's call will be available. Details on how to access the replay are in the earnings release.

During this call, we will be making forward-looking statements. These statements are based on current expectations and assumptions that are subject to various risks and uncertainties. Actual results may differ materially from the results expressed or implied in these statements if the underlying assumptions prove to be incorrect or as the results of risks, uncertainties and other factors, including factors discussed in today's earnings release, in the comments made during this call and in the Risk Factors section of our Form 10-K, Form 10-Qs and other reports and filings with the Securities and Exchange Commission. We do not undertake any duty to update any forward-looking statements.

I will now turn the call over to Janelle Frost, AMERISAFE's President and CEO.

Janelle Frost

Thank you, Vincent, and good morning, everyone. Since our February earnings call, the level of competition in workers' compensation has not changed. Approved loss costs continue to decrease, albeit at a slower rate of decline. There are reports of agents seeing slight rate increases in workers' compensation. However, I believe this is isolated to particular states and industry groups.

AMERISAFE has not experienced the ability to raise rates within our classes of business. Over all, insurance carriers are reporting shrinking workers' compensation premiums in part due to pricing and in part due to declining payrolls. Certain industries have not yet rebounded from the pandemic-related unemployment levels and continue to experience lower payrolls.

Economic conditions impacted our insurance payrolls, but I conclude to a lesser degree, given the industries we insure. Our high-hazard industries were deemed essential during the pandemic, and much of the work was performed outdoors. Driven by increasingly positive economic conditions, we have some optimism for the second half of the year.

The increasing number of vaccinations provide optimism for public health and for the economic outlook. In addition, the potential for an infrastructure bill being passed could positively impact the industries we insure. For example, the current proposed bill includes spending on highways, bridges and roads, which are right in AMERISAFE's wheelhouse.

We also saw other positive signs in the quarter. We wrote 4.4% more policies in the quarter compared to the first quarter of 2020. We saw improvement in our new business and continued to experience strong policy retention, of 93.4%, for those policies for which we offered renewal. Offsetting the policy growth was average loss cost declines of 7.7%.

Our ELCM for the quarter was 1.54, compared to 1.57 in the first quarter of 2020, continuing our pattern of being slightly lower each quarter from the prior year. As a result of voluntary premiums written in the quarter, we were down 3% compared to the first quarter of 2020.Additionally, we experienced less robust audit premium and other adjustments.

The first quarter of 2021 audit and other premium adjustments were $300,000, compared to $3.6 million in the first quarter of 2020. Still, audit premium for the quarter was positive, which speaks to my earlier comment on our insureds' ability to work during the pandemic.

It is an important distinction that, generally, audit premium in the first quarter of 2021 reflects the difference in estimated payroll activity for annual policies written in the fourth quarter of 2019. Therefore, the audit premium we recognized are audits conducted during the quarter, which was impacted by the slowing of work activity during the pandemic-related recession. Overall, gross premiums written for the quarter were down 6.4% from the first quarter of 2020.

Moving on to losses. The loss in LAE ratio for the quarter was 55.9%. Our loss estimate for Accident Year 2021 is 72%, down 0.5 percentage point from the Accident Year 2020. We spoke about this estimate in our February call. The decline in the estimate is in recognition of favorable severity trends we experienced in more recent accident years.

I acknowledge frequency declined, particularly in 2020. However, our book of business is low-frequency, high-severity. Based on 3 months of data and our assumptions regarding 2021, we believe the estimate for 2021 to be appropriate.

In the quarter, we also experienced favorable case development, particularly in Accident Years 2015, 2016, 2017 and 2018. This favorable case development resulted in $11.4 million of favorable loss development, decreasing the loss in LAE ratio by 16.1 percentage points.

We continue to closely monitor the impact of the pandemic on the cost of claims. Delayed procedures, changes in methods of delivery and the potential for medical inflation are just some of the factors which influence severity, both on the current accident year and any open claims from prior accident years. We continue to focus on getting injured workers to maximum medical improvement, back to work and settling claims quickly.

I will now turn the call over to Neal to discuss expenses, the balance sheet and other financial metrics.

Neal Fuller

Thank you, Janelle, and good morning, everyone. For the first quarter of 2021, AMERISAFE reported net income of $19.3 million, or $0.99 per diluted share, compared with $10.8 million, or $0.56 per diluted share, in last year's first quarter.

Operating net income for the first quarter was $14.7 million, or $0.76 per share, a decrease of $0.12 from the first quarter of 2020. Revenues in the quarter were impacted by $5.5 million in unrealized gains on equity securities and, therefore, increased to $83.4 million, compared with $79.2 million in the first quarter of 2020. Net premiums earned decreased 10.4%, to $70.7 million, when compared to last year's first quarter.

Turning to our investment portfolio, net investment income decreased 15% in the first quarter to $6.6 million, compared with $7.7 million in the first quarter of 2020. The decrease was driven by lower interest rates on fixed income securities, particularly on overnight investments and short-term investment securities.

If you recall, for most of the first quarter last year, pre-pandemic, the Fed funds rate and overnight investments were earning 1.5% to 1.6%, compared to just 5 basis points in the first quarter of 2021. Because cash and overnight investments are at such low yields right now, we hold just 2.8% of the portfolio in cash and overnight investments at quarter-end compared to 6.6% last year at this time.

The tax equivalent yield on our investment portfolio was 2.77% at the end of the first quarter. The pre-tax yield on the portfolio was 2.46% at the end of the quarter, down from 2.7% one year ago. Realized gains on securities sold were $300,000, compared with $1 million during the first quarter of 2020.

The investment portfolio is high quality, carrying an average AA credit rating, with a duration of 3.99 and with 66% in municipal bonds, which includes 15% in taxable muni bonds; 18% in corporate bonds; 9% in U.S. Treasuries and agencies; 4% in equity securities; and 3% in cash and other investments.

Approximately 60% of our bond portfolio is comprised of held-to-maturity securities, which were in a net unrealized gain position of $28.6 million at quarter-end. These unrealized gains are not reflected in our book value, as the bonds are carried at amortized cost.

Moving now to operating expenses. Our total underwriting and other expenses were $19 million in the quarter, compared with $21.3 million in the first quarter of 2020. The decrease was largely due to lower loss-based and premium-based insurance-related assessments.

By category, the 2021 first quarter expenses included $6.6 million of salaries and benefits, $5.5 million in commissions and $6.9 million of underwriting and other costs. As a result of the favorable decline in expenses, our expense ratio for the quarter was held to 26.8%, compared with 26.9% in the first quarter of 2020.

Our tax rate for the quarter was 18.3%, compared to 18.4% for last year's first quarter. Return on equity for the first quarter of 2021 was 17.4%, compared to 10% for the first quarter of 2020. Operating ROE for the quarter was 13.9%.

In capital management, our company paid its regular quarterly cash dividend of $0.29 per share in the first quarter, which represented a 7.4% increase over last year's amount. This quarter, the Board declared a quarterly cash dividend of $0.29 per share, payable on June 25, 2021, to shareholders of record as of June 18, 2021.

And finally, just a couple of other items to note. Book value per share at March 31, 2021 was $23.16, up 2% from $22.70 at year-end. Our statutory surplus was $384 million at quarter-end, up from $366 million at year-end. And lastly, we will be filing our Form 10-Q with the SEC today after the market close.

That concludes my remarks. And we would now like to open the call up for the question-and-answer session. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] We will take the first question at this time. It comes from Matt Carletti. Please go ahead.

Matt Carletti

Yes, thanks. Good morning.

Janelle Frost

Good morning, Matt.

Neal Fuller

Good morning.

Matt Carletti

Janelle, I sensed a little bit of cautious optimism in your opening comments about direction of economy and kind of your workforce getting back to work or your insured workforce. Could you help me through -- I want to make sure I'm thinking about a few things right. First of all, can you help us through as hours worked go up, whether that’s existing workers working more hours or your existing insureds hiring more workers and them working, is it normal to expect a little bit of a delay in seeing that premium? I'm thinking about, like, they're working on the spot. And so you might see those losses, but some of that premium might come through in an audit function later on. Can there be a little bit of mismatch? Is that something we should be cognizant of?

Janelle Frost

That’s a great question, Matt. You are absolutely right, because the -- if it's an annual policy, we are going to estimate the annual premium at the beginning of the policy period. If the agent and the insured hadn't anticipated that increase in activity, it won't be built into the estimated annual premium. So throughout the policy period, if the insured is working, if they're working those additional hours, we could have losses, but the premium will not get recognized until we do that audit.

Matt Carletti

Okay. And then kind of another thing I think a lot of people have an eye on is just inflation; like, what inflation is doing. And so to the extent there's just wage inflation, and so I'm not talking more hours worked, but just workers getting paid more, is that favorable to your loss ratio in the sense that you're not necessarily picking up exposure; you're just getting paid more for it?

Janelle Frost

That’s exactly right. So yes, we like wage inflation. That means we collect more premium. Even if it means we are paying out a little bit more on the indemnity side, it's definitely a win for us in terms of just the revenue.

Matt Carletti

Okay, great. And then look, we’ve been, I guess, 15 months, give or take, pandemic. What -- as you see it, are there things that have happened during the pandemic, whether it's things AMERISAFE has adapted to or that your injured workers have come to adapt to, whether it be Zoom medical calls or probably a lot of things I haven't even thought of, but do you see anything being a lasting impact of the recession, good or bad?

Janelle Frost

That’s a great aspect. I don’t know about lasting impact of the recession. There's certainly lessons that we took as a company and as an organization from everything that happened in 2020. To me, a great example is even though I think we're all tired of virtual meetings and Zoom meetings and we are anxious to get back in a room with people, it also provides opportunity, right? So we are able to coordinate getting an agent, a TSM, an underwriter, a safety professional, even a claims professional, all on the same call and building those relationships and making those connections. And I think that was beneficial to us, particularly in the first quarter of this year.

And if we can carry that forward as people maybe are still -- maybe they're back at work, they're back in their offices, but yet they're still reluctant to have visitors, I think that's a great way for us to build relationships. And as you know, AMERISAFE's model is built on relationships with our agents and their clients and injured workers. So I think that's going to be really a plus for us, going forward, just a lesson we can take with us.

You mentioned telemedicine. Again, I think that will definitely impact workers' compensation on a go-forward basis, because we were forced into it to some degree, right, when everything shut down. Maybe we would have been slow adopters to begin with, but we were forced into it. I think it will have a lasting impact on workers' compensation. It will be interesting to see in these initial stages as the economy gets back up and the medical profession is recovering from everything that happened, how that gets prescribed.

And the reason I use the word prescribed, because as an insurance carrier we really can't dictate whether certain visits happen or certain services are provided telemed versus in-person. It's really going to be dictated by the medical community. So it will be interesting to see how they respond on a go-forward basis. Is that something that they want to happen? And there's always a fee component to that. Are they going to get paid more or less, the same for those telemedicine visits? So to be determined, which is one of the things, I mentioned in my earlier comments, one of the things we're really keeping our eye on because that could have the potential to add some medical inflation or it may actually end up being a wash in the end. It will be interesting to see how it plays out.

Matt Carletti

Okay, great. And then last quick one. I apologize. I'm sure you mentioned it and I missed it. But the ELCM for the quarter?

Janelle Frost

1.54.

Matt Carletti

All right. Great. Thank you so much. Congrats for the nice start of the year.

Janelle Frost

Thank you Matt.

Neal Fuller

Thanks Matt.

Operator

[Operator Instructions] We will take the next question. It comes from Mark Hughes. Please go ahead.

Mark Hughes

Yes, thank you. Good morning.

Janelle Frost

Good morning Mark.

Mark Hughes

Janelle, did you give us the number of large claims in the quarter?

Janelle Frost

I didn't, Mark. We had one, which can be exciting to say, oh, we had one. If I recall, last year at this time we had one, and we ended the year with 18. I always have to remind myself we're in a lumpy business. There doesn't seem to be a rhyme or reason to when those large claims happen as far as timing throughout the year. So at the end of the quarter, there was one, but there was one at the end of the first quarter in 2020, as well.

Mark Hughes

Well, so far, so good.

Janelle Frost

Yes, I'm sorry did I not sound grateful. I'm grateful.

Mark Hughes

And you might have touched on this, but kind of frequency in 1Q, large claims aside. Clearly, 2020 frequency was below what would have been expected. How has that trended when you think about the last few months and even the end of 2020?

Janelle Frost

Yes, frequency was obviously down in 2020. Reported claim counts were down. If you look at the 10-Q, you will see reported claim counts were down slightly in 2021 as well. I keep focusing on the fact that we're not frequency-driven; we're severity-driven. So it really is going to matter what happens with average severity in 2021. And yes, with three months of data, I can say, oh, it's in line with my expectations. It's 3 months of data.

Mark Hughes

Yes. Okay. And then the new business was up. Can you talk about that? How much of that was brokers maybe being more up and running, more underlying business activity, more small business, more construction? Could you maybe give a little depth on that?

Janelle Frost

Absolutely. I will start with your question about brokers and agents. I do think brokers and agents are getting back into the flow of things, getting things going again. As I mentioned, we've really been focusing on building those relationships, taking that time that everybody was going, what's happening, and reintroducing ourselves in terms of how they can work with their underwriter and their safety professional and their claims person and just building those relationships so they can translate that to their clients, which is the AMERISAFE proposition, right, the services that we offer.

We did see an improvement in new business in the quarter, and it was coming from roofing. Roofing is our single largest class; I guess trucking now is considered one class of business. But roofing within the construction class has always been a really good class of business for us, and we saw improvements in roofing in the first quarter. Unfortunately, I can't tell you if that's maintenance roofing or if that's new construction. I can just tell you it's roofing. So we saw improvement in roofing. We saw improvement in manufacturing was another positive for us in the quarter.

Mark Hughes

And then I should have asked in terms of claims, was there any indication that there might have been any catch-up in claims? Did you get any sense that some of these were late-reported claims?

Janelle Frost

No, we don't have a lot of true late reported claims in our line of businesses. Again, we are severity-driven. So they're going to tell us really quickly when they've had a severe injury. So late reported doesn't really impact us as much than -- it's not like we have carpal tunnel claims and those type of things.

Mark Hughes

Yes, exactly. Okay. I mean, when you put it together, do you think -- I think Matt framed it similarly, is this turning a corner? If you were down 3% on a voluntary basis, ex auto premium, which presumably maybe next quarter isn't as good either since you are talking about 1Q -- well, I will hold that. The 1Q20 policies, were they -- do you think they have the same impact here that they -- once those get audited, you probably face less upside? Or was that already captured at this time last year?

Janelle Frost

No. I think that we will have the same impact.

Mark Hughes

Okay. All right. Then I will get back to my earlier question, which was do you feel like we've turned some kind of corner here given the [multiple speakers] down 3%?

Janelle Frost

I definitely feel like there are some positive signs that I can point to, right?

Mark Hughes

Yes.

Janelle Frost

Whether we've turned a corner or not, time would tell. I wish I had the crystal ball that told me that. I believe with the rollout of the vaccinations there is a sense of optimism, I think, in businesses and the economy, and that's contagious. So hopefully, it converts into reality, that there are capital expenditures and people do start new contracts and do start building things. And maybe there will be an infrastructure bill. So there's things that we can point to that are positive signs. So, yes, we are -- I think Matt's words were cautiously optimistic.

Mark Hughes

Yes, okay. Yes. So far so good as they say.

Janelle Frost

That’s why I also -- I’m going to write these things, so far so good.

Mark Hughes

Okay. Thanks. I appreciate it.

Janelle Frost

Thank you, Mark.

Neal Fuller

Thanks, Mark.

Operator

[Operator Instructions] And we will take the next question at this time. Caller, please go ahead.

Randy Binner

This is Randy Binner from B. Riley. Am I the next the caller?

Janelle Frost

Hi, Randy.

Neal Fuller

Hi, Randy.

Randy Binner

Hey. Sorry, I didn't catch the intro there.

Janelle Frost

Welcome.

Randy Binner

So I’m mostly interested in the same thing that the other analysts are interested in. And so I guess my question always was, though, as we hear from the larger writers of comp and folks who are maybe a couple of steps farther back from comp, there's kind of a confidence that, oh, yes, comp is going to turn the corner next year because it has to, but it just seems like there's kind of a lack of evidence. And so is that just -- I know you don't want to speak to what other people say, but is that sense that the market is going to turn just because it's kind of overdue to? I'd just be curious, or is it different for general workers' comp where it's part of a package or it's part of a non-hazard class? Like, is there a different narrative out there for other corners of the workers' comp industry?

Janelle Frost

Right. I guess it really depends on what you mean by the markets turning. Because workers' compensation, as a line, whether you're monoline or a multiline, is still generating a profit. I think even with the estimates that NCCI and A.M. Best has put out, it's still below 100. So in terms of profitability, it's still there. I think it's deteriorating. I think, like, again, I think both A.M. Best and NCCI have projected that the combined ratio is going to go up a point or two, within reason. So in that aspect, the industry is still profitable. If you mean turn -- reaching a turn in terms of …

Randy Binner

In terms of pricing.

Janelle Frost

… premium growth, right, if that's what you're referring to, there's a couple of things going on. When I was talking to Matt and Mark, I was -- we were focused on, or I was focused on the payrolls and work activity and the economy. And all of those things that I said apply, but at the same time, loss costs are still declining. We are still battling the fact that rates are going down, and that shrinks premium dollars. The latest rate filings range from, I think, a 20% in Virginia down, a decline of 20%, to a high of almost 6%, for Hawaii. I think there were maybe 4 or 5, 6 states that had increases on just loss -- on loss cost, regardless of what carriers are charging, but on loss costs themselves. So carriers are still trying to, in that regard, catch the falling knife, right? The rates are still going down. So even if we have positive signs, like I pointed to earlier, in the economy or the workforce, that’s still going to be a hurdle that's going to happen in 2021. That's not going away.

Randy Binner

I guess the other kind of observation I would have, if you can help with, and this one might be tricky, too, but I would generally think of the kind of excess reserve pool along with the current accident year loss pick as both kind of trending downwards. So those are offsetting items. Would that generally be the natural way we'd kind of transition to the other side of the market from your view when pricing is higher again?

Janelle Frost

That's definitely a sign that everyone looks for, right? Are you starting to see deterioration in loss reserves? Are you seeing adverse development? It will be interesting to see how 2020 impacted that for workers' comp as a whole. If you think about the industry as a whole, with frequency going down so much in 2020, what does that mean in terms of people's redundancies and deficiencies? And does that somehow mask for another year things that were coming to fruition? I think it will be -- we will know more about that come the end of 2021, going into 2022. If we start seeing companies change their current accident year loss pick, recognize development from earlier, more recent accident years, if they recognize development for '20 and '21, adverse development or whatever the case may be, at a different rate than they normally do, I think that will be another sign that maybe there's some, to your point, deterioration in those excess reserves.

Randy Binner

All right. I leave it there. Thank you so much.

Janelle Frost

Thank you

Neal Fuller

Thanks Randy.

Operator

It appears there are no further questions at this time. Janelle Frost, I'd like to turn it back over to you for any closing remarks.

Janelle Frost

Okay, great. Thank you. I’m somewhat amazed how a small dose of vaccine has the potential to end a global pandemic, return us to normalcy and boost the economy. Nevertheless, I'm happy to find elements of good news to point to. Because of our employees, our operations and our earnings over the 35-year history, AMERISAFE continues to respond to the needs of our agents, their clients and injured workers through the peaks, the valleys and everything in between. Thank you for joining us today.

Operator

That concludes today’s conference. Thank you for your participation. You may now disconnect.