AMERISAFE Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 22, 2024

There are 7 speakers on the call.

Operator

Good day, and welcome to the AMERISAFE 2023 4th Quarter Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the presentation over to Ms. Catherine Shirley, Chief Administrative Officer. Please go ahead, ma'am.

Speaker 1

Good morning. Welcome to the Amerisafe 2023 4th quarter investor call. If you have not received the earnings release, it is available on our website atamerisec.com. This call is being recorded. A replay of today's call will be available.

Speaker 1

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 result of risks, uncertainties and other factors, including factors discussed in the earnings release, in the comments made during today's call and in the Risk Factors section of our Form 10 ks, Form 10 Qs and other reports and filings with the Securities and Exchange Commission. We do not undertake any duty

Speaker 2

to update any forward looking statement. I will now turn the call over to Janelle Frost, Amerisafe's President and CEO. Thank you, Catherine, and good morning, everyone. We are pleased to report solid operating earnings results for both the Q4 and full year of 2023. For the year, we reported a combined ratio of 85.9%, gross premium written growth of 3.3% and operating ROE of 17.7%.

Speaker 2

These results come during a period in the workers' compensation industry of multiyear rate decreases, somewhat offset by recent wage inflation. Competition has not lessened as workers' compensation is one of the more profitable of the property and casualty lines. Remaining true to our disciplined approach of underwriting high hazard risk, while being responsive to our agents and caring for the needs of injured workers and their employers is evident in our consistent results year after year and serves all of our stakeholders. Gross written premiums for the quarter were $60,300,000 increasing 8.4%. During the quarter, premiums for policies written in the quarter increased 4.7%, which was further improved by payroll audit and related premium adjustments of $4,800,000 At Amerisafe, we continue to see strong retention in policy for which we offer renewal with 93.9 percent retention in the 4th quarter.

Speaker 2

For the full year, our accident year loss ratio was in line with the prior year at 71%. The company experienced $41,100,000 of favorable development on prior accident years in 2023, which we attribute to lower claims severities and proactive claims handling. In addition, we ended the year with 9 severe claims, of those with case incurred in excess of $1,000,000 As of December 31, 2023, our open claim count was down 6.4% from 2022. This metric demonstrates the success of our focus on resolving and closing claims and the decline in reported claims. Our balance sheet is conservatively positioned with roughly $897,000,000 in investments and cash, a solid reserve position and no outstanding debt.

Speaker 2

Despite challenging market conditions, our tenure ensuring high hazard risk positions the company for continued solid results. Amerisafe's strong retention, coupled with our focus on profitable growth, is delivering robust returns to our shareholders. Finally, as it relates to capital management, Amerisafe's Board of Directors has approved 8.8% increase in our regular dividend to $0.37 With that, I'll turn the call over to Andy to discuss the financials.

Speaker 3

Thank you, Janelle, and good morning to everyone. For the Q4 of 2023, Amerisafe reported net income of $19,200,000 or $1 per diluted share and operating net income of $14,300,000 or $0.74 per diluted share. During the Q4 of 2022, net income was 20,800,000 or $1.08 per diluted share and operating net income of $16,100,000 or $0.84 per diluted share. The lower net income was primarily driven by certain items in the quarter driving the expense pressure higher as well as less tax exempt interest income driving a higher tax rate compared with the Q4 of 2022. For the full year, net income was $62,100,000 and net operating income was $55,900,000 compared with $55,600,000 $59,300,000 in the prior year, respectively.

Speaker 3

Our total underwriting and other expenses were $19,000,000 in the quarter, a 9% increase compared with the $17,400,000 recognized in the prior year quarter. This increase resulted in an expense ratio of 28.9 compared with 26.4 in the Q4 of 2022. The increase was primarily due to wage inflation and an increase in insurance related assessments. For the full year, the expense ratio was 29.3% compared with 26.5 in 2022. For the year, our tax rate was 19.7% compared to 17.8 percent in the prior year, largely due to a lower proportion of tax exempt income versus underwriting income in the quarter compared with the last year.

Speaker 3

Turning to our investment portfolio. In the 4th quarter, net investment income increased 5.7 percent to $8,100,000 from $7,600,000 in the prior year quarter. For the full year, net investment income was $31,300,000 compared with $27,200,000 in 2022. The increase was driven by the yield on new investments, which exceeded that of portfolio roll off by approximately 200 basis points and drove the portfolio tax equivalent book yield to 3.69 percent or 31 basis points higher than the previous year. Realized gains for the portfolio and securities sold were $1,100,000 in the quarter compared with $1,000,000 during the Q4 of 2022.

Speaker 3

The investment portfolio is high quality carrying an average AA- credit rating with a duration of 4.2 years. The composition of the portfolio is 61% in municipal bonds, 25% in corporate bonds, 4% in U. S. Treasuries and agencies, 6% in equity securities and 4% in cash and other investments. Approximately 60% of our bond portfolio is comprised of held to maturity securities.

Speaker 3

During the Q4, interest rates moved noticeably lower, which improved the net unrealized loss position of held to maturity securities to $10,500,000 from $35,100,000 in the 3rd quarter. As a reminder, these held to maturity securities are carried at amortized cost and therefore unrealized gains or losses on these securities are not reflected in our book value. Our capital position is strong with a high quality balance sheet. For the year, the company returned $93,300,000 to shareholders through a combination of regular and special dividends, plus an additional $2,200,000 of shares were repurchased. And finally, just a couple of other topics.

Speaker 3

Book value per share was $15.28 after paying the special dividend in December 2023, a decrease of 7.8% from year end 2022 and operating return on average equity was 17.4% for the quarter and 17.7% for the full year. Our statutory surplus was $254,900,000 at year end, up from $252,500,000 at the prior year end. And finally, tomorrow, February 23, 2024, we will be filing our 10 ks with the SEC after market close. With that, I would like to open the call for the question and answer portion of the call. Operator?

Operator

Yes, sir. Thank you. We'll take our first question from Matt Carletti with JMP Securities.

Speaker 4

Hey, good morning.

Speaker 2

Good morning, Matt.

Speaker 4

Maybe if I could start with the top line, specifically the voluntary premiums showed some modest growth. And I think you commented that policies in force also grew. So the question is just can you give us a little bit of color on are there certain geographies or kind of underlying sectors of the economy exposures that you have that you're seeing certain success with or is it more just broad based?

Speaker 2

I'll start with your question about geographies. I'll steer away a little bit from that and I don't think I'm not directly answering question, but for competitive reasons, I want to be careful about speaking about geographies that I feel like we're being more successful in at the moment. Fair enough.

Operator

But I will say,

Speaker 2

I think it's more broad based, to be honest, Matt. We've talked a lot over the last few quarters about our internal focus on ease of doing business with our agents. We've had really strong retention for a number of years, which we are very appreciative of and I think really speak to the service level of the Amerisafe employees. At the same time, agents are trying to shop new business does come at fewer and fewer opportunities during this market where everyone's getting a rate decrease. So we really have been focusing on ease of doing business with our agents, streamlining processes, making sure we have the right workflows and just focusing on those agent relationships so that when the opportunities do present themselves from a new business perspective, we are at the ready.

Speaker 2

And I do think just a combination of those things happening over a period of time, we've been successful in growing some new business along with our strong retention. And you were spot on about the policy count. We're very excited that we were able to grow policy count in 2023.

Speaker 4

Great. And then if I shift to thinking about where kind of margins are in the business, and as we look forward, I mean, you mentioned frequency was down. I think I I guess, you throw a severity in there too. I guess, I'm asking, looking at your crystal ball a little bit, I guess you throw severity in there too. I guess I'm asking looking at your crystal ball a little bit and kind of how do you feel about sustainability of accident year margins when you kind of put all those pieces of the puzzle together and any other ones that I'm forgetting?

Speaker 2

No, those you hit all the right elements. Certainly, we have the realities of multiple years of rate decreases. And I think if we look at 2024, nothing on a macro basis that seems to be changing that directionally. I still think it's going to be higher single digit rate decreases going into 2024. I like how Amerisafe is positioned because we are very disciplined in our approach, in our underwriting approach and that we individually underwrite every single account.

Speaker 2

That's built into that margin is built in to how we are underwriting those accounts today and in our pricing for those accounts. So I feel really good about that. From the loss we are appreciative of. But keep in mind, the things that we write are more severity driven than frequency driven. So severity has been relatively modest within our expectations.

Speaker 2

There's certainly a concern in the industry across the industry. Every article you pick up talks about medical inflation and concerns about medical inflation. But to the credit of the industry, right now, fee schedules are helping contain costs. I read an article recently that the CMS is predicting medical inflation to be somewhere between 2.5% and 3.5% going into 2024 and the years to come. If the industry can hold on to that, that would be fantastic, but there's going to be pressure.

Speaker 2

No question on medical inflation. So I feel really good about our margins going forward because I know we're maintaining that discipline.

Speaker 4

Great. And then one last quick one if I could. ELCM for the quarter?

Speaker 2

146.

Speaker 4

146. Awesome. Thanks so much. Appreciate it.

Speaker 2

Thank you, Matt.

Operator

We'll now take our next question from Mark Hughes with Truist.

Speaker 5

Yes, thanks. Good morning, Janelle. Good morning, Andy.

Speaker 2

Good morning, Mark. Good morning, Mark.

Speaker 5

The Janelle, frequency down 6% and then I think did you say severity was within your expectations? Did you give a number for that?

Speaker 6

I missed the first couple of quarters.

Speaker 2

I did not. I did not. So within our expectations built into the 71% that we've been carrying for accident year 2023.

Speaker 5

Yes. And have you ever historically outlined your expectations on severity, low single digits?

Speaker 2

That's a great question, Mark. I mean, if you think about it in terms again, I was just talking to Matt about it, if you think about it in terms of medical inflation, we've always took a long term approach to that and it's always been mid single digit range in terms of medical inflation. The other side of that is just how many given the types of injuries that we deal with, I don't know any given year how many of those are going to be the horrific catastrophic claims. I mentioned in my prepared remarks, we had 9 claims with $1,000,000 in excess of $1,000,000 case incurred this year, which is a little bit lower than prior years. So I hate to go back to my favorite term when I'm talking about severe claims, but we're just in a lumpy business.

Speaker 2

I don't know when the accident is going to happen or the severity of those accidents.

Speaker 5

Yes. Did you have any movement in the reserves on the large accident that came at the end of 2020?

Speaker 2

No, we have not. No, we have not. We are we're still very comfortable with the reserves that we initially recorded for that claim.

Speaker 5

Yes. The audit premium is holding in there pretty well. One might have thought with the economy slowing, that would be tapering a bit. Is there any particular area you're seeing a better audit premium?

Speaker 2

Mark, across our book, we're seeing strong audit premium. Across our book, I can tell you we had about 7.4% of what I would call payroll growth, 5.6% of that was wage growth. And if you look at BLS data, I think the wage growth number projected at least for construction or maybe the countrywide is 4.1 as of the last quarter. So we're running slightly higher than that. That doesn't really surprise me given the skilled labor jobs that we insure.

Speaker 2

And we're still not seeing a large influx of new employees. Now what the labor market will do in 2024, that I don't know, but construction jobs are up. So we feel pretty confident that being a large part of our book of business that should be pretty resilient in 2024.

Speaker 5

Yes. I was going to ask you that question. You used the formulation of kind of the next job, but it sounds like you see construction holding in there pretty well?

Speaker 2

We do. We do.

Speaker 5

Okay. And was the 7.4 and 5.6, is that the 4th quarter or is that full year?

Speaker 2

That was 4th quarter and it was right in line with 3rd quarter. If you recall, 3rd quarter was 7.5%. So in line, no real deterioration between the two quarters.

Speaker 5

Yes. And you think the still projected loss cost is going to be down high single digits again?

Speaker 2

I do. And again, that's Janelle's opinion, but I do. I mean, based on the approved loss costs that have already come in the door this year, I do think that and I just don't see anything on a macro basis that's going to change that. I mean, we'll get industry wide results in May and we'll see what that looks like. But just based on following other companies and their reporting, I don't think anyone has had any large surprises in terms of losses.

Speaker 2

Concerns, I think we can all list the things we worry about, but haven't really seen any in the results. So I don't know that that will change the perspective on loss costs.

Speaker 5

Yes. You mentioned the growth being helped by your ease of doing business. Anything on the competitive front or your change in your own appetite in terms of end markets, class codes, anything like that?

Speaker 2

No, I appreciate the looking for clarity on that. No, we really we have not changed our underwriting approach. We have not changed our mix of business. We haven't changed our risk tolerance. This is really just about trying to further our relationships with our agents.

Speaker 5

Yes. Okay. I think that was it for me. Appreciate it.

Speaker 2

Thank you, Mark.

Operator

We'll take our next question from Bob Farnam with Janney.

Speaker 6

Hey there, good morning. Good morning, Bob. I have additional questions on the improved loss costs. So this year you got Florida down 15%. You have a change coming up in Louisiana down 9% or so.

Speaker 6

I'm curious, do the classes of business that you write, are they comparable to the overall, the statewide averages or are they better or worse in terms of kind of loss cost

Speaker 2

changes? That's a really good point, Bob. They are. They run our book of business sometimes varies a little higher, sometimes a little lower. But on average, I think using the industry wide, if you're trying to move out, I think using the industry wide approved loss cost does track with our own experience.

Speaker 6

Okay. And this is probably more of a kind of a philosophical question, but as the approved loss costs continue to go down, at some point, they're going to go beyond where they should go down. So you're going to kind of miss the inflection point, I believe. So how do you ensure that your strong profitability remains if kind of the underlying loss costs have gone too far?

Speaker 2

It goes back to what I was just saying earlier. The fact that we are individually underwriting our accounts and we've had a very consistent book of business for a long period of time. So I think my underwriters have a true expertise in understanding how much rate or how much how many dollars of payroll we need to cover our loss and to cover the margin that we want in that individual book of business. Hence why we always try to report the we had been reporting the ELCM. It was just trying to give you a measure.

Speaker 2

It's not absolute cost, but the fact that we're not chasing that 10%, 20%, or 10%, 15% down in terms of the rate that the approved rate. I think we have the expertise to understand that rate per $100 of payroll and what it takes for an individual risk. But we're highly relying on our expertise versus the industry wide averages.

Speaker 6

Right. Just refresh my memory, the ELCM, does that include or not include kind of scheduled credits and debits?

Speaker 2

The ELCM would include that. So it's sort of the aggregate. If I took all my states and aggregated them together, it would be inclusive of that.

Speaker 6

Yes. That's what I thought. Okay. Thank you.

Speaker 2

Thank you, Bob.

Operator

It appears there are no further telephone questions. I'd like to turn the conference back over to Ms. Frost for any additional or closing comments.

Speaker 2

Thank you for joining us today. We are pleased with both the quarter and full year results reported. These results are reflected of the dedication of Amerisafe employees to fulfilling commitments to our policyholders, agents and shareholders. I believe our consistent returns year in and year out clearly reflect our unwavering focus on turning risk into opportunity.

Operator

And once again, that does conclude today's conference. We thank you all for your participation. You may now disconnect.

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Key Takeaways

  • Amerisafe reported a strong full year 2023 with a combined ratio of 85.9%, gross written premium growth of 3.3% and an operating ROE of 17.7%, driven by a 71% accident year loss ratio and $41.1 million of favorable prior-year development.
  • In Q4, gross written premiums rose 8.4% to $60.3 million, policy count grew and retention remained high at 93.9%, while open claims declined 6.4% year-over-year.
  • The company’s expense ratio increased to 28.9% in the quarter (29.3% for the full year) due to wage inflation and higher insurance assessments, contributing to Q4 net income of $19.2 million (versus $20.8 million a year ago).
  • Amerisafe’s high-quality investment portfolio (AA- average rating) generated a 3.69% tax-equivalent book yield, boosting Q4 net investment income by 5.7% to $8.1 million and realizing $1.1 million in gains.
  • With no debt and $897 million in cash and investments, the board approved an 8.8% dividend increase to $0.37 per share and returned $93.3 million to shareholders in 2023, while book value per share stood at $15.28.
AI Generated. May Contain Errors.
Earnings Conference Call
AMERISAFE Q4 2023
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