AMERISAFE, Inc. (NASDAQ:AMSF) Q1 2024 Earnings Call Transcript

AMERISAFE, Inc. (NASDAQ:AMSF) Q1 2024 Earnings Call Transcript April 25, 2024

AMERISAFE, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day. And welcome to the AMERISAFE 2024 First Quarter Earnings Conference Call. Today’s conference is being recorded. At this time, I’d like to turn the conference over to Ms. Kathryn Shirley, Chief Administrative Officer. Please go ahead, ma’am.

Kathryn Shirley: Good morning. Welcome to the AMERISAFE 2024 first quarter investor call. If you have not received the earnings release, it is available on our website at 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 a result of risk, 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-K, Form 10-Q, 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, Kathryn, and good morning, everyone. Workers’ compensation rates across the industry continue to decline in the first quarter, spurred by favorable frequency trends and modest increases in severity. Continued wage growth is helping the industry taper the impact of multiyear rate decreases. However, it is not as robust as 2023. With these conditions as a backdrop, AMERISAFE had solid results in the first quarter, reporting a combined ratio of 87.3% and an ROE of 22.8%. We remained competitive by maintaining our strategy of evaluating risk through safety services and underwriting, giving our insurers peace of mind, and continuing our track record of creating value for our shareholders. Premiums for policies we wrote in the quarter were relatively flat compared to the first quarter of 2023.

We continued to see strong retention in policies for which we offered renewal, with 94.9% of retention in the first quarter, as well as modest policy growth. Both new business submissions and bonds increased on a year-over-year basis as we’re seeing higher agent engagement. Gross premiums written decreased 2.9% compared with the first quarter of 2023, primarily due to lighter audit premiums, as wage pressure is moderating. Each quarter of last year, we reported that wage growth was slowing from the post-pandemic highs. For the types of jobs that we insure, we continue to see upper single-digit wage growth, which speaks to the economic strength of our insured classes in the near-term. For example, the construction industry continues to add jobs when looking at the latest national data.

I believe we will continue to report positive audit premium in 2024, but at lower levels than 2023. As for losses, our accident year loss ratio was in line with the prior year at 71%. Our expectation is that frequency trends will remain favorable and severity increases will be modest, similar to the industry as a whole. In addition, we experienced $8.6 million of favorable development on prior accident years due to proactive claims handling. The favorable development was primarily attributable to accident years 2017 through 2020. We continue to monitor the potential impact of rising healthcare costs on the long-term medical cost inflation, but nothing noteworthy at this time. With that, I’d like to turn the call over to Andy to discuss the financials.

Andy Omiridis: Thank you, Janelle, and good morning to everyone. For the first quarter of 2024, AMERISAFE reported net income of $16.9 million or $0.88 per diluted share and operating net income of $13.3 million or $0.69 per diluted share. During the first quarter of 2023, net income was $17.3 million or $0.90 per diluted share and operating net income was $16.1 million or $0.83 per diluted share. The lower net income this year was primarily driven by a combination of lower earned premium and net investment income, as well as favorable items impacting the year ago quarter. Gross written premiums were $80.1 million in the quarter, compared to — with $82.5 million in the first quarter of 2023. The year-over-year decrease was primarily due to moderating wage inflation, which reached record levels in the prior year.

Our total underwriting and other expenses were $18.7 million in the quarter, compared with $17 million recognized in the prior year quarter. This increase resulted in an expense ratio of 27.3%, compared with 24.5% in the year ago quarter. The increase was primarily the result of lower earned premium and a $3.3 million favorable impact from profit sharing commission in the first quarter of 2023. For the quarter, our tax rate was 18.4%, compared to 19.5% in the prior year, largely due to a higher proportion of tax-exempt income versus underwriting income in the quarter compared with last year. Turning to our investment portfolio. In the first quarter, net investment income decreased 0.9% to $7.4 million despite increased reinvestment rates as compared to the prior year.

For the quarter, the yield on new investments increased approximately 215 basis points in relation to the portfolio roll-off, driving our tax equivalent book yield to 3.75% or 26 basis points higher than the first quarter of 2023. Realized loss for the portfolio and securities sold were $200,000 in the quarter, compared with a realized gain of $300,000 during the first quarter of 2023. The investment portfolio is high-quality, carrying an average AA- credit rating with a duration of 4.1 years. The composition of the portfolio is 58% in municipal bonds, 27% in corporate bonds, 4% in U.S. Treasuries and agencies, and 7% in equity securities, and 4% in cash and other investments. Approximately 58% of our bond portfolio is comprised of held-to-maturity securities.

As a reminder, these held-to-maturity securities are carried at amortized costs 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, solid loss reserve position and conservative investment portfolio. At quarter end, AMERISAFE carried roughly $900 million in investments, cash and cash equivalents. And finally, a couple of other topics. Book value per share was $15.74, an increase of 3% compared to the prior quarter and operating return on average equity was 17.5%. Our statutory surplus was $270.5 million at quarter end, up 6.1% from $254.9 million at December 31, 2023. And finally, tomorrow, Friday, April 26, 2024, we will be filing our Form 10-Q with the SEC after market close.

With that, I would like to open the call for the question-and-answer portion. Operator?

Operator: Yes, sir. Thank you. [Operator Instructions] And we’ll take our first question from Mark Hughes with Truist.

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Q&A Session

Mark Hughes: Yeah. Thank you. Good morning.

Janelle Frost: Good morning, Mark.

Andy Omiridis: Good morning.

Mark Hughes: Janelle, do you have the, excuse me, do you have the ELCM the quarter? Could you give that?

Janelle Frost: $144.

Mark Hughes: And then you alluded to you expect wage growth to be in the upper single digits. Could you give us specific numbers for this quarter, payroll growth and what proportion of that is wage growth?

Janelle Frost: Yeah. Our payroll growth for the quarter was 7.6%, 6.4% of that being wage increases and then the others being new employees. So the new employee count has been steady over many quarters now and we continue to see wage inflation or extended work hours. I don’t have visibility into that. But still higher than what at least we’re seeing from the national averages. I think the national average is just somewhere between 4% and 5%. So, our industry groups seem to be a little bit higher than that. I expect that to somewhat moderate during 2024. This quarter we talked about audit premium being down. Yes, audit premium and other adjustments were down in comparison to first quarter of 2023. But if you recall, first quarter of 2023 was a record number of $8.9 million.

Mark Hughes: Yeah. Yeah.

Janelle Frost: So, even first quarter of 2024 was actually higher than third quarter, not that they’re sequential. Audit premium is not necessarily sequential. So that being said, I do think we’re going to continue to see wage pressure from our insurers, which should in turn be wage growth for us, but maybe not to the same degree that we were starting. If you hearken back to the 2022 periods of wage growth, we were seeing double digits, right? And then it slowly started tapering down. So that’s my expectation.

Mark Hughes: What was the NCCI, the loss cost where you got states in the quarter? How is that trending?

Janelle Frost: Yeah. It still — at this point, Mark, we’ve seen most of what I would call the approved loss cost for 2024, whether they’re in effect yet or not. We’ve pretty much seen the filings come through from the NCCI states. So, I think, originally we said we thought 2024 would be high-to-mid single digits and that’s what we’re seeing. I think it’s in the 7% to 8%, somewhere around in that range, if you look at all the states across the rate filings. They certainly vary. I think the highest was Maine at like 19% decrease. Of our states, I think Florida, which I know there was a lot of talk about Florida. I think Florida was the highest decrease of maybe around 15% and the lowest would have been something like Virginia, which was like maybe 0.5 point, but they were all decreases.

Mark Hughes: Yeah. Yeah. How would you characterize the competitive environment? Any change from the last few quarters?

Janelle Frost: Interestingly not really. Throughout this stock cycle, as rate — as the rate decreases were approved, we didn’t see a real fluctuation in competition. I think, we — good or bad, right? So it’s very competitive, obviously, because everyone’s showing rate decreases, but we haven’t seen really what I would call new capital enter the space, nor have we seen companies really out there trying to buy market share. I think the discipline has been pretty good for the industry as a whole. In part, I think, because the industry has been profitable. I do think there is a concern amongst everyone, how long can these rate decreases continue, just because of the magnitude of them over a number of years. And then, of course, there’s always, as we’ve talked about in many calls recently, is I think there’s a concern over medical cost inflation.

So you add all those things together, it makes for a competitive marketplace, but it’s unchanging in terms of good or bad.

Mark Hughes: Yeah. And then final question, how many or any large losses in the quarter?

Janelle Frost: We had two claims in excess of a $1 million in the quarter, which I think is the same thing we reported last first quarter was two. And if you recall, we ended the year with nine. So two in the quarter, but as I always like to remind everyone, this is a lumpy business. We had — I have no indication as to what quarters those types of claims happen.

Mark Hughes: I lied. Did you buy any stock back in the quarter?

Janelle Frost: We did not. And you lied…

Mark Hughes: Thank you very much.

Janelle Frost: Thank you, Mark.

Operator: [Operator Instructions] Our next question will come from Matt Carletti with Citizens JMP.

Matt Carletti: Hey. Good morning.

Janelle Frost: Good morning, Matt.

Andy Omiridis: Good morning.

Matt Carletti: Janelle, you made, I think, I caught a comment in your opening script about higher agent engagement and I know that’s been a focus for you of late. I was hoping you could just kind of dig into that a little bit and update us on kind of, obviously, you guys have made a lot of efforts there recently, but kind of what’s happening and what results you’re seeing?

Janelle Frost: Yeah. Thank you for remembering that we are making efforts in that regard. In this rate — particularly in this rate environment, just what we were just talking about with Mark, the level of competition that’s out there. We at AMERISAFE knew we needed to do something about our agent relationships in order to find those opportunities for new business, because agents at this point, customers are getting rate decreases. Shopping accounts is not a necessary evil in terms of the things agents are having to face right now, particularly when there’s rate in other lines of business. So workers’ compensation sort of falls off that priority list when it comes time for renewal. So we had to find ways for them to consider AMERISAFE.

So, just reinforcing with our agents what our appetite is and what the value proposition of AMERISAFE is, particularly with our claims and safety services. Our longevity in the high hazard classes, the focus and the discipline that we’ve had over a long period of time. I think, we point to that track record. We point to how that serves the agent’s client and that we can be a steady source for that agent. So sort of not only reintroducing ourselves, but really focusing in on our appetite and the things that we do offer. I think agents, just like the rest of us, we get very comfortable with our markets, and you say, oh, I know AMERISAFE, that’s where I go to for trucking, but maybe they don’t think of us when a lumber account comes about or an oil and gas account comes about.

And so just reinforcing with those agents and those relationships that we do have. While we are high hazard and we do have a niche, small to midsize employers, I do think we get lost in the shuffle sometimes in that regard. So I’m very proud of our sales force and our underwriting force and our safety force in terms of developing those agent relationships so they can have the right conversations and possibly get opportunities on books of business or accounts that have been continually renewing with the same account and just reminding them what AMERISAFE offers. So in that regard…

Matt Carletti: Yeah.

Janelle Frost: … we did see new business increase in the quarter, which we were happy to see. Even though renewals remain strong in this rate environment, when you look at the premium dollars, there’s certainly pressure there. So we were able to grow policy count because of some of the new business efforts that we have.

Matt Carletti: Perfect. That’s really helpful. And then maybe just a numbers question for Andy. Andy, you mentioned in the — your opening comments about despite kind of higher yields, investment income dipped a little. Is there any one-time items kind of going on in there contributing to that or is that more so just obviously a paid out of special and maybe the balance is a little lower for a short period of time?

Andy Omiridis: Matt, first of all, good morning to you. But it’s purely the asset-based decrease because of the special dividend.

Matt Carletti: Okay. Perfect. Thank you very much.

Operator: [Operator Instructions] We’ll now take a follow-up from Mark Hughes with Truist.

Mark Hughes: Hey. Janelle, you — in your opening comments before my brain got engaged, you had made some comment about something was not as robust as in 2023. Was that wage pressure that you were talking about? What was that, I think…

Janelle Frost: It was, Mark. It was.

Mark Hughes: Okay.

Janelle Frost: Yeah. It was simply the fact that, as I was mentioning, if you look at 2022 quarters or even going into 2021, we had double-digit wage growth coming through or wage payroll increases in those quarters, which we believe bodes for future audit premiums. So, now you look at the quarters of starting with the second quarter of 2023, that number tapered down to 7%, 7.5%, 7.4%, 7.6%. Still very robust, higher than national average, but less than what we were seeing in the previous quarter. So, if you look at that and say that’s indicative of future audit premiums, I do think that while it will remain positive and be a strong number, it’s not going to be as robust as 2023. I think the industry, in my opening comments, I said, I believe that’s not only true for AMERISAFE.

I believe it’s true across workers’ comp. I do think the wage pressure that employers were feeling and experiencing has started to taper. Even if you look at national numbers, that number has slowly come down over time. If you use that as a gauge for audit premium, I think that same being true. However, as I was talking about, for first quarter of 2024, for AMERISAFE, ours was, again, a very strong number, over $6 million, but in comparison to first quarter of 2023, which was a record number, it did show a decrease.

Mark Hughes: Understood. Andy, the expense ratio, underwriting expense ratio at 27.3%. There’s a year-over-year impact on the profit-sharing commission, but is that 27.3% or this level of expense, is that a reasonable run rate or is that skewed by anything?

Andy Omiridis: No. I would say, Mark, first of all, good morning to you. But, no, I think, we are in the range where we normally are, anywhere between a 26% and a 29%, and — so there is nothing skewing. Again, I think the 24.5% from last year is depressed by the 3.3% that favorably came through for the profit commission.

Mark Hughes: Yeah. Yeah. Okay. All right. Very good. Thank you.

Operator: It appears there are no further questions at this time. I’d like to turn the conference back over to Ms. Janelle Frost for closing comments.

Janelle Frost: Despite challenging market conditions, AMERISAFE’s focus on providing protection for small to mid-sized businesses by caring for their injured workers has a track record of strong retention and delivering robust returns to our shareholders throughout the cycle. The first quarter demonstrated the continued success of our strategy. Thank you for joining us today.

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