AMERISAFE, Inc. (NASDAQ:AMSF) Q4 2023 Earnings Call Transcript

AMERISAFE, Inc. (NASDAQ:AMSF) Q4 2023 Earnings Call Transcript February 22, 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 2023 Fourth Quarter Earnings Conference Call. Today’s conference is being recorded. At this time, I’d like to turn the presentation over to Ms. Kathryn Shirley, Chief Administrative Officer. Please go ahead, ma’am.

Kathryn Shirley: Good morning. Welcome to the AMERISAFE 2023 fourth 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 the results of risks, uncertainties and other factors, including factors discussed in the earnings release and 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. We are pleased to report solid operating earnings or results for both the fourth quarter 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%. 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 $60.3 million, increasing 8.4%. During the quarter, premium for policies written in the quarter increased 4.7%, which was further improved by payroll audit and related premium adjustments of $4.8 million. At AMERISAFE, we continue to see strong retention in policies for which we offer renewal with 93.9% retention in the fourth quarter. For the full year, our accident year loss ratio was in line with the prior year at 71%. The company experienced $41.1 million 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 nine severe claims of those with case incurred in excess of $1 million.

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 million in investments in cash, a solid reserve position and no outstanding debt. 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.

Andy Omiridis: Thank you, Janelle, and good morning to everyone. For the fourth quarter of 2023, AMERISAFE reported net income of $19.2 million, or $1 per diluted share, and operating net income of $14.3 million, or $0.74 per diluted share. During the fourth quarter of 2022, net income was $20.8 million, or $1.08 per diluted share, and operating net income of $16.1 million, or $0.84 per diluted share. The lower net income was primarily driven by certain items in the quarter driving the expense ratio higher as well as less tax-exempt interest income driving a higher tax rate compared with the fourth quarter of 2022. For the full year, net income was $62.1 million, and net operating income was $55.9 million compared with $55.6 million and $59.3 million in the prior year, respectively.

Our total underwriting and other expenses were $19 million in the quarter, a 9% increase compared with the $17.4 million recognized in the prior year quarter. This increase resulted in an expense ratio of 28.9% compared with 26.4% in the fourth quarter 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% 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. Turning to our investment portfolio. In the fourth quarter, net investment income increased 5.7% to $8.1 million from $7.6 million in the prior year quarter.

For the full year, net investment income was $31.3 million compared with $27.2 million 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% or 31 basis points higher than the previous year. Realized gains for the portfolio on securities sold were $1.1 million in the quarter compared with $1 million during the fourth quarter of 2022. 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. During the fourth quarter, interest rates moved noticeably lower, which improved the net unrealized loss position of held-to-maturity securities to $10.5 million from $35.1 million in the third quarter. 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. For the year, the company returned $93.3 million to shareholders through a combination of regular and special dividends plus an additional $2.2 million of shares were repurchased. And finally, just a couple of other topics.

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 $254.9 million at year-end, up from $252.5 million at the prior year-end. And finally, tomorrow, February 23, 2024, we will be filing our 10-K 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. [Operator Instructions] We’ll take our first question from Matt Carletti with JMP Securities.

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Q&A Session

Matt Carletti: Hi, good morning.

Janelle Frost: Good morning, Matt.

Matt Carletti: 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. And 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?

Janelle Frost: 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 answer your 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. And…

Matt Carletti: Fair enough.

Janelle Frost: …but I will say 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 – shopping new business does come at fewer and fewer opportunities during this market where everyone is 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.

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.

Matt Carletti: 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 caught about a 6% number. We know there is pressure on pricing, but we know there is wage inflation, and that’s good for margins. I guess you throw severity in there, too. I guess I’m asking you to look 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?

Janelle Frost: No, those you – 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 and our underwriting approach and that we individually underwrite every single account. That’s built into – that margin is built into how we are underwriting those accounts today and in our pricing for those accounts. So I feel really good about that. From the loss perspective, you’re absolutely right. Frequency is down. Frequency is down for the industry.

Frequency is down for AMERISAFE, which 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. There is 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 to 2024 and the years to come, if the industry can hold on to that, that would be fantastic, but there is going to be pressure, no question on medical inflation. So I feel really good about our margins going forward because I know we’re maintaining that discipline.

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

Janelle Frost: 1.46.

Matt Carletti: 1.46, awesome. Thanks so much. I appreciate it.

Janelle Frost: Thank you, Matt.

Operator: We’ll now take our next question from Mark Hughes with Truist.

Mark Hughes: Yes, thanks. Good morning, Janelle. Good morning, Andy.

Janelle Frost: Good morning, Mark.

Andy Omiridis: Good morning, Mark.

Mark Hughes: Yes. So Janelle, frequency down 6%, and then I think did you say severity was within your expectations? Did you give a number for that?

Janelle Frost: Yes.

Mark Hughes: I missed the first couple of minutes.

Janelle Frost: I did not. I did not. But within our expectations, built into the 71% that we’ve been carrying for accident year 2023.

Mark Hughes: Yes. And have you ever historically outlined your expectations on severity, low single digits or something like that?

Janelle Frost: That’s a great – yes, that’s a great question, Mark. I mean if you think about it in terms – again, I was just talking to Matt about if you think about 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 in any given year how many of those are going to be the horrific catastrophic claims. I mentioned in my prepared remarks, we had nine claims with $1 million, in excess of $1 million case incurred this year was 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. I don’t know when the accident is going to happen or the severity of those accidents.