Good day, and welcome to the AMERISAFE 2022 first quarter earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Miss Kathryn Shirley, Chief Administrative Officer. Please go ahead, ma'am.
Good morning. Welcome to the AMERISAFE's 2022 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 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 statement. I will now turn the call over to Janelle Frost, AMERISAFE's President and CEO.
Thank you, Kathryn , and good morning, everyone. Our combined ratio of 80.1% this quarter was supported by strong policy retention, favorable prior year case development, better-than-expected insured payrolls, and a reduction in assessments. I will address premiums, losses, and payrolls, and Neal will speak to the reduction in assessments and other financial metrics. Premiums written in the quarter were down 4.6% from the first quarter of 2021. We continued to face a competitive marketplace as carriers seek market share and premium in a declining rate environment. Our average loss cost decline in the quarter was 8.2%. Our ELCM, which is an index of the approved loss cost, was 154, same as first quarter of 2021.
In holding our discipline and responding to competition, we were successful in retaining 93% of the accounts for which we offered renewal, but overall policy count was down 1.1%. Additive to the top line was higher than expected policyholder payrolls. Audit premium and related adjustments increased premium $2.8 million in the quarter, which was a marked improvement over $300,000 reported in the same quarter of 2021. Wage inflation was the primary driver of payroll increases. Moving on to losses, we experienced $10.2 million of favorable prior year development in the quarter, primarily from accident years 2017, 2018, and 2019. Importantly, we did not adjust our reserve estimate for the catastrophic claim reported in the fourth quarter. As for the current accident year, our loss ratio was 71%.
I believe it is at this time each year that I use the words, "Three months does not a trend make." That being said, frequency for the quarter was down from accident year 2021 at three months, and severity was within expectations. We view fewer reported claims as opportunity to focus on open claims and finding avenues to resolve and close them. Before turning the call over to Neal, I want to speak about this quarter's share repurchases. In the quarter, we repurchased shares for a total of $2.1 million, with $22.9 million remaining within our authorization. The repurchasing of shares, along with our dividends, reinforce our confidence in the earnings power of our niche business. I'll now turn the call over to Neal.
Thank you, Janelle, and good morning, everyone. For the first quarter of 2022, AMERISAFE reported net income of $17.3 million, or $0.89 per diluted share, compared with $19.3 million or $0.99 per diluted share in last year's first quarter. Operating net income for the first quarter was $15.9 million or $0.82 per share, an increase of $0.06 or 8% from the first quarter of 2021. Revenues in the quarter were lower, impacted by last year's $5.5 million increase in unrealized gains on equity securities. Revenues came in at $75.6 million, compared with $83.4 million last year. Net premiums earned decreased 4.5% to $67.6 million, compared with $70.7 million in last year's first quarter, and an improvement from the trend in recent quarters.
Turning to our investment portfolio, net investment income decreased 7.1% in the first quarter to $6.1 million, compared with $6.6 million in the first quarter of 2021. The decrease was driven by the continued impact of lower interest rate on fixed income securities as they worked through the year-over-year comparisons. On a positive note, net investment income for the first quarter was slightly higher than last quarter and third quarter of 2021, and the yield on our portfolio continues to increase. As a result, after one more tough comparison next quarter, we expect positive net investment income growth in the third and fourth quarter this year. The tax equivalent yield on our investment portfolio was 2.75% at the end of the first quarter.
The pre-tax yield on the portfolio was 2.45% at the end of the quarter, flat from 2.46% one year ago. Realized gains for the portfolio and securities sold were $700,000, compared with $300,000 during the first quarter of 2021. The investment portfolio continues to be high quality, carrying an average AA- credit rating with a duration of 3.84 years, and with 62% in municipal bonds. That includes 15% in taxable munis, 24% in corporate bonds, 4% in US Treasuries and agencies, 7% in equity securities, and 3% in cash and other investments. We have increased our allocation to corporate bonds over the past several quarters, finding some attractive opportunities, and slightly decreased our allocation to municipal bonds.
Approximately 60% of our bond portfolio is comprised of held to maturity securities. With the substantial rise in rates during the quarter, these bonds are now in a slight net realized gain position at quarter end. 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 book value. Moving now to operating expenses. Our total underwriting and other expenses were $15.1 million in the quarter, compared with $19 million in the first quarter of 2021. The decrease was largely due to lower insurance related assessments, driven by a $3.8 million return of assessments from Minnesota. By category, the 2022 first quarter expenses included $5.9 million of salaries and benefits, $5.2 million in commissions, and $4 million of underwriting and other costs.
As a result of the favorable decline in expenses, our expense ratio for the quarter was 22.4%, compared with 26.8% in the first quarter of 2021. Our tax rate for the quarter was 19.1% compared to 18.3% for last year's first quarter, largely due to higher underwriting profits. Return on equity for the first quarter of 2022 was 17.4%, identical to the 17.4% ROE we earned in the first quarter of 2021. Operating ROE for the quarter was 16.3%, an increase from 13.9% in last year's first quarter. In capital management, the company repurchased shares during the quarter for a total of $2.1 million, leaving $22.9 million remaining on its share repurchase authorization.
Also in capital management, our company paid its regular quarterly cash dividend of $0.31 per share in the first quarter, which represented a 6.9% increase over last year's amount. This quarter, the board declared a quarterly cash dividend of $0.31 per share, payable on June 24, 2022 to shareholders of record as of June 17, 2022. Finally, just a couple of other topics. Book value per share at March 31, 2022 was $20.46, down slightly from $20.62 at year-end. Our statutory surplus was $295 million at quarter end, up from $278 million at December 31, 2021. Lastly, we will be filing our Form 10-Q with the SEC on Friday, tomorrow, after the market close. That concludes my remarks.
Now we would like to open up the call for the question and answer session. Operator?
Yes, sir. Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, that is star one if you would like to ask a question. We'll take our first question from Matt Carletti with JMP.
Hey, good morning.
Good morning, Matt.
Morning.
Janelle, I was hoping I could dig in a little deeper into your comment about better than expected payrolls. Were there any particular geographies or you know, sectors, coverage areas that you saw that more so than in others? I heard your comment about it being wage inflation. Can you just talk a little bit about kind of how you view kind of that aspect of it? Am I right in thinking that all else equal, that's positive for you know, the outlook on future margins?
Certainly. Yeah, I'll start with the payroll, better than expected payroll growth. You know, if you recall, each quarter we've kind of been giving some indication of what we've seen in the prior quarters' payrolls reported to us. As an example, in the fourth quarter, we talked about the payroll growth that we saw reported to us via monthly payrolls was up about 4%, and 3% of that was wage inflation. We continued to see that, you know, each quarter last year seemed to improve over the prior quarter. I think maybe third quarter was 3.5% in terms of wage inflation, and the fourth quarter was 3%. When I look at the first quarter of 2022, however, that number is 7.3%.
From 3.5% in the third quarter, 3% in the fourth quarter, 7.3% in the fourth quarter. It really was across our industry groups for the most part. I think Marine was the only one that didn't show a lot of wage growth itself. But particularly in our services, construction, particularly roofing, trucking, we saw wage growth across the board in those categories. What I don't have visibility into, Matt, is, yes, it's wage growth. Is that simply higher wages, or could it be same workers, more hours?
Right.
That's something I don't really have visibility into at this point. We do also look at employee count, and in the first quarter of 2022, that was 1.9%. I think in the first quarter it was 1.2% and maybe 1% or 1% the quarter before that. Not a lot of fluctuation in terms of employee counts or adding on new employees, which, you know, always gives us a little bit of pause because we think that drives frequency. To your point about that resulting in a tailwind for future premium growth, I think the answer is yes in terms of what we're seeing in the economic activity of our insureds currently. That certainly is how we view that.
Got you. Whether that ultimately results in kind of, you know, a tailwind from margins a little bit on your, I guess, on your comment of trying to figure out.
Yeah.
As time goes on, how much of that is maybe you know, same employee, additional exposure, hours worked versus.
Uh-huh.
Them just getting paid more for the same exposure.
Yeah. We much prefer to see the wage growth in like the 7.3% number because we do think that means same workers. We think that's safer than new employees, if that helps you in terms of thinking about future margins. I do want to clarify because sometimes it gets a little confusing when we talk about top line and when it shows up. Keep in mind that these payroll numbers I'm talking about are first quarter 2021 work activity.
2022.
2022. Thank you, Neal. 2022 work activity that translates to audit premium when those policies are audited. That 7.3% is not impacting our top line currently.
Yeah, it'll come in future quarters. Yep. Got you.
Exactly. Wanted to clarify.
Great. No, that's helpful. Then kind of a little bit of a follow-on to that, but obviously audit and adjustment premiums were kind of very favorable in the quarter. Neal, could you remind us just what's the dollar number that impacted last year's second quarter? So kind of what's the comparison number that we're gonna be basing it off of for the upcoming quarter?
Last year's second quarter audit and other premiums were just a half a million dollars, so $0.5 million.
Okay.
Versus $0.3 million in the first quarter of 2021.
Okay. Wonderful. Then one more question, if I could, just shifting to the investment portfolio. Neal, can you remind us or update us, I guess, on kind of what you're looking at in terms of new money yield versus kind of book yield? I'm sorry if I missed it in your comments. I was trying to keep up. Then how much of the portfolio you expect to roll over the next 12 months?
Yeah. The new money rate rose during the quarter and particularly got into very attractive new money rates, we think, in the last two weeks of March. We think we're at a point now where we're ready to put money out a little bit longer, maybe, increase our duration a little bit, because these yields look attractive relative to the last several years. I don't have a specific new money rate to give you versus what's rolling off, but there is a pretty big gap, whereas before that was pretty much one for one. I would say that it is on the lines of maybe perhaps 100 basis points. Our cash is relatively low right now because we've been taking advantage of those opportunities.
As cash flow comes into the company and then is reinvested and cash flow comes off the portfolio and is reinvested, we would expect that would continue to drive net investment income growth. In terms of turnover, I don't have a specific percentage of the portfolio to give you.
Okay, great. Well, thank you for the answers, and congrats on a nice start to the year.
Thank you, Matt.
Thanks, Matt.
Once again, that is star one if you would like to ask a question. We'll take our next question from Mark Hughes with Truist.
Yeah. Thank you. Good morning.
Good morning, Mark.
Morning, Mark.
Any more detail you can give us on the new business environment? I think you mentioned it was a competitive market. I'm just sort of curious if you're seeing anything change in terms of maybe your ability to go out and sign up new customers.
Mm-hmm.
Yeah, great question, and I wish the answer was, "Oh, I've seen lots of change. Competitors are pulling away." That's not the case. At the same time, we're not seeing a new rash of competitors either. It's just been steady state. I think every carrier is sort of battling the same issues in terms of, you know, approved loss costs are still declining to, you know, high single digits dollar. Everyone's looking for premium and trying to grab market share, but at the same time appear to be relatively disciplined in terms of their pricing. It'll be interesting to see, you know, NCCI's annual numbers come out in a couple of weeks. It'll be interesting to see how much fluctuation there's been in discretionary pricing over the last two years comparatively.
Because I saw a report recently from CIAB. I think it was CIAB that you know they poll agents, and agents have seen the last couple of quarters has been really benign in terms of what they are reporting as rate increases or rate decreases. I do think carriers are being responsive to that. In terms of, you know, the agents aren't seeing these large decreases come through like we were seeing before. That's sort of a maybe an indication of what's happening with pricing, but it's really on the discretionary side 'cause the approved loss costs that we've been seeing come through are still declines.
Yeah. On that topic, you gave a good precise number in the release. I appreciate that.
You're welcome.
8% or 0.88% or 8.2%.
8.2%. Yes.
Yeah. If I'm thinking about it, your commentary last quarter was that it was kind of a mid-single digit decline. But if I'm thinking about it properly, you were just speaking generally.
Uh.
I was just gonna ask. Was it really 8% versus, you know, mid-single, which would be, you know, 5% or 6% or something? Did it step down, or is that overreading it?
That's a great question. I did it 8.2% for the quarter. I'll have to go back and look, but I remember it being high single digit last quarter as well.
It was. I think our expectations for 2022 when we talked last quarter were more in the mid-single digits. I would say that based upon the most recent rate filings, we're expecting that to be more in the, you know, upper part of the range, you know, more in line with maybe what's in the press release for the rest of the year. Obviously, we'll get an update on that from NCCI at the conference in May in a few days' time.
Yeah, yeah. Okay. Thanks for that clarification. When you think about the frequency being down, could you frame it up versus two years ago or pre-COVID? Seems pretty striking. Frequency is down again. I wonder if you could give us some longer- term perspective on that.
Yeah. We'll be filing the Q on Friday, and you'll see on there, we always have that chart that says kind of rolls forward the open inventory. It has open claims reported, claims closed, and then ending open. You'll see that chart, you'll see claims reported in the first quarter of 2021 were less than 1,000 claims. I think it was like 993, if I remember exactly. Versus first quarter last year, which again, coming out of COVID, was over 1,000 claims. Just the number of reported claims, putting aside for premium for a second, just actual reported claim counts are down. As I.
I said, as I said in my prepared remarks, we appreciate that and are trying to use those opportunities to find ways to resolve older claims.
Mark, just to clarify, too, last year, you know, we saw frequency bounce back from accident year 2020, right, in comparison because that frequency was so low. That accident year 2021 frequency was still lower than pre-COVID levels.
I will throw in my cautionary tale of three months is not a trend make.
Yeah. Could you give the number of large claims in the quarter?
I'm sorry, we did not. It was four. Thank you for asking.
Okay. That's been the norm. Is that right?
Yes. It has been. I think we ended last year with 18, 19. Yeah. Again, it depends on the quarter. No, there's nothing about that that would cause us to think there's an alarming trend there, no.
Yeah. Refresh me. Did you say how many people were involved in the catastrophic claim?
I did not.
Can you give us some sense on that?
I would prefer not to at this point just because of the.
Is it like?
All the surrounding results.
Yeah. I don't mean to push. I will. Is it kind of a handful? Is it double digits? If that's helpful.
I really truly appreciate the question, but we try not to give too much information around the claim, obviously because we wouldn't want to identify anyone. There are certainly circumstances surrounding the claim. It has not been our practice to discuss individual claims, and I would just prefer not to at this point.
Yeah. I guess I'm just sort of wondering how much variability there can be in the losses depending on how individual cases develop, you know, so if it's a large.
We are comfortable with the reserve estimates that we have up at this time given how these the claimants have progressed medically.
Yeah. I guess if it's a larger number of people then, you know, maybe you see less variability. If it's a smaller number of people, then you could see more variability depending on their progress.
I.
That was the nature of the question. I don't know if.
Understood.
I don't think that'll prompt more detail from you.
Understood.
Okay. All right. Well, thank you very much for the answers.
You're welcome.
Thank you, Mark.
It appears there are no further telephone questions. I'd like to turn the conference back over to Ms. Janelle Frost for any additional or closing remarks.
Next week, we will celebrate the 36th anniversary of writing our first policy. A lot of things have changed since underwriting that first logging policy. Experience and technology have enhanced our ability to turn risk into opportunity. What has not changed is our commitment to serving agents, policyholders, injured workers, and since going public in 2005, providing returns to shareholders. Thank you for joining us today.