Good day, ladies and gentlemen. Welcome to the AMERISAFE 2016 fourth quarter earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star then zero on your touch-tone telephone. I would now like to turn the call over to Vincent Gagliano, Chief Risk Officer. Please go ahead.
Good morning. Welcome to the AMERISAFE 2016 fourth quarter and year-end 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 statement. I will now turn the call over to Janelle Frost, AMERISAFE's President and CEO.
Thank you, Vincent. Good morning, everyone. On today's call, I will start with a few comments regarding the workers' compensation market, followed by some of AMERISAFE's operational metrics. Neal Fuller, our CFO, will conclude with the financial results before Q&A. Let me begin with the workers' compensation market. Over the last few quarters, I have described the market as increasingly competitive. The latest state-approved loss costs reflect declines, with few exceptions across the country. According to nationwide agent surveys, 85% of agent respondents saw no change or rate decreases in their books of business. Both of these reference points are consistent with last quarter. We continue to experience pressure from multi-line carriers willing to once again write workers' compensation. This mostly affects AMERISAFE on large accounts, those accounts with annual premium in excess of $250,000.
We have not seen new capital nor new entrants coming into the marketplace. Interest rate increases have been slight, but certainly not sufficient to divert underwriters from underwriting profits. All that said, my outlook for the market has not changed. We saw increased competition in the fourth quarter, and it is my expectation that that will continue in 2017. To combat the increased competition, our focus during this softening market continues to be on risk selection, retaining profitable accounts, and providing exceptional claims and safety services for our policyholders. Our combined ratio of 76.8 for the quarter and 77% for the year are reflective of our focus over an extended period of time. My reference to increased competition leads me to my first operational metric.
We were disappointed with gross premiums written this quarter, which declined 9.1% from the previous year's fourth quarter. The decline was driven by the loss of three large accounts in the quarter. The expiring annual premium for those three policies totaled $4.7 million. Keep in mind our average policy size is approximately $40,000 in premium. Overall, we increased voluntary policy count 5% this quarter. The increased policy count did not generate enough premium to compensate for declining loss costs or the loss of the large accounts that I previously referenced. We also adjusted our pricing in the quarter in response to competition.
Our ELCM, or effective loss cost multiplier, declined from 176 in the fourth quarter of 2015 to 167 in the fourth quarter of 2016. Relative to losses, the loss and LAE ratio for accident year 2016 remained unchanged at 67.9%. Both frequency and severity were in line with our expectations for the accident year. Claims reported in the calendar year were down 2.3% from 2015. As for prior accident years, favorable case development in the quarter led to $9.9 million of favorable loss development, primarily from accident years 2014, 2013, and 2012. Altogether, our loss and LAE ratio for the quarter was 57%, up from 50.8% in last year's fourth quarter. I will now turn the call over to Neal to discuss the financial results.
Thank you, Janelle. For the fourth quarter of 2016, AMERISAFE reported net income of $19.1 million, or $0.99 per diluted share, compared with $23.1 million or $1.21 per diluted share in last year's fourth quarter, a decrease of 17.3%. Operating net income in the quarter was $20 million or $1.04 per share, a 13.1% decrease from the fourth quarter of 2015. For the full year 2016, AMERISAFE produced record net income of $77.9 million or $4.05 per share, an increase of 10.5% over 2015. Operating net income for the full year was $78.2 million, an increase of 8.5% when compared to 2015.
Revenues in the quarter declined 3.1% to $98.6 million compared with the fourth quarter of 2015. Net premiums earned also decreased 3.1% to $92.1 million when compared to last year's fourth quarter. For the full year, net premiums earned were down 1.9%, coming in at $368.7 million. Turning to net investment income, we saw an increase of 8.3% in the fourth quarter to $7.9 million, compared with $7.3 million in the fourth quarter of 2015. The increase was largely due to the increase in value of a hedge fund investment, which is marked to market through net income each quarter. Net investment income for the full year totaled $28.1 million, an increase of 0.7%. The tax equivalent yield on our investment portfolio was 3.2% in the fourth quarter, down slightly from 3.3% in the same quarter a year ago. There were no impairments during the quarter.
As part of our tax strategy, we sold some securities at a loss during the quarter to offset taxable realized gains from earlier in 2016, as well as to offset some taxable realized gains from 2013. Our opportunity to carry back losses to offset those 2013 gains was expiring at year-end. As a result, during the quarter, we had realized losses of $1.5 million, compared with minimal realized gains in the same quarter a year ago. The investment portfolio is high quality, carrying an average double A-minus rating with a duration of 3.45, and with 55% in municipal bonds, 29% in corporate bonds, 7% in U.S. Treasuries, and the remainder in cash and other investments. Approximately 54% of our bond portfolio is comprised of held-to-maturity securities, which are in an overall unrealized gain position of $6.5 million.
These gains are not reflected in our book value as the bonds are carried at amortized cost. With regard to operating expenses, our total underwriting and other expenses decreased 11.6% to $17.1 million in the quarter, compared with $19.4 million in the fourth quarter of 2015. The decrease was primarily due to lower premium-based assessments and premium taxes than in the same quarter in 2015. By category, the 2016 fourth-quarter expenses included $6.5 million of salaries and benefits, $6.5 million of commissions, and $4.1 million of underwriting and other costs. Our expense ratio for the quarter was 18.6%, compared with 20.4% for the fourth quarter of 2015. For the full year 2016, operating expenses decreased $3.5 million or 4.2%, and the underwriting expense ratio was 21.9% in 2016 compared with 22.4% in 2015. Our tax rate decreased to 31.4% in the quarter, down slightly from 31.7% a year ago.
The decrease reflects the smaller amount of taxable income compared with tax-exempt income during the quarter as a result of the smaller favorable prior year development in the quarter compared to the same quarter last year. For the full year 2016, the effective tax rate was 31.0% compared with 30.2% in 2015. Return on equity for the fourth quarter of 2016 was 15.8%, compared to 19.5% for the fourth quarter of 2015. Operating ROE for the quarter was 16.7%. For the full year, ROE was 17.1% compared with 15.6% last year, while operating ROE for the full year was 17.2%, up from 16.1% in 2015. Now to capital management. During the fourth quarter, the company paid its regular quarterly cash dividend of $0.18 per share, as well as an extraordinary dividend of $3.25 per share.
This quarter, the board has declared a quarterly cash dividend of $0.20 per share, payable on March 24th, 2017, to shareholders of record as of March 10th, 2017. This represents an 11% increase in the regular quarterly dividend. Just a couple of other noteworthy items. Book value per share at December 31st, 2016 was $23.72, flat with last year's $23.73 per share. We paid out $3.97 per share in dividends to shareholders during the year. Our statutory surplus was $394 million at December 31st, 2016, compared with $371 million last year at this time. Finally, we will be filing our Form 10-K with the SEC, including our loss reserve triangles this Friday after the market close. That concludes my remarks, and we would now like to open the call up for a question and answer session. Operator?
Thank you. Ladies and gentlemen, if you do have a question at this time, please press star then one on your touch-tone telephone. If at any time your question has been answered or you wish to remove yourself from the queue, please press the pound key. Our first question comes from Mark Hughes with SunTrust. Your line is now open.
Good morning.
Good morning, Mark.
Good morning.
Where do we stand with the large accounts, the three accounts of $4.7 million? Are there many more like that, or have we chased off the ones that are vulnerable?
Well, I wouldn't like to say we chased them off. Yes, we have approximately 74 a ccounts over $250,000 in force at December 31, 2016, that accounts for about $26 million of premium. The largest one is less than $700,000.
Right. To a degree, your vulnerability there is less.
Correct.
Yeah. How about, are there steps you can take, still maintaining your prudent underwriting to expand the book? Any new distribution initiatives? Anything that, again, given the environment you're faced with and your underwriting approach, anything you can do to kind of get the top line stable or moving up?
Yeah, that's a really good question. I'll start with, I think during this market cycle, our number one priority is maintaining and renewing those accounts that we know are profitable and keeping those on the books. We are seeking new business. I don't expect us to expand our focus, change our risk selection process, or expand geographies. I do think there are opportunities out there for AMERISAFE, but there is plenty of competition to go along with that. At this point, any growth, all other things being equal, may not be the prudent answer for AMERISAFE.
Understood. How about in Florida? What are you seeing there with the potential volatility around losses, the price changes? What do you think is going to happen?
I think AMERISAFE, as well as all other carriers at this point, are just cautious about what's happening in Florida. There is business to write there. With the 14% rate increase, I think people are willing to write business. Obviously there's two ways you compete on business, commissions and policyholder dividends, because the rates are set. I think everyone's still in a cautious mode, but there's opportunity to grow there.
Right. You haven't seen any spike in losses, nothing like that?
No, we haven't. Good question, but no, we haven't.
At least at this point, as far as you can judge, the rates are keeping ahead of any loss trends?
Well, I don't know that the court decision has been finalized at this point. It's still on appeal, so everyone's charging the 14% rate increase at this point, but I guess it's still technically in limbo.
Right. Okay. Thank you very much.
Thank you.
Our next question comes from Randy Binner with FBR Capital Markets. Your line is now open.
Hey, good morning. Thanks.
Good morning.
Morning. I guess I kind of focus more on margins. The ELCM ticked down a little bit kind of sequentially, but it's still pretty darn good. It implies like a 60% loss ratio and you guys are running at kind of 68%. Clearly the comments on the market are cautious and we are across the industry going into a softer market. How should we think about loss picks? Do they need to get more conservative or do you need to think about what you can do on the top line? Because you are running the ELCM versus where your picks are and where your book is emerging still has a pretty wide buffer.
Okay. I would say this, AMERISAFE's reserving practices has not changed. We are aware of the ELCM. Obviously, part of the way we set our pricing is how we're reserving on accounts today. I don't see that changing in the near future.
While the prior year development favorable is greater for the year-
Right
It was a high number. It seemed like it's kind of slowed down a little bit in the back half of 2016. Is your sense that there were some very good underwriting years for workers' compensation? Is your sense that the redundancy from those years is kind of declining, or is this more of a timing issue, first half versus second half of 2016?
I don't think you can read into that there's a change in the reserving based on where it falls into various quarters. We're in a lumpy business, and as we've said the last two quarters, the development that we've experienced, the favorable development that we've experienced, has really been driven by case reserves. Those don't seem to happen escalating over a period of time, first quarter versus fourth quarter. Look, comparing this year to last year, it does look odd that we had less favorable development in the fourth quarter this year than we did last year, and I think actually the first quarter was our largest quarter this year. That's really driven by what's happening with our case reserves.
Okay, more lumping, not really trend.
Correct.
Yeah. Okay. Yeah, I'll leave it there. Thanks so much.
Thank you, Randy.
As a reminder, ladies and gentlemen, if you do wish to ask a question, please press star then one. Our next question comes from Matthew Carletti with JMP. Your line is now open.
Yes, hi, good morning. My name is Karol Chmie l. I have a question on behalf of Matt Carletti at JMP, and I apologize if I missed this on the call earlier, but can you just advise what the reported LCM number is for the quarter?
Certainly. It was 167.
Okay. Thank you very much.
You're welcome.
I'm showing no further questions. I would now like to turn the call back over to Janelle Frost for any further remarks.
Thank you, operator. Our record earnings this year are the result of AMERISAFE's employees' focus on risk selection, safety and claim services, and expense management. Our 400-plus employees thrive on providing exceptional service to our policyholders while balancing their responsibility to provide returns to our shareholders. We are proud to be part of such an amazing team. Thank you, AMERISAFE employees, for a successful year. I would also like to express gratitude to Austin Young. Austin has announced that he will be retiring from AMERISAFE's board at our annual meeting. Austin has served our board for 12 years, and his leadership has been instrumental to the company and to me personally. On behalf of AMERISAFE's board and employees, I would like to thank him for his service and guidance. Thank you for joining us today.
Ladies and gentlemen, thank you for participating in today's conference. You may all disconnect. Everyone have a great day.