Good day, and welcome to the AMERISAFE 2022 third quarter earnings conference call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Kathryn Shirley, Chief Administrative Officer. Please go ahead.
Good morning, and welcome to the AMERISAFE 2022 third 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-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.
Thank you, Kathryn, and good morning, everyone. I'd like to take this opportunity to virtually welcome Anastasios Omiridis, our new CFO. As previously announced, Andy joined the team in September and has been working with Neal as he transitions to retirement. Welcome, Andy. Moving on to the quarter. We are pleased with this quarter's results, reporting an 85.4% combined ratio and an operating ROE of 14.4%. The quarter's results were supported by favorable prior year development, an increase in net investment income due to higher interest rates, and strong audit premiums. Premium written is up for the second consecutive quarter, with the current quarter written premium up 1.5%, primarily due to audit premium. Wage inflation continues to be the primary driver for payrolls, with our payrolls up significantly from the same period last year.
In maintaining our operational effectiveness, we were successful in retaining 93.5% of the accounts for which we offered renewal. Our overall pricing, as measured by our ELCM, was at 153, identical to the third quarter of 2021. Overall policy count was down as we continued to face competitive headwinds in the marketplace. We are well-positioned to retain our policyholders and successfully compete for new business. In addition, we continued to see growth in payrolls reported in this quarter, driven primarily by wage growth. This bodes well for future audit premiums. A smaller percentage of the growth is attributable to new workers. The number of new workers is a trend we closely monitor, as new workers typically translate to more claims. Over 40% of the claims reported in any given year are injuries from workers with one year or less of tenure.
Job training, turnover rates, and accident prevention measures are risk differentiators our safety professionals evaluate during their on-site visits and are critical to our underwriting evaluations. Continuing with losses, we experienced $10.4 million of favorable prior year development in the quarter, primarily from accident years 2017 through 2020. For the current accident year, our loss ratio was 71%, unchanged from the first two quarters. Frequency for the current accident year is down from accident year 2021 at the same point in time, and severity was within expectations. Before turning the call over to Andy, I want to discuss the special dividend. The company's board of directors declared a special dividend of $4 per share for shareholders of record as of December 2nd, 2022.
This dividend reflects the operational excellence and commitment to our shareholders by seeking to deploy capital to create long-term shareholder value and return excess capital to shareholders. I'll now turn the call over to Andy.
Thank you, Janelle, and good morning to everyone. For the third quarter of 2022, AMERISAFE reported net income of $11.4 million or $0.59 per diluted share, compared with $19.1 million or $0.99 per diluted share in last year's third quarter. The decline in net income was primarily driven by larger declines in our equity securities compared to last year's third quarter. Additionally, last year's third quarter favorable development included a larger amount of favorable case reserve development from closed cases. Operating net income for the third quarter was $14.1 million or $0.73 per share, a decrease from $19.8 million or $1.02 per share in the third quarter of 2021. Revenues in the quarter were lower, impacted by $4.1 million in unrealized losses on equity securities.
Revenues came in at $71.3 million compared with $73 million last year. Net premiums earned increased 0.2% to $67.8 million compared with $67.6 million in last year's third quarter, primarily driven by audit premium. Turning to our investment portfolio, net investment income increased 15.4% in the third quarter to $7 million, compared with $6 million in the third quarter of 2021. The increase was driven by yields on money market funds and bank accounts, as well as higher reinvestment rates on fixed income securities. During the first nine months of the year, our yield on new investments was approximately 147 basis points higher than the securities maturing or sold out of the portfolio. We expect this trend to continue.
The tax equivalent yield on our investment portfolio was 3.16% at the end of the third quarter, up 66 basis points from one year ago. The pre-tax yield on the portfolio was 2.88% at the end of the quarter, also up from 2.21% one year ago. Realized gains for the portfolio on securities sold were $600,000 in the quarter compared to a minimal loss during the third quarter of 2021. The investment portfolio is a high quality, carrying an average AA- credit rating with a duration of 4.09 years.
The composition of the portfolio is 58% in municipal bonds, which includes 14% in taxable munis, 21% in corporate bonds, 6% in Treasuries and agencies, 6% in equity securities, and 9% in cash and other investments. Approximately 60% of the bond portfolio is comprised of held-to-maturity securities. Our total underwriting and other expenses were $19.6 million in the quarter, compared with $17.9 million in the third quarter of 2021. The reported increase in the quarter was primarily due to a benefit in last year's third quarter from a reinsurance treaty profit-sharing commission. Our expense ratio for the quarter was 28.9% compared with 26.5% in the third quarter of 2021.
By category, the 2022 third quarter expenses included $6.7 million of salaries and benefits, $5.4 million in commissions, and $7.4 million of underwriting and other costs. Return on equity for the third quarter of 2022 was 12%, and operating ROE for the quarter was 14.4%. Moving on to capital management. As Janelle discussed, the $4 per share special dividend declared by the board of directors. What I would like to focus on is the quarterly repurchasing of shares for a total of $6.5 million at an average share price of $46.83, including commissions, with an additional $12.8 million remaining in our share repurchase authorization as of September 30th, 2022, for future purchases.
Finally, just a couple of other topics. Book value per share at September 30th, 2022 was $19.47, down 5.6% from $20.62 at year-end 2021. Finally, tomorrow, October 28th, 2022, we will be filing our Form 10-Q with the SEC after market close. That concludes my remarks. We would like to open up the call for the question and answer session. Operator?
Thank you. If you would like to signal with questions, please press star one on your touchtone telephone. If you're joining us today using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, that is star one if you would like to signal please. Star one for questions. Our first question come from Mark Hughes with Truist.
Yeah, thank you. Morning, Andy. Morning, Janelle.
Morning, Mark.
Good morning.
The audit premium outlook, I think you suggest, the growth that you're seeing in payrolls suggests audit premium ought to continue to be pretty strong. Is it looking as good as it did at this time, say, three months ago?
The wage growth or the payroll growth that we saw this quarter is stronger than we've experienced over the last few quarters. Overall wage growth. Again, I should clarify, these are payrolls that were reported to us this quarter. Payrolls reported to us this quarter, so they reflect activity for the months prior, grew 12.1% on an overall basis, and about 2.9% of that was new employees. The wage growth itself component was 10%, which is higher than it reported last quarter, which was around 9%.
Yeah. Okay. From a loss cost perspective, you gave us the ELCM. Sounds like it's steady.
Yes.
Do you have kind of the update on what you're seeing in terms of loss cost trends?
Yeah, the loss cost trend still continued down for the quarter. It on the average was 10% down or 10.3% down, which is pretty much in line with what we reported for the second quarter as well. We're not seeing, if there's a way to say this, we're not seeing increasing decreases.
Yeah. Yeah.
On the other hand, we're not seeing net positives either.
Yeah. Then anything on the medical inflation front? There's been some talk about that in other lines. What do you see?
Yeah, certainly something that we're keeping our eye on. You know, when we think about medical costs in particular, and rather anecdotally, but we all hear about how much, you know, the medical field itself is experiencing wage inflation. We keep a close eye on that for a couple of reasons. We do think that eventually works its way into the workers' compensation system, either via the Medicare schedules or state updating their loss costs. Meanwhile, you know, it's not built into the rate. So I think the first place we'll see it in terms of workers' compensation is probably companies really just using discretionary pricing to get in front of the costs that they're experiencing on the claims side. That's something that we're closely monitoring.
You know, as of yet, there hasn't been a lot of updates to the fee schedules, but it's something that we anticipate happening. Of course, it takes a while for that to make its way into the actual loss cost or the rates themselves.
Could you maybe expand on that a little bit, how the trajectory, if you do see the inflation and it starts in the fee schedules, what is the lag on that? What's that process?
That's a great question. What is the lag? I only know of one state thus far that has actually updated their fee schedule. I do think it takes time for those trends to build up in that either it will happen. It depends on the state. It could be in the Medicare or Medicaid fee schedule, because a lot of states base their workers' comp fees off of those schedules, or the state may have a specific fee schedule for workers' compensation. There's definitely a lag there in terms of when that happens.
Like I said, we've only seen one thus far, so I think we're probably 6-9 months away from really seeing any real movement there, given the rate of medical inflation that is being experienced in the healthcare field.
Yeah. I'll ask one more. I'll be rude here. You're rude in asking another question. The question-
Oh, okay. I paused.
What color are the shoes you're wearing? Now, the capital situation. With the dividend, how are you looking at the kind of capital ratios, that sort of thing?
Right. You know, as we've talked about numerous times, we know the metrics we talk about are our operating leverage, whether that's net premiums written to GAAP equity or even net premiums written to statutory surplus. You know, we think on a GAAP equity standpoint, we could be at 1x or 1.1x. On a statutory basis, it could be up to 1.4x. We're not at those targets. Our operating leverage at the end of the quarter was 0.71x, I believe, from an operating standpoint. There's definitely excess capacity there, excess capital there in terms of where we think we can operate and still maintain all of our AM Best rating and those marks that we are so important to us to operate.
Understood. Thank you very much.
Thank you, Mark.
Thank you. Our next question will come from Matt Carletti with JMP.
Janelle, I was hoping I could kind of ask you a broad economy question, just with everybody kind of thinking about the recession. You guys have some specific sectors that, you know, make up large portions of your book. What are you seeing in your core sectors in terms of economic activity? Has it changed much, you know, kind of this quarter to last quarter, you know, so on?
Yeah. You know, Matt, that's a great question. When we look at our insured base now, our best indication is what are we seeing in reported payrolls. I mentioned, you know, what we saw this quarter in reported payrolls were up 12%. A lot of that was wage growth, you know, 10% of that was wage growth and then new workers. Even the new workers being at roughly 2.5, between 2.5 and 3% is not a stark change from what we have been seeing. We, you know, we monitor new workers very closely.
I think if we think in terms of recession, which is where your question's coming from, I would suspect that we would start to see that number decline to some degree in terms of new workers. Our industry groups fare pretty well. If we're talking minor recession or some people like to say little R recession, you know, our industry groups respond pretty well in a little R recession. Their essential work, if you think about the housing market and, you know, certainly making headline news with the interest rates being what they are. When you think about commercial or construction being our largest industry group, about 5% of that, roughly 5% of that is not commercial construction. We feel very comfortable that our construction book bodes pretty well.
Of all of our industry groups, I'll tell you, to me, trucking seems to hold up really well, even in recessionary times. Our trucking book has been pretty steady. That was a long-winded answer. I apologize.
No, it's super helpful. Super helpful.
Okay.
Maybe switching gears a little bit just to the development, you know, both this quarter as well, it's been just really steady for a number of quarters now. Maybe just can you refresh us on kind of what's driving that? In particular, what I'm getting at is it mostly claims closing kind of below expected and kind of that happens, you're kind of, for lack of a better term, kind of forced to release it? Or are you seeing anything in kind of the loss trends on open claims that you're then kind of adjusting the reserves you're keeping up on claims that remain open?
You know, when you think about AMERISAFE, and I do think this is one of the things that when you think about our loss reserving, you really have to remember how different we are in terms of if you just look at our overall reserves, case reserves as a component of our reserves versus IBNR. We rely heavily on our case reserves. We believe in the expertise of our field case managers. You know, we keep really low inventories in the field, less than 50 claims per adjuster, and that's very intentional on our part. Simply because we want them to know those claims intimately and give up what we believe is most likely outcome in terms of the case reserve.
Fast-forward to what we're seeing in loss development or favorable loss development, it's coming from those case reserves and my claims department really focusing in on how do we close these claims? How do we get best outcomes, not only for AMERISAFE, but for these injured workers and ultimately for the policyholders themselves, in terms of mitigating those costs and getting those claims closed. You know, I probably sound like a broken record, but our job is maximum medical improvement and return that injured worker to work. Our claims folks are thinking about that every single day, and that's where our favorable development is coming from, is those case reserves and being able to close and settle those claims and at the same time, take care of those injured workers.
Perfect. Just a real quick one. Can you update us on where kind of, you know, large claims, you know, frequency and the number of large claims sits, you know, at September thirty?
Certainly. At September 30th, we had 12 large claims, and when I say large, that's claims with case incurred over $1 million. If I compare that to where we were at 9/30 last year, that number was nine, but the year ended with 19. Actually, year 2021 ended with 19 large claims, and we're at 12 right now for 2022. No, in my mind, no real differences between in frequency of severity, but of course, this is a lumpy business and you know.
Mm-hmm.
I think there's 100 days left in the year.
Lots of time.
No, there's 65 days left in the year. 65 days. I think today is day 300.
Perfect. Well, thank you very much for the color, and welcome Andy and Neil. Your best of luck for an enjoyable retirement.
Thank you.
Our next question will come from Mark Hughes with Truist.
Anything we should think about in the expense ratio in terms of inflation that you may be seeing in wages? I know it's pretty volatile, but maybe it's been a little bit higher lately. Is that a-
Sure.
Correct impression?
Yeah. AMERISAFE is not immune to what everyone seems to be experiencing in terms of wage inflation and what that pressure is. We're not immune to that. Yeah, we're experiencing the same thing everyone else is. What that is on a long-term basis, particularly when you start thinking about the expense ratio, great question that I don't have the answer to. I just don't know what the long-term impact's going to be, 'cause I think sometimes you see it in pockets, right? Depending on the job market or the skill level, what is in demand at the time.
Okay. How would you characterize competition in some of the other quarters? You spoke about what you're seeing, the appetite among bigger carriers or regional carriers. How would you characterize it now versus three, six months ago?
It's unchanged. Competition is still strong. There are still carriers out there willing to write what AMERISAFE writes. You know, I think the agent force is really honed in on other lines of business besides workers' compensation because of the availability of carrier coverages in various pockets. Workers' comp, given the fact that loss cost has been declined and everybody's pretty much going to their agent and getting a rate decrease, workers' compensation is probably not top of mind for those agents in terms of placing that coverage. They're really, as we all know, there are other property and casualty lines that are really struggling. That's where I feel like we could do a better job in terms of new business.
As far as the competitive environment, it really hasn't changed much. You said 6-9 months, I would even go farther back than that. Probably been two years even, that we really haven't seen a change in the level of competition.
Yeah. I had a great question that is,
My shoes are brown.
Yeah. The question was, you've also, I think, sort of characterized, you know, when you look at your customer base, it's mostly commercial. Maybe it's that next job that's important when you think about.
Right.
-the future. Any perspective on, you know, just what they're saying about backlog, bidding activity, you know, what you feel like there?
Right. You know, that was one of our concerns coming out of or during the pandemic and even coming out of the pandemic. We knew our insureds were working, and the concern was, would the next job be there? Based on the payrolls that are being reported to us, the answer to that question then is yes, the next job was going to be there. When I look at consumer demand, if you, for lack of a better term, you know, it's still very strong. Even though interest rates have been going up, I don't think we've really seen a lessening of demand. Until we see that, I do think, you know, the next project's going to be there.
Yeah. Yep. Okay. Thank you again.
You're welcome.
Thank you. That does conclude the question and answer session. I'll now turn the conference back over to Janelle Frost.
Thank you. I started today's call welcoming Andy to the team. I'd like to end by thanking Neal Fuller for his service and leadership at AMERISAFE. The company and our community are better today because of the influence of Neal and his wife, Maria. We wish them the very best. Thank you for joining.
Thank you. That does conclude today's conference. We do thank you for your participation. Have an excellent day.