Good day, welcome to the AMERISAFE 2023 First Quarter Earnings Call. Today's conference is being recorded. At this time, I'd like to turn the presentation over to Ms. Kathryn Shirley. Please go ahead, ma'am.
Good morning. Welcome to the AMERISAFE 2023 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-Q, 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, good morning, everyone. AMERISAFE's long tenure in the high hazard workers' compensation market and disciplined approach to risk selection and pricing has allowed us to navigate competition and pricing pressure while maintaining solid results. We started the year with a strong first quarter performance, reporting a combined ratio of 82.2%, gross premiums written growth of 6%, and an operating ROE of 19.1%. During the quarter, top line grew 6% as positive audit premiums more than offset rate declines. Our overall pricing this quarter, as measured by our ELCM, was a 148. We continue to see strong retention in policies we offer renewals, with a 94% retention for the first quarter, largely in line with our recent experience despite steady competition. As we look forward, competitive pressures and rate declines are anticipated to remain a headwind.
At the same time, we anticipate audit premiums to remain a tailwind. However, the quarter-over-quarter growth comparisons should begin to flatten. Moving to losses, the accident year loss ratio remains steady with the prior year at 71%. During the quarter, our claims handling practices drove better than expected outcomes, resulting in favorable prior year development of $10.1 million or 14.6 loss ratio points. These reserves were primarily released from accident years 2016 through 2020. As it relates to loss trends, frequency and severity are both within our line of expectations. Frequency was trending slightly below and severity on par with the previous accident year. It bears repeating that claims trends can be lumpy when isolating quarters.
As has been our historical practice, our case reserves include anticipated medical inflation, particularly given the long tail nature of severe claims. Our balance sheet is conservatively positioned as we were minimally impacted by the economic volatility this quarter. Our financial position remains strong with roughly $1 billion in investments in cash, a solid reserve position and no outstanding debt. We expect our market dynamics to remain challenging. Given our long tenure of experience in high hazard niche and strong balance sheet, we are well positioned to retain our policyholders and attract business while delivering robust returns to our shareholders. I'll turn the call over to Andy to discuss our financials.
Thank you, Janelle. Good morning to everyone. For the first quarter of 2023, AMERISAFE reported net income of $17.3 million or $0.90 per diluted share, and operating net income of $16.1 million or $0.83 per diluted share. This is largely in line with Q1 2022 net income of $17.3 million or $0.89 per diluted share, and operating net income of $15.9 million or $0.82 per diluted share. Gross written premiums were $82.5 million in the quarter versus $77.8 million in Q1 2022, growing 6% on a year-over-year basis. During the quarter, voluntary premium decreased 1.1%, primarily due to continued rate pressure. Payroll audit and related premium adjustments benefited the quarter by $8.9 million.
Rates continued to decrease with the average decline in approved loss costs of 6.8% on a year-over-year basis. Wage growth remained strong, resulting in some offset to our top line pressures. The accident year loss ratio was 71% in the quarter, in line with what was booked in the previous year. The net loss ratio for the quarter was 56.4%, which reflects $10.1 million in favorable loss development, primarily from accident years 2016 through 2020. Our total underwriting and other expenses were $17 million in the quarter, resulting in an expense ratio of 24.5% compared with 22.4% the first quarter of 2022.
This quarter included a $3.3 million increase in profit sharing reinsurance commission, while the first quarter of 2022 included a $3.8 million return of assessments from the Minnesota Reinsurance Association. After netting out these two items, the balance of the increase is driven by commissions and professional fees. Turning to our investment portfolio. In the first quarter, net investment income increased 21.6% to $7.4 million from $6.1 million in the prior year quarter. The increase was driven by higher yields on cash as well as higher reinvestment rates on fixed maturity securities. Yield on new investments increased approximately 313 basis points, driving our tax-equivalent book yield to 3.49% or 74 basis points higher than the previous year.
The investment portfolio is a high quality, carrying an average AA- credit rating with a duration of four years. The composition of the portfolio is 58% in municipal bonds, which includes 15% in taxable munis. We have 27% in corporate bonds, 3% in U.S. Treasuries and agencies, 7% in equity securities, and 5% in cash and other investments. Approximately 60% of our bond portfolio is comprised of held-to-maturity securities. 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 $1 billion in investments, cash, and cash equivalents. Since year-end, book value grew 4.9% to $17.38, operate, and operating return on average equity was 19.1%.
With that, I would like to open the call for the question-and-answer portion of the call. 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 now take our first question from Matt Carletti with JMP.
Hey, good morning.
Good morning, Matt.
Janelle, I was hoping you might be able to just kind of walk us through a little bit of the, the loss environment, just kind of your mental math on how you get to think about kind of accident year loss ratios and specifically kind of just what you're seeing with frequency and severity and kind of your expectations there. You talked a bit obviously about what loss costs are doing, but then also with an eye towards, you know, kind of the piece of the puzzle that is, you know, exposure growth and wage inflation and kind of how that might impact that calculus and how much of that might, you know, act like rate even though it isn't, you know, loss cost per se.
Right. That's a good way to look at it, Matt. I'll start with talking about the loss trends themselves. It sounds like a broken record when I say this, but we're still not seeing reported claim counts rebound to pre-pandemic levels. Which is good, right? That's good news.
Mm-hmm.
Safer employers, safer workplaces, all wonderful things. When I talk about frequency, I tend to talk about frequency in terms of premium dollars, not payrolls, but I'll get to the payrolls in a second. Even though we've collected less premium dollars, to cover those losses, our frequency, even our frequency measure has been slightly down, even compared to first quarter of 2022. Granted, one quarter does not a trend make, but we just haven't seen the rebound in claims reported, and which is definitely benefiting us from the frequency standpoint. From a severity standpoint, severity for the first quarter, again, one quarter does not a trend make. For the first quarter, severity was pretty much on par with where severity was for the first quarter of 2022 accident year.
As we've talked about numerous times on these calls, where our concerns come in in severity is given the long tail nature of our claims, how does medical inflation influence that over a long period of time? I feel like we've always taken a very long-term view of medical inflation, so I feel very comfortable about that for my ultimate loss ratio pick. Even on the case reserving basis, I cannot give enough credit to my field case managers in terms of how they think about these claims. They really do look out to say, what could that knee replacement cost us five years from now, 10 years from now, and how many of those are going to be factored into the claim? They put that in their initial case reserve.
Credit to them for how they review and think about individual claims. To your question about payrolls sort of acting as rate, you're absolutely right. You know, in Andy's prepared remarks, he mentioned that premium audits added $8.9 million to the top line for the quarter. We continue to see payroll growth. If you think about Andy's number of 8.9%, that's reflecting policies that we wrote a year ago and how those estimated payrolls turned out regarded to how we originally estimated them to be, how the actual payrolls compared to what we originally estimated them to be. You think about that time period, we're talking policies that were in effect or the work activity that happened in 2022.
Each quarter, we've been trying to give a little bit of a forward-looking picture of that, saying, "Well, what are we seeing in wage growth or payroll growth in the previous quarter?" As you know, we've been reporting double-digit increases. Third quarter i t was 12.1%. Fourth quarter, 11%. First quarter 2023, 11%. We think that bodes well for us in terms of continuing to see pretty robust audit premium. Now, obviously, the comparative year-over-year is going to get a little bit tougher because the audit premiums that we've seen increasing, it really started increasing in first quarter of 2022. As we get these quarter-over-quarter comparisons, you know, that growth rate will tend to flatten or, you know, be less impactful to the top line. Still, to your point about the underlying loss cost and the rate, those payroll dollars are certainly adding to our premium.
That was a long-winded answer. Did I answer all your questions? I'm sorry.
No, very helpful. I guess just one more kind of on, as we think about that payroll growth, do you have a feel for how much of that is increased exposure, so more hours worked or more you know, employees working that sort of thing versus true wage growth, just same person doing same exact exposure, getting paid more for it?
Yeah. I don't have transparency into hours worked. That would be ideal, right? If I knew it's same workers, extended hours. I don't know that. I know of the 11% that we saw reported to us in the first quarter, which would've been fourth quarter activity, 8% of the 11% was wage growth, absolute wage growth. It could have been higher wages or same workers, higher, more hours. The new employee count has been relatively benign, which we like to see. That's really across, Matt, really across our industry groups. It's, when we look at it, the payroll broken down by industry group, it's been pretty robust for most of them.
Obviously, we saw a little bit of increase in, more so in roofing, maybe in our construction book than other lines, but maritime had really strong wage growth. I can't even isolate it down to particular industries. I think it's just the economies for these small to mid-size employers really.
That makes sense. You actually kinda hit on something there I was gonna ask as my follow-up question, and that is, you know, you have the number, the millions of dollars of Q2 2022, what was the benefit from audit premiums in that quarter, just so we have a baseline as we think about this coming quarter?
It was $5.5 million, second quarter of 2022 was $5.5 million.
Perfect. Wonderful. Great. That's all I got. Thank you very much for the color, and congrats on a nice start to the year.
Thank you, Matt.
Once again, that is star one if you would like to ask a question. We'll now take our next question from Mark Hughes with Truist.
Yeah, thank you. Good morning.
Good morning, Mark.
Good morning, Janelle. I wanted to explore your mental map a little further.
Absolutely
Did have a question on construction. Y ou hadn't said that it was any sort of headwind or any issue. What's your feeling about that? I think you've talked about the customers are always focused on the next job. What's the latest vibe on that?
Right. If I base it, my vibe strictly off what's being reported to us in payrolls, I would say, "Wow, my construction book looks really great." You're absolutely right in terms of, well, what does the next job look like? You know, I am not naive to the headlines that we see about in terms of the tightening in the credit market, and that certainly could impact our small to mid-size employers in terms of lines of credit or their credit lines being available to them from, you know, small regional banks. We haven't really seen it in work activity yet. You know, I harken back to the COVID-related recession. That was one of our bigger concerns was, okay, you're working now, but is the next job gonna be there?
For our employers, the, again, the small to mid-size businesses, they had steady work throughout. Unless somehow credit tightens to the point where maybe that makes it a little bit more difficult to complete that next job or bid on that next project, I think we still have a few quarters of robust payrolls coming from those industry groups. I guess, you know, we all read the headlines about is there gonna be a recession, is there not gonna be a recession? Our industry groups tend to bode well in, you know, what we call mild recession. I feel pretty comfortable about that as well.
Yeah. Maybe by the time the recession's over, they'll, you know, they'll have continued to work on their existing backlog and then we can start on the new backlog.
That would be great. That would be great.
Yeah. Any large losses in the quarter, $1 million plus?
We had two claims with case reserves over $1 million in the quarter.
Okay. The you give the NCCI loss costs in the release, and it looks like it's moderating a little bit. I think last quarter was- 7+
Yeah
kind of high sixes. Is that a wishful thinking or how are you seeing that?
Yeah. You know, it's funny. We've been saying for so long if we would appreciate a slowing of the decline. In that regard, I guess we got what we asked for, a little bit slowing in terms of the rate of the decline. We'll see. You know, NCCI will put out the industry-wide results in a couple weeks in May. We'll see how the industry fared in terms of the accident year loss ratio. You know, if you harken back to that data, the last few years, every year it's been creeping up a little bit higher. I anticipate that to be the case this year as well for the industry.
When you say creeping up a little higher, a little less negative or more negative?
Approaching that 100 combined. If you think about it in term of the combined ratio.
Oh the combined.
The accident year. I know companies are still reporting some redundancies. If you look at the accident year combined ratio or even loss ratio for the industry as a whole, each year it's been going up a point or two, where the combined ratio was approaching 100 last year. We'll see what they report for 2022.
Yeah. I don't know if you spend enough time looking.
That's ultimately what's gonna drive. That's ultimately what's gonna drive whether the rates, you know, continue to decline or let's be bold and say flatten.
Yeah. Yeah. Do you have any observations about the loss development trends, maybe across the sector? I don't know if that's part of your process or whether you wait for the NCCI to come out. I wonder if you have any thoughts on what's happening more broadly around loss development.
Yeah. You know, I think the industry as a whole has certainly seen the benefits of declining frequency. I don't think that's really changed all that much. You know, it's happened for AMERISAFE, I think it's happening for the industry. Severity is the question mark as to what's going to happen with severity. I think anyone you talk to in the workers' comp space obviously is spending a lot of time thinking about medical inflation. You know, just survivability alone, particularly on the types of severe claims that we deal with, you know, through medical technology and innovation, people survive injuries and have better healthcare, which is fantastic, but that adds to the ultimate severity of those claims.
I think that just continues to be, has to be continued to be factored into the rates themselves, that severity is not just about, medical inflation. The fact that these injured workers tend to get the best in class in terms of care, as they should. That also means a higher price tag is associated with those claims.
Yeah. You mentioned steady competition. Any shading on that when you think about Q1 versus maybe the back half of 2022? A little tougher, a little easier?
No. You know, we were able to get some new business growth in the quarter, but I'm totally gonna attribute that to our employees just really hustling for that new business. Agents continue to, you know, have struggles, if that's the right word, in all the other lines of business. Everyone that's coming in for workers' comp coverage, it's particularly if they're pricing out all of their product lines, workers' comp's a rate decrease no matter which company they're gonna be dealing with, unless they've had something obscure happen. The agents just, you know, don't have the luxury really, if I, if you want to call it that, of shopping workers' comp right now. It's really about where am I gonna find the auto coverage? Where am I gonna find the liability coverage? Kudos to AMERISAFE for doing more with what we have.
You know, we would love to get a large influx of opportunities to see new business. You know, that requires, to your point, it requires the competitive environment to have a shift. We really haven't seen that in quite some time.
Have you, this may not be as relevant in workers' comp, and I'm sorry for hogging the call here.
You're fine. You're fine.
Yeah. I don't know how if this is relevant for workers' comp, but any observations around agents being able to get appointments or have access to markets, that I guess could end up being beneficial? You know, that maybe some of your bigger competitors, the Travelers or Hartford, just isn't as interested in working with the same group of agents as they might have in the past because they're kind of narrowing that relationship list. Do you see anything like that?
I have not, Mark. I haven't seen anything like that.
Okay. It was an idea.
It is. You're right.
Yeah. Okay. All right. Well, that's good for me. Appreciate it. Thank you.
Thank you, Mark.
We'll now take our next question from Bob Farnam with Janney.
Hi there. Good morning.
Hi, Bob.
One question in your reserves. What medical inflation assumption are you using for your reserves?
We continue, l et me, I think of this in two different ways. When we think about our overall reserves, like the ultimate pick for 2022 or 2023 or even 2022 when we were doing 2020. Like I said, we took a, we take a long-term approach, so it tends to be mid to high single digits in terms of medical inflation. More importantly, on our case reserves, I, again, I'll give credit to my field case managers. On a case reserve basis, they really do factor in the realities of each individual case and what that means on a long-term basis. On a few calls ago, I maybe the last call even, I talked about home health for using that as an example. There's certainly a labor shortage in home health.
It's a challenge for any, for any company that's having to deal with long-term health component. My field case managers are factoring that into my case reserves now, the realities that they're seeing currently. You know, if something shifts in that regard, then that could be beneficial to us in the future. We wanna make sure that we get our most likely outcome in terms of our case reserving now.
Right. If the actual inflation is not as robust as the inflation assumptions that you're putting into the reserves, that portends well for future favorable reserve development as you find out that these, the inflation wasn't as strong.
Yeah, I would agree with that statement.
The second question I have is more about the industry, probably getting along with what Mark was asking. If the industry's accident year combined ratio is approaching 100.
Mm-hmm
I don't know if confident is the right word, but how confident are you that the industry doesn't overshoot the loss cost declines, and that 100 turns into 105 or 110 over time? You know, I know in many years past, you know, the workers' comp was not a great line in terms of profitability. I don't know, any sights in the near term as to where profitability will be going?
Yes. It's a great question. History would say that's exactly what happens, right? Where we get in a period where we have declining rates, and ultimately, you know, companies are using that to book their premium and put up their loss reserves. The realization of claims start getting paid out, you haven't estimated that correctly, and you start paying out those claims, and you didn't collect the right dollars. Rates take a swing. Ideally, for a company like AMERISAFE, that's when we tend to do better, right? In terms of we like those kinds of environments because of our underwriting discipline. We feel like we are very good about managing where what the right price is for our individual risk.
As an industry as a whole, if you look back, that's typically what happens. You have this period of declining rates. All of a sudden, the industry has some adverse development, then it swings the other way, then you get those rate declines. Will it be as large of a swing, will the valleys be as low and the peaks be as high as in prior years? I don't think so. The industry has better data. I think people are more disciplined in that. I don't really hear a lot about cash flow underwriting, which was something that was done in the past.
Maybe I think the market is still the cycle is still alive and well, but maybe, yeah, like I said, maybe the valleys aren't as low and the peaks as high. I do think as the industry approaches getting into that unprofitable level, what you, what we hope to see, we AMERISAFE hope to see is other multi-line carriers contracting their appetite for workers' compensation, particularly severe workers' compensation and utilizing their capital to pursue lines where they are getting rate, and where they have had more success.
I don't know that they will completely walk away from workers' compensation, but just contracting their appetite, for us would be a consideration of quote-unquote, "a hardening market," which we just haven't seen a lot of fluctuation in competition for over a year now, maybe even two years if we, I lose track of time with COVID, but let's say 2 years, where there really hasn't been a lot of fluctuation in the competitive levels.
Yeah. That was kind of what was driving my question. I didn't mean to imply that AMERISAFE's combined ratio is going to be going up that high. That was more of an industry question.
No, no.
Just wondering when the competition might start pulling back because it's not profitable anymore? Yeah, I think you answered that around a good color. Thanks.
Thank you.
It appears there are no further telephone questions. I'd like to hand the conference back over to Ms. Frost for any additional or closing comments.
First quarter was a strong start for the year. We're pleased with the quarter's results. Equally, we look forward to continual success in 2023 as the AMERISAFE team strives to enhance our service to our agents, our policyholders, and injured workers. Thank you for joining us today.
That does conclude today's conference. We thank you all for your participation. You may now disconnect.