Good day. Welcome to the AMERISAFE 2021 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. Welcome to the AMERISAFE 2021 third quarter 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 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 statements. I will now turn the call over to Janelle Frost, AMERISAFE's President and CEO.
Thank you, Kathryn. Good morning, everyone. We were pleased with this quarter's results, reporting a 71.5% combined ratio and an ROE of 16.1%. Competition was strong in the quarter. We remained competitive by deploying our strategy of evaluating individual risks through safety services and underwriting, promoting safe workplaces, and caring for injured workers. These services, performed by our expertise in workers' compensation, benefit our policyholders and agents, created value for our shareholders, and build a foundation on our strong balance sheet. In the quarter, we maintained a strong retention rate of 93.5%, and we also found solid opportunities to buy new business, allowing us to grow policy count when compared to last year. The associated premium for voluntary policies written in the quarter was down 4.6%. For perspective on the decrease, our average loss costs for policies renewed in the quarter were 7% lower than the prior policy period.
Our overall pricing, as measured by our ELCM, was a 153. A headwind in the quarter was audit premium and other premium adjustments, decreasing written premiums by $2.1 million. Audit premium in the quarter was slightly negative. This was not surprising given the policies audited in this quarter covered payrolls fully impacted by the pandemic and the resulting economic slowdown. As for payrolls being reported now, which will impact future audit premium, we are seeing growth in payrolls driven mostly by wage growth and by a slight increase in the number of workers. In total, gross premiums written in the quarter was down 7.5% from the prior year quarter. Turning to losses, we experienced favorable prior year case development in the quarter as our claims handling practices reached better than anticipated outcomes.
Prior accident year favorable development reduced loss and loss adjustment expenses by $19 million in the quarter, or 28.1 loss ratio points. We are pleased that our experience and singular focus on workers' compensation enabled us to reach maximum medical improvement and return to work for injured workers while also settling and closing claims. As for the current accident year, frequency of claims based on earned premium was up in the quarter but has not returned to pre-pandemic levels. Severity trends are within our expectations. Therefore, our loss ratio of 72% for the current accident year remained unchanged. We continue to monitor the potential impact of rising healthcare costs on the long-term medical cost inflation. As an example, the nationwide demand for nurses and the wages healthcare systems are paying to attract and retain nurses will, I believe, impact medical cost inflation going forward.
I raised this concern earlier in the pandemic, we're seeing some slight increases in costs, particularly as we plan long-term care for injured workers. I believe this is a trend to watch. I will now turn the call over to Neal to discuss investments, expenses, and capital management.
Thank you, Janelle, good morning, everyone. For the third quarter of 2021, AMERISAFE reported net income of $19.1 million, or $0.99 per diluted share, compared with $23.4 million, or $1.21 per diluted share, in last year's third quarter. Operating net income for the third quarter was $19.8 million, or $1.02 per share, a decrease of $0.14 from the third quarter of 2020. Revenues in the quarter decreased to $73 million compared with $83 million in the third quarter of 2020. Net premiums earned decreased 9.6% to $67.6 million when compared to last year's third quarter. Turning to our investment portfolio, net investment income decreased 14.4% in the third quarter to $6 million, compared with $7.1 million in the third quarter of 2020. The decrease continues to be driven by lower interest rates on fixed income securities, as well as higher cash balances for special dividends.
The tax equivalent yield on our investment portfolio was 2.50% at the end of the third quarter. The pre-tax yield on the portfolio was 2.21% at the end of the quarter, down from 2.49% a year ago. There were no significant realized gains or losses in the quarter or in the year ago quarter. The investment portfolio is high quality, carrying an average AA- credit rating with a duration of 356 and with 61% in municipal bonds, which includes 14% in taxable munis, 15% in corporate bonds, 9% in U.S. Treasuries and agencies, 5% in equity securities, and 10% in cash and other investments. Approximately 60% of our bond portfolio is comprised of held-to-maturity securities, which were in a net unrealized gain position of $28.2 million at quarter end.
These unrealized gains are not reflected in our book value as these bonds are carried at amortized cost. Moving now to operating expenses. Our total underwriting and other expenses were $17.9 million in the quarter, compared with $13.9 million in the third quarter of 2020. The increase was largely due to a $5.7 million benefit in last year's third quarter from the termination of an assessment related to a multiple injury fund. Adjusted for the benefit, expenses were $1.7 million lower in the third quarter of 2021 compared to the third quarter of 2020. These lower expenses were due to a $1 million profit-sharing accrual on a reinsurance treaty, as well as lower compensation and commission expenses.
By category, the 2021 third quarter expenses included $6.2 million of salaries and benefits, $5.2 million in commissions, and $6.5 million of underwriting and other costs. Our expense ratio for the quarter was 26.5% compared with an expense ratio of 26.2% in last year's third quarter, adjusted for last year's $5.7 million expense benefit. Our effective tax rate for the quarter was 22.6%, compared to 18.5% for the same period in 2020. This was due to a higher estimate of income from underwriting and taxable investment income compared to last year's third quarter. Return on equity for the third quarter of 2021 was 16.1% compared to 19.8% in the third quarter of 2020.
Operating ROE for the quarter was 17.2%. Now turning to capital management, as announced in conjunction with our earnings release, the company's board of directors declared a special dividend of $4 per share for shareholders payable on November 17, 2021 to shareholders of record as of November 10, 2021. In addition, the company's board of directors also declared a quarterly cash dividend of $0.29 per share payable on December 17, 2021 to shareholders of record as of December 3, 2021. Finally, just a few other items to note. Book value per share at September 30, 2021 was $24.80, up 9.3% from $22.70 at year-end.
Next, I wanted to let you know that the company recently published some additional sustainability disclosures for investors. These disclosures, which align with the SASB and TCFD standards, can be found on our website under Sustainability. Finally, we plan to file our Form 10-Q with the SEC tomorrow after market close. That concludes my remarks, and we would now like to open up the call for the question and answer session. Operator?
Of course. 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 mute function is turned off to allow your signal to reach our equipment. If you find your question has been answered, you may remove yourself from the queue by pressing star two. As a reminder, it is star one if you would like to ask a question. We'll go ahead and take our first question from Mark Hughes from Truist. Please go ahead.
Yeah, thanks. Good morning.
Good morning, Mark.
Good morning, Mark.
Janelle, what did you say about audit premium? I didn't quite pick it up. What was the driver in the quarter, and then does that mean anything on a go-forward basis?
Yeah. I said audit premium for the quarter was slightly negative, that is in total. We certainly had classes of business that still remained positive. For example, construction remained positive sans roofing. Roofing had slightly negative audit premium. Trucking was still positive. Lumber, which has responded for us quite well during the pandemic and even with economic slowdown, was still positive. Oil and gas, for example, is negative. In total, it was slightly negative for the quarter. I also mentioned in my prepared remarks, if we're looking forward based on the payrolls that we're seeing right now, we are seeing wage growth. We're seeing a slight increase in the number of workers. That kind of speaks to maybe future audit premiums when this policy period is audited.
As a reminder, if you would like to ask a question, please signal by pressing star one on your telephone keypad. We'll go ahead and recall Mark. Please go ahead.
Yeah. Thank you. If we think about the quarters that are, or the policies that are going to be audited in the fourth quarter, going back to mid-late 2020, I guess I would assume maybe you'd see a similar dynamic. I would've thought the audit premium would've been positive. I'm just thinking from a macro perspective. I guess my question is Q4 likely to see a similar impact? I hear what you're saying, that the payrolls now look like they're better, but I wonder the trend over the intervening period. I don't know if I'm thinking about that properly, but when we think about Q4 or Q1, still maybe a little negative, or?
I don't know exactly how that's going to pan out, Mark. I'll say this, if you think about, to your point, if you're thinking back to that time period, fourth quarter 2020, first quarter 2021, I do think we were seeing a little bit of boost in the economy from that aspect. Again, it was ever so slightly negative this quarter, so that wasn't a big surprise to us and nor a major concern.
Yeah. I guess you had the delta variant in the interim that might've impacted the aggregate-
Perhaps. Yeah. Perhaps.
Yeah.
Good point.
You mentioned frequency is up from last year, but not returned to pre-pandemic levels, severities as expected. Wouldn't that suggest that the current accident year ought to be a little bit lower?
Yeah, that's a great question. We have not seen the number of claims reported return to pre-pandemic levels. That has not happened. As I mentioned in the prepared remarks, one of the things we're kind of watching is what happens on the severity side, and we talked about this early on in the pandemic, healthcare costs and the long-term component of our claims. As you know, when we reserve, we reserve most likely outcome, even for the most current accident year. We get those case reserves out rather quickly. We're contemplating the going rate for what we're having to pay for some of these services. Now, I guess there's a national debate as to how long that lasts, and is it sustainable for the medical community, but it is our reality currently.
Yeah. The number of large losses in the quarter or year to date compared to last year?
We had nine in the quarter, or as of the end of the quarter. Not in the quarter.
Okay
nine.
What was it last year?
Last year.
Through three quarters.
at the same time we had it. Yeah, through three quarters we had 11 last year.
Okay. Large losses down even from the reduced level. How about competition, the behavior of your either bigger regional competitors, any different this quarter versus prior quarters?
In the quarter itself, I would say competition remained strong. Really didn't see a lot of changes in the quarter. Post-quarter, I'll say, there have been some rumblings of some carriers backing away from certain hazardous classes, which, of course, we like to hear.
Right. Is that in public commentary, or you're just sort of seeing that on the ground?
We're seeing that on the ground.
Yeah. Are they having some bad results?
I can't speak to what drives other companies' underwriting appetite. I don't know.
Yeah. I guess so.
I will say this, I think in the public, we've seen companies' current accident year loss ratio go up, right? I don't know if you view that that's not adverse development, but yet there's something to that. No, I haven't seen reporting of adverse development that I can think of off top of my head. I can speak to what we're seeing on the ground of certain carriers pulling out of classes of business.
Yeah. I'll just ask one more. It seems like your written premium, you still had a little bit of a dip, but it was low end, what maybe X audit premium down 3%, if I'm thinking about it properly, low single digits.
4.6% for voluntary during the quarter.
Okay.
With the loss cost on average 7%.
Yeah. That's kind of the middle of the recent range.
Okay. All right. Very good. Thank you.
Thank you, Mark.
Thanks, Mark.
As a reminder, if you would like to ask a question, please signal by pressing star one on your telephone keypad. We'll go ahead and move on to our next question from Matt Carletti from JMP. Please go ahead.
Yeah, thanks. Good morning.
Good morning, Matt.
Morning, Matt.
A couple questions. Mark covered a couple of mine, but following up on the frequency and severity discussion, would it be right to think that if those conditions hold, that frequency kind of stays at or below pre-pandemic norms and severities within expectations that as we think ahead to, say, next year, that speaks to kind of a likely unchanged accident year loss ratio or are there other items, whether it be continued loss cost pressure or otherwise that we need to think about in that equation?
Matt, right now we're still seeing approved loss costs in that high to mid-single digit decline. Obviously that adds pressure. Like I said, my larger concern on the severity side is really what happens with medical cost inflation. Obviously, you know medical costs are a huge component of what we do, particularly when we're trying to set reserves for ultimately what we think these claims are going to cost us. From a severity side, that is a little bit more of our concern. From the actual reported number of claims, I will say this, we've seen wage growth, which we often say we like wage growth. Same workers, higher wages, higher premium. We have seen a slight uptick in the number of employees. Let's play that out.
If the economy rebounds even further, we have new employees entering these higher hazardous classes of business, that could drive frequency to some degree. You would think it may be baked into the loss cost, frequency has been on the decline for so long. It'd be an interesting balance to see how those new employees impact frequency relatively quickly.
That makes sense. Just another question, you mentioned kind of along those lines, your little bit of concern around, I think particularly you mentioned nursing wages and just that cost.
Yes
severity cost element.
Yes
on the medical side. You've mentioned in recent quarters kind of the pandemic remote medicine, right? Virtual medicine has needed to be used in some cases. Have you seen that persist? Do you think that that's something that has some legs to it, that once people kind of start using it, and obviously it only can be used in certain situations, but do you see that as having some staying power and not that it offsets that severity stuff, but maybe helps a little bit?
Oh, I do. I do think it will, in some instances, change how people access medical care. Certainly, severe injury, you've lost an arm, you're going to get acute care. I think on a long-term basis, I do think there's some impact there for all of us. If there's silver linings to the pandemic for the industry, that could be one of them.
Great. Well, thank you for the answers and congrats on a nice quarter.
Thank you, Matt.
Thanks, Matt.
With that does conclude our question and answer session for today. Now I would like to turn the call back over to Janelle Frost for any additional or closing remarks.
Thank you. I believe the $4 special dividend reflects our operational consistency and discipline over the long term. In this season of giving thanks, it is imperative to recognize that the commitment to the discipline is rooted in the expert employees of AMERISAFE and what they do day in and day out. Thank you to the AMERISAFE team, and thank you for joining us today.
With that does conclude today's call. Thank you for your participation. You may now disconnect.