Good everyone, and welcome to AMERISAFE's 2019 third quarter earnings conference. Today's call is being recorded. At this time, I'd like to turn the call over to Kathryn Shirley, Executive Vice President and General Counsel. Please go ahead.
Good morning. Welcome to the AMERISAFE 2019 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-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, and good morning, everyone. It has been interesting listening to and reading earnings comments thus far this quarter as insurance CEOs have discussed getting rate, followed by the pause or parenthetical, except in workers' compensation. The news for workers' compensation is that most states continue to approve loss cost declines. For AMERISAFE, this meant voluntary premium for policies written in the quarter were down 8.6%, while on account basis, we were down 1.3%. We continue to have strong policy retention of 93.4% as we maintained underwriting discipline, reflected in our 162 effective loss cost multiplier, or ELCM. I'll pause here to remind those of us who like to plot data points that ELCM is best compared quarter over prior year quarter, not sequentially. Our second quarter ELCM was a 161. However, this quarter's 162 was down from 2018's third quarter of 165.
That being said, the primary driver for the decline in premium was simply earning less premium per 100 dollars of payroll. Offsetting the rate declines were stronger payrolls. Audit premium and other premium adjustments added $2 million to top line, compared to a decrease of $2.1 million in last year's third quarter. In total, gross premiums written for the quarter were down 3.2% from third quarter of 2018. While declining rates lowered premium and competition remained strong, we produced an attractive return on equity of 18.6% this quarter. Our ROE, our long-term capital adequacy, along with our commitment to creating shareholder value, led to the declaration of an extraordinary dividend of $3.50. This quarter's ROE was supported by favorable loss ratios and expense management. Neal will provide color around the expense management, but allow me to provide additional information about our losses.
Our loss and LAE ratio for the quarter was 53.6%, down from 55.9% in the third quarter of 2018. The current accident year loss ratio remained unchanged from the beginning of the year at 72.5%. Both frequency and severity trends were in line with our expectations for the full year. As for prior accident years, we experienced significant favorable case development this quarter. Slightly higher claim closure rates were one of many factors influencing the case development and led to $15.6 million of favorable development this quarter. Neal will now provide more details around expenses and the remainder of the financials.
Thank you, Janelle, and good morning, everyone. For the third quarter of 2019, AMERISAFE reported net income of $21.4 million, or $1.11 per diluted share, compared with $19.7 million or $1.02 per diluted share in last year's third quarter. Operating net income for the third quarter was $21.1 million or $1.09 per share, compared with $19.5 million or $1.01 per share in the third quarter of 2018. Revenues in the quarter decreased 2.2% to $91.5 million compared with the third quarter of 2018. Net premiums earned decreased 2.9% to $82.7 million when compared to last year's third quarter. Turning to earnings from our investment portfolio, net investment income increased 4.8% in the third quarter to $8.3 million, compared with $7.9 million in the third quarter of 2018. The increase was driven by slightly higher interest rates on fixed income securities.
The tax equivalent yield on our investment portfolio was 3.10% at the end of the quarter. The pre-tax yield on the portfolio was 2.79% at the end of the quarter, up from 2.70% one year ago. There were no impairments on any of the securities held in the portfolio during the quarter, and there were no significant realized gains or losses during the quarter. The investment portfolio continues to be high quality, carrying an average AA rating with a duration of 3.68, with 56% in municipal bonds, 21% in corporate bonds, 11% in U.S. Treasuries and agencies, and the remainder in cash and other investments. Approximately 59% of our bond portfolio is comprised of held-to-maturity securities, which were in a net unrealized gain position of $22.4 million at quarter end.
These unrealized gains, which total approximately $0.92 per share after tax, are not reflected in our book value as the bonds are carried at amortized cost. Moving now to operating expenses. Our total underwriting and other expenses were $19.3 million in the quarter, compared with $20.6 million in the third quarter of 2018. The decrease in expenses was primarily driven by lower loss-based assessments, lower premium-based assessments, and lower commissions compared to last year's third quarter. By category, the 2019 third quarter expenses included $6.4 million of salaries and benefits, $6.2 million in commissions, and $6.7 million of underwriting and other costs. As a result of the lower expenses, our expense ratio for the quarter was 23.3%, compared with 24.2% in the third quarter of 2018. Our tax rate for the quarter was 19.6%, compared to 19.5% for last year's third quarter.
Return on equity for the third quarter of 2019 was 18.6%, compared to 17.4% for the third quarter of 2018. Operating ROE for the quarter was 18.9%. Now turning to capital management, as Janelle mentioned earlier, the company's board declared a special dividend of $3.50 per share, payable on November 20th, 2019 to shareholders of record as of November 13th, 2019. This brings the total amount of special dividends paid out in the last seven years to $18.25 per share. In addition, the company's board of directors declared a regular quarterly cash dividend of $0.25 per share, payable on December 27th, 2019 to shareholders of record as of December 13th, 2019. Finally, just a couple of other topics. Book value per share at September 30th was $24.29, up 14.3% from $21.26 at year-end 2018. Our statutory surplus at quarter end was $325 million.
This surplus level was lower this quarter due to dividends paid up to the parent company for the special dividend. Finally, we will be filing our Form 10-Q with the SEC later today after the market close. That concludes my remarks, and we would now like to open the call up for the question and answer session. Operator?
Thank you. If you would like to ask a question, simply press the star key followed by the digit one on your telephone keypad. Also, if you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, press star one at this time. We'll pause for a moment. We'll first hear from Matthew Carletti of JMP Securities.
Hey, good morning.
Good morning, Matt.
Good morning, Matt.
Congrats on yet another very nice quarter.
Thank you.
Just a couple questions. Janelle, I was hoping maybe you could just give a little more color on two things, the first being the competitive environment. We know it's a competitive market. We know what rates are doing, but kind of more the nuances of, in general, what you're seeing amongst your competitive set, how the larger peers are acting at this point in the cycle, whether you see capital on the margin moving in or moving out. And then separately, the underlying economic impact and what you're seeing from the economy and where in your book you might be seeing better trends or worse trends.
Sure. I'll start with competitive environment. As far as the third quarter, Matt, it was really unchanged. We had a healthy policy retention of 93.4%. We think that is a response to our service level, where we're pricing our book of business. I mentioned the ELCM at a 162, down from last year's third quarter. I think we're being responsive to the market. We still haven't seen what I would call new capital or new carriers in the space. Multiline carriers find workers' comp attractive. I'll put a little forward-looking into that since Kathryn said I was going to do that at the beginning of the call. I was sort of energized listening to the earnings releases coming out this quarter of some multiline carriers out there talking about they were getting rate in their other lines of business.
For me, that was a little glimmer of, okay, well maybe they'll deploy that capital away from workers' comp and get back to their core lines of business. Time will tell if that's the case, if we see that in terms of larger carriers, to your question, if we see some of the larger carriers starting to pull back a little bit out of workers' compensation in the anticipation that it won't remain a profitable line for a longer period of time. Again, that's all speculation. We'll see what the market tells us going into the fourth quarter and I guess really the first quarter of 2020. As far as the economy, I think for our insurance, it's a pretty robust economy. Our payroll audits remain positive. We saw growth in, again, this is payroll growth in construction obviously being our largest class, but it was pretty robust this quarter.
Less so in trucking, we saw pretty big increases in terms of marine, what we call wholesale retailers, so that's like lumber yards and building materials, gas dealers, those type of things. Where we saw a little bit of slippage, the payrolls were positive, but not as positive as third quarter of 2018, was actually in our farm book and a little bit in our lumber book.
Okay, great. One other question just as we're getting closer to 2020 and just want to make sure I'm thinking about this right. We've seen the accident year loss ratio, small tick ups kind of the past couple years. It seems that set of circumstances is still in place, being pricing down, severity, while manageable, still up, and kind of probably not making the assumption that frequency will go down forever. Is it right to think about some small uptick in that accident year as we enter 2020?
Yeah. There's things that factor into that, Matt. A, 2019's not over. We'll see what the rest of the year holds out in terms of, you're right about frequency, no question. Where it turns in terms of severity, I think we'll see where accident year 2019 falls in. As well as the loss cost filings that are still coming in. I think we're a little over halfway there in terms of states that have approved their 2020 rates that'll be impacting those numbers for 2020. As the loss cost filings come in, we'll keep an eye on those as well and see. On the flip side of that, we had significant case development this quarter in some more recent accident years. I mentioned that in last quarter's earnings release, we had favorable development in accident years 2017. We had it again this quarter.
That also impacts what we think in terms of loss ratio.
Of course, that makes sense. Well, thank you for the color and congrats again.
Thank you, Matt.
Thanks, Matt.
We'll hear from Mark Hughes of SunTrust.
Yeah, thank you. Good morning.
Good morning, Mark.
Janelle, Good morning. You mentioned the 2020 loss cost coming in from NCCI. What are you seeing in those state-by-state numbers?
Yeah, we're still seeing decreases. Some of them have been single digits, which I like to see, finally start seeing some single-digit decreases. Yeah, for our major states, we're still seeing approved decreases. There's been a couple of, I think, small, maybe some law-only increases. I've heard a couple of jokes amongst just other people in the industry, "Well, Hawaii had an increase," and I think everyone just sort of chuckles about that. Yeah, still no major increases at this point coming in.
Yeah. In aggregate, is it kind of mid-single-digit declines or low-single-digit or?
I think NCCI anticipated 9%. I'm looking at Neal. I think NCCI anticipated 9% for 2020, or go at 2019 and 2020, going into 2020.
Right. That was their projection.
I think that was their projection. We'll see what pans out.
Yeah. Then the large losses in the quarter, how many of those did you have?
We had 12 at the end of the third quarter compared to 18 at the end of third quarter in 2018.
Okay. Very good. Appreciate it. Thank you.
Thank you, Mark.
Thanks, Mark.
As a reminder, if you'd like to ask a question or make a comment, press star one. We'll now hear from Christopher Campbell of KBW.
Hi, good morning.
Good morning, Chris.
Hey, quick question on the expense ratio changes. I guess, can you unpack that a little bit and why were the assessments lower and where did they originally come from last year?
Yeah, certainly. The expense ratio, we did see some favorable loss-based assessment activity in the quarter, and it really depends upon where we see favorable reserve development by state because that will affect those loss-based assessments which are based upon our reserves in various states. Loss-based assessments in the quarter were down $637,000 from last year's third quarter. Premium-based assessments were down about $361,000 from last year. Again, that is more based upon some rate changes in some states where we actually are paying slightly lower premium taxes.
Okay. Got it. All right. Then I think one of Mark's questions previously about the rate changes. When we see these headline rate numbers like NCCI is like 5% or something, I forget what the number is this year, is there a spread that you guys typically do better than? So if the rate declines are 5% for the industry, AMERISAFE typically does, I don't know, 200 basis points better than that. Is there a heuristic-
Yes
we can think about in terms of-
Yeah, that's a good question.
How well you guys can recoup some of those rate declines?
Right. That's actually a very good question. As you know, you're right. When they see the headline, let's use Texas as an example. It had an approved loss cost filing for 7/1 that was 12.4%. That was the headline. What was that in terms of AMERISAFE's class codes? Well, in the Texas example, it was actually 12.4%. Yeah, it does vary sometimes by class code because I think Arkansas had their headline was 3.4%, and AMERISAFE's was 5.4%. It does vary by class codes, but I think it goes both ways. I still believe if you're looking in the aggregate at the decreases, I think that's a very good measure of where it is headed directionally, whether it's high hazard or low hazard.
Okay, great. Just one last one on your policyholder dividends. Obviously, if you guys keep having great reserve development, those probably go up. What's a good way to think about modeling those? Is 150 basis points on the combined ratio, is that a good way to think about it or?
That's a really good question. It does fluctuate from quarter to quarter, and it's really driven by our performance in various states where we compete through policyholder dividends, so Florida, Virginia, Wisconsin. I think it was actually a little bit high this quarter at 1.5% than we've seen it running in prior quarters. It really does depend, again, on what policies came up in that period and what dividends they earned. I don't have a good way to model it for you other than to expect that maybe it's going to be between 1% and 2%.
Okay, great. Well, thanks for all the answers. Best of luck in the fourth quarter.
Thank you.
Thank you.
It appears there are no further questions at this time. Janelle, I will turn the call back over to you for any additional or closing comments.
Thank you. AMERISAFE has shown a strong commitment to creating shareholder value through our operational consistency and long-term capital adequacy. This quarter's combined ratio of 78.4% and a return on average equity of 18.6% were just two measures to illustrate that commitment. We are pleased to share those rewards of that commitment through our extraordinary dividend, while at the same time building a better AMERISAFE for our shareholders, our policyholders, and our employees. Thank you for joining us today.
That does conclude today's conference. Thank you all for your participation. You may now disconnect.