Good morning, ladies and gentlemen, and welcome to the AMERISAFE 2019 second 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 touchtone telephone. As a reminder, this conference call is being recorded. I would now like to turn the conference over to one of your presenters, Ms. Kathryn Shirley, General Counsel. You may begin your conference.
Good morning. Welcome to the AMERISAFE 2019 second 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 statement. I will now turn the call over to Janelle Frost, AMERISAFE's President and CEO.
Thank you, Kathryn, and good morning, everyone. It is hard to believe I'm sitting in DeRidder, Louisiana, in August and for the past week have experienced more pleasant temperatures than many other parts of the country. July and August are typically months apt for travel away from Louisiana to more pleasant temperatures. When I think about it, the current weather is similar to the workers' compensation competitive landscape. Workers' compensation, particularly high hazard, is typically a tough market for carriers, and many shy away from the line for its volatility and long tail. For the last few years, industry-wide profitability has made this space more palatable for carriers not to back away. We believe this to be temporary, similar to our cooler temperatures.
For the second quarter, competition remained strong. As a result, premium for voluntary policies written in the quarter was down 5.3% from last year's second quarter. Premium continued to be significantly impacted by the decline in underlying loss costs. Our overall pricing, as measured by our effective loss cost multiplier, was 161, down from 166 in the prior year quarter. Our response in pricing led to policy retention of 92.5%. Combined with new business, our voluntary policy count was down slightly by 1.4%. Somewhat offsetting the loss cost declines were higher than expected payrolls, as reflected in audit premium. Audit premium was positive for the second quarter. Combined with endorsements and cancellations, audit premium and other adjustments increased written premium by $1.8 million. This was lower than second quarter last year, which if you recall, was a second quarter high since 2015.
In total, gross premiums written were down 7.1% from the prior year quarter. Turning to losses, our loss ratio for the quarter was 58.9%. The current accident year loss ratio was unchanged from the first quarter at 72.5%. We did, however, experience favorable case development in prior accident years, which led to an $11.3 million reduction of loss expense or 13.6 percentage points of favorable loss ratio. Accident years primarily contributing to favorable development were 2014, 2015, 2016, and 2017. This was our first quarter to recognize favorable development from accident year 2017, in line with our historical loss development patterns. I now welcome Neal to discuss the financial metrics for the quarter before opening the call for questions.
Thank you, Janelle, and good morning, everyone. For the second quarter of 2019, AMERISAFE reported net income of $17.9 million or $0.93 per diluted share, compared with $17 million or $0.88 per diluted share in last year's second quarter. Operating net income for the second quarter was $17.4 million or $0.90 per share, compared with $17.8 million or $0.92 per share in the second quarter of 2018. Revenues in the quarter decreased 3.8% to $91.8 million compared with the second quarter of 2018. Net premiums earned decreased 6.8% to $83 million when compared to last year's second quarter. Turning to our investment portfolio, net investment income increased 11.9% in the second quarter to $8.2 million, compared with $7.3 million in the second quarter of 2018. The increase was driven by higher interest rates on fixed income securities.
The tax equivalent yield on our investment portfolio was 3.14% at the end of the quarter. The pre-tax yield on the portfolio was 2.83% at the end of the quarter, up from 2.63% 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. The investment portfolio is high quality, carrying an average double A rating with duration of 3.90, with 55% in municipal bonds, 22% in corporate bonds, 15% in US Treasuries and agencies, and the remainder in cash and other investments. Approximately 58% of our bond portfolio is comprised of held-to-maturity securities, which were in a net unrealized gain position of $18.3 million at quarter end. These unrealized gains are not reflected in our book value as these bonds are carried at amortized cost. While we have enjoyed recent quarters where we have seen double-digit percentage increases in net investment income, with the drop in yields since late last year, we expect investment income will only be flat to slightly up in future quarters.
Moving now to operating expenses. Our total underwriting and other expenses were $19.7 million in the quarter, compared with $21.3 million in the second quarter of 2018. The decrease in expenses was due to lower estimates of future payouts of share-based incentive compensation, as well as lower premium-based assessments compared to last year's second quarter. By category, 2019 second quarter expenses included $6.1 million of salaries and benefits, $6.2 million in commissions, and $7.4 million of underwriting and other costs. As a result of the lower expenses, our expense ratio for the quarter was 23.8%, compared with 23.9% in the second quarter of 2018. Two items lowered our expenses unusually during the quarter. Approximately $500,000 in lower loss-based assessments and approximately $500,000 in lower future payouts of share-based incentive compensation. Without these two items, our expense ratio would have been closer to 25%.
Our tax rate for the quarter was 19.3%, compared to 19% for last year's second quarter. Return on equity for the second quarter of 2019 was 16.3%, compared to 15.5% for the second quarter of 2018. Operating ROE for the quarter was 16.1%. In capital management, our company paid its regular quarterly cash dividend of $0.25 per share in the second quarter. This quarter, the board declared a quarterly cash dividend of $0.25 per share, payable on September 20th, 2019, to shareholders of record as of September 6th, 2019. Finally, just a couple of other items. Book value per share at June 30th, 2019, was $23.29 per share, up 9.5% from $21.26 per share at year-end 2018. Our statutory surplus was $408 million at quarter end, up from $384 million at December 31st, 2018.
Then we will be filing our Form 10-Q with the SEC tomorrow, August 2nd, after the market close. That concludes my remarks, and we would now like to open up the call for the question and answer session. Operator?
Thank you so much, Mr. Fuller. Ladies and gentlemen, if you have a question at this time, please press the star and then the number 1 key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Our first question is from Matthew Carletti. Your line is now open.
Hey, thanks. Good morning.
Good morning, Matt.
A few questions. Janelle, I was hoping you might be able to expand a little bit on your opening comments about the competitive environment. I liked your analogy. Just kind of what you're seeing most recently, and then your thoughts on how the fairly significant pullback in interest rates recently, as well as the fact that most other lines of commercial pricing are getting some traction, and a lot of your competitors participate there too. What you think those two items, what their impact might be on the comp line?
Yeah, sure. I'll start with the competitive environment. When this soft market first started, I hearken back to those days, and we talked a lot about multi-line carriers coming into our space and demanding comp as part of a package. Carriers that two years ago, or I guess at that point, three years before that, were saying, "Get your workers' comp quote somewhere else." They were demanding comp as part of the package. That has continued throughout this soft market. What we've seen is, at the beginning, it was really the larger premium sizes. If you recall, in one quarter, we lost our four largest accounts, back in, I think it was the fourth quarter of 2017, if I'm not mistaken, or 2016 maybe. At that point, it was really based on premium size.
As we've continued in this soft market, and particularly as the other P&C line results have not improved, as you mentioned, the prices, it's getting harder. Workers' comp has still been attractive. We've somehow, as an industry, have managed to string together a few years of profitability. NCCI in May described the industry as delivering. Loss costs have continued to go down. I think the projection for 2019 was 10%. From a carrier perspective, that makes workers' comp attractive
To a number of carriers, I guess, for a number of reasons. I don't believe, and in my opening comments, we think that that's temporary. I think that the cycle's not dead. I do believe carriers will, at some point, start to experience some adverse development. If you look at the numbers NCCI published in May, while the results were good and profitable, they expect whether you look at selected or reported, that from 2017 to 2018 the loss ratio went up two percentage points. There's deterioration in that. Not enough that we've seen people pulling back as of yet. That's our anticipation. That as people start either having adverse development or the pricing continues to drop and they realize that we can't compete at these prices, that they'll start pulling back.
Specific to AMERISAFE, I think what that means is, because keep in mind, we have a very specific niche, high hazard. We do see carriers in our sandbox dipping into our fields. We do believe that'd be the first place they start pulling back as well when they get, we used to joke about when they get that first million-dollar claim. In today's environment, maybe that's their first two million dollar claim because cost of claims have gone up. Nonetheless, I do think that makes high hazard less attractive from that standpoint. To your point about the economy, obviously, we like wage inflation because that means same workers, more dollars, more premium dollars. It'd be interesting to see how the economy unfolds. When we look at our audit premium, it's still positive, so we take that as a very good sign for our insureds.
At least for them, their payrolls are more than expected. For this quarter, in particular, I think it was more heavily weighted toward wage growth versus new employees, which, you've been following us long enough to know we prefer that. Newer employees are the ones that tend to have accidents and drive up frequency. That was actually better news for us in the quarter. That was a very long-winded answer. I hope it answers-
No, it's very helpful. Just a few, I think, quick follow-ups. By industry, as I think about trucking and construction and the other kind of the pie chart you put in your presentations.
Yeah.
Are there particular areas within there that you're seeing having more success or seeing more competition, or is it fairly even across the board?
You know, Matt, it is fairly even across the board, and it's funny, I used to answer those questions really quickly, but since it is so competitive, I want to be careful about saying, "Oh, this industry is better than others." In all honesty, it has been across the board, even from the audit premium perspective. We're seeing positive audit premiums from across the industries.
Okay, great. You've updated us in the past how large losses at this point in the year are maybe comparing to what your expectations would be? Any color you can give us there?
Yeah. I thought about putting it in my prepared remarks, like it could be my I told you so moment. If you remember at the end of the first quarter, we had one loss that we thought was in that large loss category, and I said, "Oh, this is lumpy." Well, here we are in the second quarter. We have seven of those losses, which is basically what we had at second quarter last year. One quarter does not a trend make. I wanted to put it in as my lumpy moment, that, yeah, at the end of the quarter, there were seven, and I think the largest of that had an incurred of around $6 million.
Okay, great. Last, just a quick number one, probably for Neal. Last Q3 2018, can you remind us what the audit premium was that quarter?
Yeah. In the third quarter of 2018, audit and other adjustments decreased by $2.1 million, it was actually a detractor from premium.
Great. Thank you very much for all the answers, and best of luck rest of the year.
Thank you, Matt.
Thank you. Your next question comes from Mark Hughes. Your line is now open.
Yeah, thank you. Good morning.
Good morning, Mark.
It's been nice in Nashville as well.
Isn't it? We called it a cold front.
Yeah. It feels great. The loss trends overall, you mentioned the NCCI outlook. Do you think the loss cost numbers, the state loss costs developed by NCCI, are those roughly accurate for this year? I think in aggregate, the NCCI was looking for another high single digit, maybe even a 10% decline in loss costs. How is your experience on a kind of a state-by-state basis running against the NCCI assumption?
I want to be careful because there's a lot of smart people that go behind that 10% projection for 2019. I can speak to what we're seeing in AMERISAFE. Our expectation, and I'll talk about accident year 2019. Our expectation for accident 2019 is that medical inflation will be mid-single digit. I think NCCI was closer to low single digit. I think they were maybe at 2%. I don't have it in front of me. That's one difference that we see in terms of medical. In terms of frequency, for AMERISAFE, frequency has been within our expectations, and I think NCCI had frequency down, and they continue to have frequency down. It's been that way for quite some time.
I know, I said this many times before, for us, we just feel like at some point that levels off to slightly uptick simply because we're collecting less premium. I don't know if that answers your question specifically. As far as severity, again, our severity has been in line. I joked about the large losses. I just wanted my I-told-you-so moment, but as far as just overall case severity, it's within our expectations. Like I said, I really want to draw attention to the fact that even though NCCI put out some really good data and painted a good picture for the industry, there was deterioration in the loss ratio by two percentage points from 2017 to 2018.
If you think about, okay, 2017 to 2018 deterioration and they're expecting approved loss costs to go down another 10%, I think that in and of itself says there should be some deterioration for the industry as a whole in terms of losses.
Understood. On the loss cost multiplier, where does that bottom out for you? Is there some level where you say, "This is as far as we go, and we're going to hold the line on pricing until it comes back to us," is 26.6.
I wish I could give you a number. There's a lot of things that factor into that because we are trying to be responsive to the market, where we are in the market. Obviously, we individually underwrite every account. We try to make sure at that point that we are writing profitable accounts, no question. I'll use the loss cost as my example, just for loss costs that were effective in the second quarter of this year. Those were loss costs that had been approved. We had to use those for our clients. It was a decrease of 8%, just for the ones that were effective in the quarter, policies that we wrote in the quarter.
It's hard to figure out where, in other words, if I'm trying to say, "Well, where's my LCM going to factor into that?" It's a moving target, for lack of a better term. I know that doesn't directly answer your question, but it is a moving target.
Right. The underlying loss cost, the effective loss costs, were down 8% on your book in the quarter, is what you're saying?
Right. I'm sorry. I should clarify. That was on average.
Yeah
I think the highest was 15, if I'm not mistaken. Yes, but on average. Of course.
What was that for last year, out of curiosity, roughly?
For the what?
For the full year, last year.
Full year. It was double-digit. I don't know the number exactly, Mark. I apologize.
It was double digits?
Yes.
Yes, low double.
It doesn't sound like you're seeing any kind of I know one of your peers talked about in the California market, they've gotten to the point where they're going to hold the line and not take any more price cuts. In fact, they're talking about price increases. Is the industry approaching that point? You've certainly said there's plenty of competition, I don't hear you backing off of that comment.
we've been at this for a while, or the industry has been. Is there any sense of maybe at least the pressure easing up a little bit?
Of carriers backing away, I guess, is what you're asking me.
Correct.
I'm going to say no, but I'm going to caveat that with, and I've said this before, in prior soft cycles, I could name carriers that are consistently doing crazy things that we don't understand. That's not really been the case this soft cycle. We see it anecdotally. We see it on an account here and account there, but it hasn't been prolific throughout the competitive landscape. I think carriers are picking and choosing where they want to be what I consider irrational. Now, when I see someone offering 20% commission, and that's almost my entire expense ratio, obviously, I don't think they think that's sustainable. I don't think it's sustainable. I guess they're picking and choosing their market that they think they can get the rates adequate enough that they can offer that kind of commission. Again, those are very one-off illustrations.
It's not something that we see from a lot of carriers in all of our states because, again, to the point earlier, it really does matter by state. It's a different landscape. It's different competitors by state.
Thank you.
You're welcome.
Thanks, Mark.
Thank you. Our next question comes from Freddie Slater. Your line is now open.
Hi. Good morning. Firstly, I was wondering if you could give us some color on how much of the $11.3 million of reserve releases came from each accident year that you identified.
Sure. This is Neal Fuller. The total was $11.3 million, $1.3 million from accident year 2017, $3.3 million from 2016, $2.9 million from 2015, $2.3 million from 2014, and $1.5 million from accident years prior to 2014.
Okay, great. Thank you. Just going back to the year-over-year drop in the payroll audit and related premiums this quarter. I think you said, Janelle, that payroll audit premiums were still positive across all your industries, but are there any where you're seeing significant declines or growth?
It was positive throughout all the industries. I think in the quarter, we did see a slight downturn in trucking, more so than we've seen in prior quarters. If you recall, trucking's been one of those that had stayed pretty robust, more robust than all the other lines in terms of when the economy was recovering. We saw significant increases in trucking. Of course, when the storms, in states that were storm damaged, we saw upticks in trucking. It was a decline for the quarter, but it's still positive, still healthy.
The comparative figure was 3.8. That was our second highest that we've had in the last 8 quarters. It was pretty significant.
Okay. Can you give us a little bit more color on the frequency, severity, and emerging claims trends you're seeing in the book? Are you seeing a benefit from lower prescription drug costs impacting severity?
Yes. Particularly on the opioid front, we've been pleased to see declines in opioid prescriptions. The industry as a whole has seen a decline in opioid prescriptions. I think in part that's due to awareness. Obviously, it's on the news, it's in everyone's mind. People know when they are given these prescriptions what it ultimately could mean for their health. As well as I think states have done a really good job of trying to regulate that. That's been very helpful to us. And certainly-
Okay
I think full employment helps us in that regard as well. I think it brings down utilization.
Okay. Are there any other claims initiatives that you're taking to reduce frequency?
No, I would say no. I like our approach to claims management. On average, my people out in the field, our field case managers, on average, have 50 or less claims that they're working, indemnity claims that they're working. That's very intentional on our part because our initiative is to help maximum medical improvement return the injured worker to work and close the claim. When we keep those low inventories, we've been able to do that in terms of managing the claim, not just triaging, not just paying bills, but really trying to get best outcomes for all those involved. Of course, my safety department plays a huge role in that as well. We often talk about our pre-quote safety inspections, but these are more than just safety visits and being the eyes and ears of my underwriting department.
My safety professionals are really out there trying to help employers create safer work environments because at the end of the day, again, that's sort of a win-win for everyone. That's a real critical part of what we are. It's a critical part of our model. That hasn't changed because of the workers' comp environment.
All right. Great. Thank you very much for the answers.
Thank you. Your next question comes from the line of Bob Farnham. Your line is now open.
Yeah. Hi there, and good morning.
Probably a quick question. According to your plan, this is the first time you've been able to take down reserves of accident year 2017.
It is.
You had $1.3 million of favorable development there. Are you seeing that's driven by lower frequency than expected or lower severity than expected?
Well, because you think about it, we're at that 30 to 36-month window. At that point, I would say it's severity because we've pretty much known the frequency for some time, but we've been able to close claims for lower than I originally anticipated. That would be driven by severity more so than frequency.
Okay. You don't get claims that come in years after the fact for the most part.
No.
They're pretty known upfront.
Yeah. That's a valid point, Bob. We do obviously get some claims reported after year-end, given the nature of our business and the severity of the claims, it's not going to be enough to move the needle in terms of late-reported claims.
Right.
That's a good point for the industry as a whole. That could certainly be a factor.
All right. In terms of the favorable development you guys have been recognizing in the recent years, has there been any particular segment of the industry that's been driving a lot of that? Any changes in the types of claims you're getting in terms of size or body injury or whatnot?
Yeah. Gravity is still present. Falls from high, well, not even high elevations, falls are still the primary reason, motor vehicle accidents. Yeah, we haven't really seen newer types of claims that I would say, "Oh, we haven't seen that before in the past." I don't think it's some sort of safety issue that's out there that's causing a rash of claims. Like I said, I hate to make the joke, it really is just gravity.
Right. All of your segments are kind of having the improvement in the loss trends.
Yeah. Our favorable reserve and case reserve development has been across industries from the claims. Yeah, we haven't seen any significant trends in one industry versus another in terms of that. It's typically driven by lower case reserve development when we are able to settle and close a claim.
Right. Great. Okay, thanks.
You bet.
Thank you. Your last question comes from Randy Binner. Your line is now open.
Morning, Neal and Janelle. This is actually Ryan Seto on for Randy.
Hi.
Neal, quick question, and I must have missed this on the call. Did you give the statutory surplus number?
I did, yeah. At the end of the quarter, our statutory surplus was $408 million, up from $384 million at the end of the year.
Perfect. I guess along those lines, the premiums to surplus ratio has kind of been dropping the last couple quarters. What is, I guess, a comfortable level you guys are targeting in the future?
I think from a long-term standpoint, we think that the GAAP Well, there's two measures that we look at. The GAAP operating ratio, GAAP leverage, we think we can get to 1 to 1 net written premiums to GAAP equity. Then long-term, we think that our net written premium to surplus ratio could get as high as 1.4 without having any impact on our rating with AM Best.
Understood on that. Thank you. Then just one more clarifying comment. The investment portfolio you said was going to be flat to slightly up in future periods. Is that on a yield or absolute dollar basis?
We're just looking at the absolute dollars. The interest rates have sort of come back down. We saw a nice bump, particularly on yields on taxable securities and then also the amount of interest that you get even on your bank deposits and your very short-term securities. We expect that increase that's driving those double-digit increases in net investment income has run its course. We're expecting more modest increases in the future.
Understood. Thank you very much for your time.
Thank you.
Thank you. I'm showing that there are no further questions at this time. I would now like to turn the call over to Ms. Janelle Frost.
Throughout the workers' compensation industry's highs and lows, weather pun intended, AMERISAFE's appetite remains unchanged. Our response is to execute on our commitment to deliver an exceptional product to our policyholders through quality insurance services and risk assessment. In turn, remaining committed to our core disciplines has allowed us to provide stable returns for our shareholders, a consistent market for our agent partners, and aided business owners with mitigating risk. I'd also want to congratulate the AMERISAFE employees on the honor of being named as one of Ward's Top 50 P&C companies. Your service and dedication to the AMERISAFE mission are appreciated. Thank you.
This concludes today's conference call. Thank you so much for participating, everyone. You may now disconnect.