Good day, ladies and gentlemen, welcome to AMERISAFE's 2019 first quarter earnings conference call. At this time, all participants are in listen only mode. Later, we will conduct a question and answer session and instructions will be given at that time. If anyone should require assistance during the conference, please press star then zero to reach an operator. As a reminder, this call is being recorded. I would now like to turn the call over to Kathryn Shirley. You may begin.
Good morning. Welcome to the AMERISAFE 2019 first 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, 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, good morning, everyone. Our year-end call was just two months ago. Since then, we have not seen signs of change in the workers' compensation market. The soft cycle lives on. In the first quarter, the market was highly competitive as approved loss costs continued to decline. For AMERISAFE, gross premiums written were down 4.4%, with a measured decline in pricing represented by our 159 ELCM. This compares to a 163 ELCM in the first quarter of the previous year. Pricing adjustments were made to retain profitable accounts, as reflected in our policy retention rate of 92.4%. Overall, voluntary policies written in the quarter were down 1.2% on account basis and 5.7% on a premium basis. Premium declines due to lower rates were somewhat countered by stronger payrolls among our hazardous industries.
Payroll audits remained positive for all of our major industry groups, with marked increases in trucking, oil and gas, and wholesale retail. In total, audit premium and related adjustments increased top line by $1.2 million compared to last year's first quarter. Our loss and LAE ratio for the quarter was 58.4%, comprised of the current accident year loss ratio of 72.5% and a favorable prior accident year loss ratio of 14.1%. Our estimate for the current accident year was one percentage point higher than accident year 2018. We assumed frequency to be flat to slightly higher, with more reported claims on a smaller earned premium base and a declining rate environment. For severity, we assumed mid-single digit inflation. Our favorable development this quarter totaled $12 million, compared to $9.3 million in the first quarter of 2018.
This favorable development was driven by favorable case reserve development, particularly in accident years 2016, 2015, 2014, and 2012. I will now turn the call over to Neal to discuss the financials.
Thank you, Janelle, and good morning, everyone. For the first quarter of 2019, AMERISAFE reported net income of $19.4 million, or $1 per diluted share, compared with $16.2 million or $0.84 per diluted share in last year's first quarter. Operating net income for the first quarter was $17.6 million or $0.91 per share, an increase of $0.05 from $0.86 per share in the first quarter of 2018. Revenues in the quarter increased 1.1% to $95.2 million compared with the first quarter of 2018. Net premiums earned decreased 2.7% to $84.9 million when compared to last year's first quarter. Turning to our investment portfolio, net investment income increased 11.2% in the first quarter to $8 million, compared with $7.2 million in the first quarter of 2018.
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 2.82% at the end of the period, up from 2.59% one year ago. There were no impairments on any of the securities held in the portfolio during the first quarter, and there were no significant realized gains or losses during the period. The investment portfolio is high quality, carrying an average AA rating with duration of 3.91, with 55% in municipal bonds, 23% in corporate bonds, 15% in U.S. Treasuries and agencies, and the remainder in cash and other investments. Approximately 57% of our bond portfolio is comprised of held-to-maturity securities, which were in a net unrealized gain position of $11.2 million at quarter end. These unrealized gains are not reflected in our book value as these bonds are carried at amortized cost.
We have a small investment in equities, during the quarter, these securities increased by $2.2 million in value. With these changes in value running through the income statement, this increased net income by $0.09 per share. Moving now to operating expenses. Our total underwriting and other expenses were $20.7 million in the quarter, compared with $20.3 million in the first quarter of 2018. The increase was largely due to higher estimates of future payouts of share-based incentive compensation compared to last year's first quarter. By category, the 2019 first quarter expenses included $6.7 million of salaries and benefits, $6.4 million in commissions, and $7.6 million of underwriting and other costs. As a result of the decline in earned premium, as well as slightly higher expenses, our expense ratio for the quarter was 24.3%, compared with 23.2% in the first quarter of 2018.
Our tax rate for the quarter was 18.5%, compared to 16.7% for last year's first quarter. Return on equity for the first quarter of 2019 was 18.5%, compared to 15.1% for the first quarter of 2018. Operating ROE for the period was 16.9%. In capital management, our company paid its regular quarterly cash dividend of $0.25 per share in the first quarter, which represented a 14% increase over last year's amount. This quarter, the board declared a quarterly cash dividend of $0.25 per share, payable on June 21st, 2019, to shareholders of record as of June 7th, 2019. Finally, just a couple of other notes. Book value per share was $22.33 at March 31st, 2019, up 5% from $21.26 at year-end. Our statutory surplus was $401 million at quarter end, up from $384 million at December 31st, 2018.
Finally, we will be filing our Form 10-Q with the SEC tomorrow, May 3rd, after market close. That concludes my remarks, and we would now like to open the call up for the question and answer session. Operator?
Ladies and gentlemen, if you'd like to ask a question, please press star then one. If your question has been answered and you'd like to remove yourself from the queue, please press the pound key. Once again, to ask a question, that's star then one. Our first question comes from Randy Binner of B. Riley FBR. Your line is open.
Hey, good morning, everyone. This is actually Ryan Aceto on for Randy. How are you?
Good morning, Ryan.
Good morning, Ryan.
I was wondering if you could quantify in the expenses the amount of incentive costs in 1Q19 versus 1Q18.
Yeah. The amount of increase was about $400,000.
Perfect. Is 24%-25% range still what you guys are targeting?
Yeah, that's still what we expect for 2019 consistently. It will bounce around a little bit depending upon expenses in any one quarter, but overall, somewhere between 24% and 25% for the expense ratio, not including policyholder dividends.
Perfect. I guess, turning to reserves. 2017 accident year, I was wondering if you can give an update if anything material had changed there. I know it's early for 2018, but any initial thoughts would be great.
Sure. This is Janelle. For 2017, I think we have not made any adjustments to our ultimate ratio for that accident year. As you know, if you're familiar with our history, we typically look at that as a 30, 36-month window. There's not been anything material that would cause us to make any adjustments prior to that 30 to 36 month window. For 2018, I think I said this on last quarter's call as well. I felt good about 2018 at the end of the year. I felt confident in our reserve selection, and nothing, at least in the first three months of 2019, would cause me to change that statement.
Perfect. Great quarter. Thanks for taking my questions.
Thank you.
Thanks, Ryan.
Our next question comes from Matthew Carletti of JMP Securities. Your line is open.
Hey, thanks. Good morning.
Good morning, Matt.
A few questions. Maybe to start high level. There's been a lot of talk just broadly about kind of a fully employed economy or kind of a heating economy. That sometimes can play in the loss trends in workers' comp, and I think some of your peers have made some comments. What are you seeing in your book in terms of some of the typical things you might see when kind of an economy gets a little heated? Are you seeing anything yet, or is it really nothing noticeable?
As I talked about in the prepared remarks, when we were estimating what we thought accident year 2019 was going to be comparison to 2018 and 2017 in terms of frequency in particular, we did feel like we'd see a slight increase in just the raw number of claims that we would see. Of course, as we stated, on a smaller earned premium base. In the first quarter, I will say, though, however, the claim count was less than 2018 at the same point in time. I don't have anything in three months worth of data to support my assumption for 2019. Obviously with three months of data, that's not really applicable.
Right. It's the right conservative assumption to make based on the fact pattern.
One thing I think about is that we ensure in the first three months of the year, there's a lot of winter activity, so maybe not as much work activity the first three months as we would see in the summer months or fall months.
Yeah, that makes sense. I apologize if I missed it, did you mention the ELCM or if not, could you give it to us?
I did mention early on just to make sure everybody was listening. Just kidding. 159.
What was it?
159.
159. Thank you. Then, maybe last question, if I can, just from the competitive environment. Where are you seeing it the strongest? What I mean by that is, are there any particular industries within your footprint that it's more competitive than others? Does it tend to just be more by account size, which I think is classically where you might see it? Is there anything to note there, or is it just a typical cycle?
Yeah, I think it's typical cycle. Obviously, where we first started seeing the intense competition for us was in the larger policy size, which makes sense because we're competing against those package carriers, and we saw slippage early on in the cycle in those larger accounts. Where we've really been monitoring is where are we in terms of the hazard groups. I think I talked a little bit about this on the fourth quarter call. If you're ranking them A to G being the most hazardous, where we see slippage or I call slippage where we're not being able to retain as many accounts is in those lower hazard groups.
That gives me a little bit of comfort in that, yes, people are playing in my space in what I would call hazardous industries, but at least in terms of my book of business, it's in my less hazardous industries.
Right. Less in your wheelhouse.
Exactly.
Great. Actually, excuse, there's one numbers question in Neal. I think it was $4.5 million of audit premium benefit in the quarter. Do you have handy the Q2 and the Q3 last year, if you had it, so we know what kind of comp we're up against?
I'll give you a readout of the last few quarters. Starting in the first quarter of 2018, that was $3.3 million. That compares to the $4.5 this quarter. Second quarter of 2018 was $3.8 million. Third quarter of 2018 was a minus $2.1 million, the fourth quarter of 2018 was $2.3 million.
Great. Thank you very much. Very nice start to the year.
Thank you, Matt.
Our next question comes from Mark Hughes of SunTrust. Your line is open.
Thank you very much. Good morning.
Good morning, Mark.
Good morning, Mark.
Janelle, did you say how many large losses you had in the quarter?
I didn't, Mark. We had one claim at the end of the first quarter that was reported with incurred over $1 million.
Okay. Sounds like-
I'll caveat that with my usual statement of we're in a lumpy business, so I can't get real excited about one claim in the quarter because you know they can happen at any time. Yes, it was one.
Well, that was a small lump, so we'll take what we can get.
It was. I'll knock on wood at that point.
Yeah. Neal, you made a reference to $0.09 flowing through the P&L. What was that reference to? I'm sorry.
That was just a reference to the equity securities. That affects net income but not operating income. Equity securities recovering in value during the quarter impacted net income positively.
Understood. Any early read, I'm just sort of curious from a competitive standpoint, maybe I'm asking the same question again, but it seems like we've had this dynamic. Clearly, loss costs have been coming down, competition has been ramping up. Is the tide starting to stabilize a little bit in terms of the competitive environment? Loss costs are down, if you look over the last three or four years, pretty substantially. Is that tempering the competitive enthusiasm a little bit, or is it still ramping up?
No, I'd say at this point, it really is unchanged from what we saw in the fourth quarter. You mentioned the rate. In the quarter, the rate changes for our states that were effective in the first quarter accounted for 0.5%. I would love to see that start to tick off, there's no indication as of yet. I looked at our top five states. The largest of those increased 0.5%. To decrease, sorry, 0.5%, with a ranging down to 5.6% in Louisiana, just for the latest filings. That's not cumulative, latest filings. Yeah, we would like to see those taper down. I think Matt mentioned earlier about what we're seeing in some of our peers or other companies that are writing comps, you are starting to see people take up current accident year loss ratio.
I think it's indicative of what everyone's experienced, just hasn't come through in the rate data as of yet. I do think from that perspective, companies, it's still profitable, no question, but I do think companies are a little bit more cautious about what that loss ratio is in this rate environment.
Very good. Thank you.
You're welcome.
Thanks, Mark.
Once again, if you'd like to ask a question, please press star then one. Our next question comes from Freddie Sleiffer of KBW. Your line is open.
Hi, good morning.
Good morning.
I just wanted to go back to the reserve releases. I was wondering if you could give us a little bit more color on how much of the $12 million of releases came from each accident year that you identified in the press release.
Certainly. Accident year 2016 was $6.1 million. 2015 was $2.1 million. Accident year 2014 was $2 million, prior to that, it was $1.8 million for accident years 2012 and prior.
Okay, got it. Thank you.
You're welcome.
I think you, could you just repeat where the growth in payroll audit and related premiums came from, which industries and job classes are you seeing the biggest growth? Any additional color you can give perhaps about how you see audit premium growth trending in the next few quarters?
Right. Payroll audits themselves in the quarter were positive in all of our major industry groups, the industry groups we publish in our 10-K. Where we saw the most growth in the quarter was trucking, oil and gas, and wholesale retail, which, in the 10-K, that's in the other line of business. In particular, those three were the largest growth in terms of quarter-over-quarter payrolls. What do we expect for the year? At this point, as long as the economy stays at the levels that it is, we do expect to continue to see positive audit premium throughout the year. How that compares to the prior year quarters, I don't know that it will be as robust. In other words, I don't know each quarter if it's going to be a headwind or a tailwind.
I would expect it would taper off to some degree from where we were last year, but still remain positive. I guess that's the key. Even if the quarter-over-quarter change is less or a decrease, the fact that the audit premiums remain positive at least indicates that our insurers are either having more work activity than they anticipated, or they've had wage inflation or something like that where we're having positive payroll growth. In that regard, I do think that will continue in 2019.
Okay, great. Thank you. Just lastly, I think you said you expected an increase in claims because of the economy sort of heating up, but what are you seeing on your own book in terms of frequency and severity?
Right. Our expectation for accident year 2019 is that frequency would go slightly up. I do think we'll probably see an increase in the number of reported claims into 2019. That was not the case in the first quarter. Again, that's three months worth of data. It's the winter months for us. I don't want to say I don't rely on that data too much, but I don't want to base the whole entire year on that one quarter's worth of data, because in the first quarter, our reported claim counts were actually down for accident year 2019. That's not my expectation for the full year.
All right, great. Thank you very much.
Thank you.
Thanks.
There are no further questions. I'd like to turn the call back over to Janelle Frost for any closing remarks.
Yesterday, AMERISAFE celebrated its 33rd year as an underwriter. Over the decades, we have seen varying markets, changing levels of competition, fluctuating economies, technological advances, and obstacles. As a company, we have adapted, evolved, and thrived by focusing on our niche, relying on our expertise while learning from experience, and continually striving for superior service and value for our stakeholders. I feel privileged to be one of the over 400 AMERISAFE employees who are building on the foundation laid 33 years ago. I will also admit an 84% combined ratio and a return on average equity of 18.5% are pretty nice ways to celebrate an anniversary. Thank you for joining us today.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.