Good day, ladies and gentlemen. Welcome to the AMERISAFE 2018 first quarter earnings conference call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question and answer session, and instructions will follow at that time. If anyone should require operator assistance during the call, please press star and zero on your touch-tone telephone. As a reminder, this call is being recorded. I would now like to introduce yours for today's conference, Miss Kathryn Shirley, General Counsel. Ma'am, you may begin.
Good morning. Welcome to the AMERISAFE 2018 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, 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. Thank you for joining us today as we discuss the financial results for the first quarter of 2018 and the operational metrics supporting those results. I will begin by saying this was a good start to 2018. At AMERISAFE, we pride ourselves on our focus, consistency, frugality, and service, and our financial performance this quarter is the result of our dedicated employees executing on those fundamental attributes. The results demonstrate our ability to maintain discipline while navigating a competitive workers' compensation environment. Pricing pressure continued as approved loss costs declined, and carriers aggressively searched for premium. AMERISAFE, however, focused on retaining and serving our valued policyholders through risk selection, proactive safety expertise, and claims management. It was the retention of those valued policyholders that in large part enabled gross premiums written to grow 2.4% in the first quarter.
Voluntary policy count grew 2%, and the related premium grew 1.6%. The growth was supported by a historic policy retention rate of 94%, compared to 92.8% in 2017's first quarter. This was somewhat offset by a decline in new business of 10.4% as new business submissions were down. Overall, pricing on the policies written in the quarter was at a 163 ELCM, down slightly from a 165 in the year-ago quarter. Keep in mind our ELCM decrease has been a gradual decrease in a market when underlying loss costs have been on the decline for three years. In addition to the policies we wrote this quarter, top line also benefited from a million-dollar tailwind from audit and related premium adjustments. Audit premium remained positive, and we had less cancellation premium this quarter than one year ago.
We see positive audit premium as a sign of a growing economy for some of the classes we underwrite. Our loss ratio for the quarter was at 60.9%, compared to 61.8% in the first quarter of 2017. The quarter's loss ratio was comprised of a current accident year loss ratio of 71.5% and prior year development ratio of a negative 10.6%. Our initial estimate for accident year 2018 is one percentage point higher than accident year 2017, as measured at the end of the accident year. Our estimate assumes we will continue to see pressure on frequency and severity. Pressure on frequency is more a result of less earned premium rather than increased claims counts. Our reported claims for the first three months were up 2.2%, but earned premium was down 4%.
As for severity, we expect a modest increase in severity in line with what we saw in accident years 2014 through 2016. In the first quarter, we did have five claims with excess of a million in incurred losses. This compares to three such claims at the end of 2017 first quarter and 17 large claims for the full year. We certainly cannot determine a trend off three months of data. As we've seen in prior years, the occurrence and severity of such losses are lumpy but bears monitoring as the accident year progresses. As for prior accident years, we had strong favorable case development from accident years 2015 and 2014 in the quarter, which led to overall favorable development of $9.3 million. Our open inventory of claims at the end of the quarter was relatively unchanged from last year's first quarter.
We continue to focus on maximum medical improvement for our claimants, return to work, and closing claims. That concludes my prepared remarks. I'll now turn the call over to Neal.
Thank you, Janelle, and good morning, everyone. For the first quarter of 2018, AMERISAFE reported net income of $16.2 million, or $0.84 per diluted share, compared with $13.5 million, or $0.70 per diluted share, in last year's first quarter. During the quarter, we implemented the new accounting standard requiring that changes in the value of equity securities be included in net income. As a result, you will see a new line item in the financial statements, net unrealized gains or losses on equity securities. This amount will be excluded from operating net income along with any realized gains or losses on our fixed-income investment securities. Operating net income for the quarter was $16.5 million or $0.86 per share, an increase of $0.15 from $0.71 in the first quarter of 2017.
Revenues in the quarter declined 3.5% to $94.2 million compared with the first quarter of 2017. Net premiums earned decreased 4% to $87.3 million when compared to last year's first quarter, which was a better result this quarter than our recent trend. Turning to our investment portfolio, net investment income increased 7.4% in the first quarter to $7.2 million, compared with $6.7 million in the first quarter of 2017. The increase was largely due to the decrease in value of a hedge fund investment in last year's first quarter. Net investment income without the hedge fund impact was up 1.8% compared to last year's first quarter. The tax equivalent yield on our investment portfolio was 2.9% at the end of the quarter. The pre-tax yield on the portfolio was 2.59% at quarter end, up slightly from 2.54% at year-end.
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 double A rating with a duration of 3.98 with 59% in municipal bonds, 22% in corporate bonds, 13% 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 an overall unrealized gain position of $1.5 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 $20.3 million in the quarter, compared with $21.2 million in the first quarter of 2017.
The decrease was largely due to lower compensation and insurance-based assessment compared to last year's first quarter. By category, the 2018 first quarter expenses included $5.9 million of salaries and benefits, $6.5 million in commissions, and $7.9 million of underwriting and other costs. As a result of these lower expenses in the quarter, our expense ratio was 23.2%, compared with 23.3% in the first quarter of 2017. Our tax rate for the quarter was significantly lower as a result of the tax reform bill and the new lower 21% federal corporate tax rate. Our tax rate for the quarter was 16.7%, compared to 27.8% for last year's first quarter. The difference in the tax rate benefited earnings per share by $0.10 compared with the first quarter of 2017. Return on equity for the first quarter was 15.1%, compared to 11.7% for the first quarter of 2017.
Operating ROE for the quarter was 15.4%. In capital management, our company paid its regular quarterly cash dividend of $0.22 per share in the first quarter, which represented a 10% increase over last year's amount. This quarter, the board declared a quarterly cash dividend of $0.22 per share, payable on June 22, 2018, to shareholders of record as of June 8, 2018. Finally, just a couple of other topics. Book value per share at March 31 was $22.43, up from $22.10 at year-end. Our statutory surplus was $391 million at quarter end, up from $382 million at December 31, 2017. Finally, we will be filing our Form 10-Q with the SEC tomorrow, April 27, after the market close. That concludes my remarks, and we'd now like to open the call up for the question and answer session. Operator?
Ladies and gentlemen, if you have a question at this time, please press the star and 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 comes from Matthew Carletti with JMP. Your line is now open.
Hey, good morning.
Good morning, Matt.
Just have a few questions. Neal, first one might be for you. Just as we think about audit premium, looking at Q2, Q3, Q4 of 2017, do you have those numbers handy for what audit premium was in those quarters as a base to compare for what we might expect going forward?
Yeah. In the second quarter of 2017, audit premium was -$2.6 million. Third quarter-
Okay
was -$1.1 million, and the fourth quarter of 2017 was a positive $2.1 million.
Okay, great. Thank you. Let's see. On competition in the market, are you seeing any change in where it's coming from, whether that be from type of competitor, national versus more of a mutual or regional or geographically? Just trying to get your feel for how the market might be changing, if at all.
That's a really good question, Matt. We really haven't seen a change first quarter versus what we were seeing in the fourth quarter. We still see pockets of, and this is very anecdotal, we still see pockets of what we consider slightly irrational pricing when I look at my quoted and failed ELCMs and where I'm missing on accounts. Those are more one-offs here and there. There's no particular pockets that I would say the competition is any more intense than others. It's very broad. One of our concerns, as we've talked about many times, to your point, about the multi-line carriers is how long is that going to last for workers' comp? NCCI will put out their year-end 2017 results in a couple of weeks, as well as the trends they saw in the data.
AM Best has already preliminarily put out their estimates for 2017, and the combined ratio was a 95.1%. Anytime those numbers start getting published and start getting in the news, we start thinking, well, how will carriers respond? Because this will be the third year of underwriting profits for workers' compensation. I think that makes it attractive to those multi-line carriers. There's part of me that says, "Oh, no, another profitable year." There's part of me that says, "Okay, people will start becoming irrational because they're going to be chasing those profits, trying to increase their top lines." Obviously that leads to adverse development eventually.
Right. Okay. How about by subsegment, like transportation versus agriculture versus logging and so forth. Are you having a lot of success, whether it be just economic conditions or competitive conditions in one area versus another? Or is that also pretty broad-based?
Right. Well, I'll tell you, the audit premium, which we try to use that as our judge of how the economic conditions are for the classes that we write. In terms of audit premium, again, this quarter, we saw the larger increases coming from the trucking line of business. We saw it more from trucking and services. When I say services, that's like cell tower repair, window washers, that type of class of business. Audit premiums still remain strong, even in construction and roofing. Just the change quarter-over-quarter, the increases seem to be coming more so from the trucking line.
Got you. Those are turning the most. Got you. All right. This last question on frequency severity trends. Anything different that you're seeing in Q1? I know in Q4, you had brought the accident year up for last year, more on some severity concerns. I caught your comments on just the number of over $1 million, but more kind of at a deeper level. Are you seeing any changes there for better or for worse?
No. I'll caveat that with, it's three months worth of data for the accident year, so there's nothing in three months that causes me to change my estimate for obviously the number we came out with for accident year 2018.
Okay, great. Well, congrats on a nice start to the year, and thank you for the answers.
Thanks, Matt.
Thanks, Matt.
Our next question comes from Mark Hughes with SunTrust. Your line's now open.
Yeah, thank you. Good morning.
Good morning.
Good morning, Mark.
Anything in the back book? I hear what you're saying. It sounds like inflation, there wouldn't necessarily be any new data points. It sounds like the 71.5 incorporates the view of inflation that you had last quarter, and that's obviously up 100 basis points from the full year loss pick. I guess you're saying no change in view. You think inflation is still in the system, but this loss pick is covering it?
I do. I do think that. As far as frequency, my concern or my thoughts or assumptions going into the accident year are not unlike what I thought in 2017. I know that my earned premium was going to be declining because of what we wrote in 2017. Even though my claim counts may not increase or remain relatively flat, that will put pressure on our frequency numbers.
When you think about the back book, the older accident years, you had the good favorable development in the quarter.
Yes.
What's your view on inflation there? The potential increase in severity and longevity of claims. Does that seem like it's under control and stable, or is there risk that you see? There's always risk, but is there some reason to think there could be movement there?
In terms of the ultimate picks for those accident years, is that what you're referring to?
Yeah, exactly. Is there some sort of uptick in bad things, longevity, severity in the older accident years?
To your point, obviously, I think that risk is always there. When I think of it in terms of the loss costs that were covering the premiums for those years, I think they were coming off all-time highs off of the recession. I think those years, 2014, 2015, 2016, are going to be good years for the industry. Like I said earlier, I think it'll be interesting to see what NCCI comes out with in a couple of weeks. I think that was all built into the pricing of that book of business as far as the inflation assumptions.
The ELCM, the 163, it sounds like you think competition has not much changed, some pockets, et cetera. I don't know what may happen if people get incrementally more excited.
That's true
is the 163, do you think it should stabilize here, or do you think there continues to be downward pressure on that?
I think there's probably going to be downward pressure on that simply because we're continuing to see the latest filings on loss costs are still declines. They're not to the same impacts as they were a year and a half ago, but we're still seeing declines in the loss costs come through. Yeah, I think that pressure is going to be there.
Right. Your pricing, this takes into account the lower loss cost, so you're-
Yes
You're reducing the denominator when those lower loss costs come out. Is that right?
That's correct.
Yeah. It's kind of an interesting situation, the retention being so high, but then new business submissions. Could you talk about that dynamic? I guess it implies not much business is moving, but it seems like there's more competition out there, and so it's kind of some contradictory moving or not moving parts in your business.
Yeah, I think you're exactly right. I think the fact that our retention was at a historical level, and our new business was down, was just what you said. I don't think there's a lot of business moving from carrier to carrier. People are getting rate decreases when they come up for renewal. Unless they have a service issue or something to that effect, they have no need to actively pursue moving carriers. That makes the job of the sales department a little bit more difficult but doable. We've really been focusing, as we've been talking about the last few quarters, really trying to focus on retaining those valued policyholders, tenured policyholders, that we want to retain. If we're going to be aggressive, that's where we need to be aggressive because those are the accounts we know the best versus new businesses, we're walking into the unknown.
Do you get any boost off of the storms, anything perceptible in terms of rebuild in your, say, construction?
I think I would like to say yes, simply because I saw the uptick in trucking, particularly in trucking payrolls and trucking audit premium from those states that I think were impacted by the storm. From that aspect, I would say yes.
Thank you very much.
You're welcome.
Thanks, Mark.
Again, if you have a question, please press star and then one. Our next question comes from Randy Binner with B. Riley FBR. Your line is now open.
Hi, everyone. This is Ryan Acito, filling in for Randy today. How are you?
Morning, Ryan.
Good morning, Ryan.
Morning. Just wanted to follow up on two quick points. Severity in 2017, is there any specific segment you guys were seeing I guess most prevalent, or was it more across the board? I know you guys had mentioned something about elevated single vehicle accidents in prior quarters.
Yeah. In the fourth quarter, we mentioned on the call that we were having sort of the same number of accidents, but just sort of seemed to see more severe incidents. It wasn't in any one particular pocket of business. It was really across the board. I think we saw maybe a few more young people get injured, and those tend to cost more because you're also thinking about the lifetime medical for those individuals versus someone who is an older worker. There wasn't any particular area other than what we mentioned before on the fourth quarter call.
Thank you. That's helpful. One quick note on the expense ratio. Little bit lower this quarter year-over-year is, I know you guys guided to about 24%-25%. Is that still in play for this year?
Yeah, it is. In the quarter, we had some pretty significant benefits on expenses. Our loss-based assessments, which are in different states, and it depends upon your reserve development in those states that drives that expense. Those loss-based assessments were $1.1 million lower this first quarter than last year in the first quarter. If you take that out of the equation, our expense ratio really would've been around 24.5%, and that's kind of where we expect to be for the full year, somewhere in the 24%-25% range. That does not include the policyholder dividends, which adds another 1.5 points. That's still what we expect. We did see some unusual benefit, I think, in the first quarter on expenses.
Appreciate that color. Thanks for your commentary.
Thanks, Ryan.
Thank you.
Again, if you have a question, please press star and then one. Our next question comes from Christopher Campbell with Keefe, Bruyette & Woods. Your line's now open.
Yes. Hi, good morning.
Good morning, Chris.
Good morning, Chris.
Hi. I guess my first question would be on the audit premiums. Janelle, I think you mentioned you're seeing larger increases from trucking and then your service industries-
Yes
which I'm assuming is mostly kind of newer employees. Is there any changes that you're thinking about just in terms of your loss picks for those industries, assuming you're getting presumably less experienced and potentially higher frequency employees?
Yeah, I think it's more related to payroll growth than new employees per se. Payroll growth, wage inflation are things that are, to your point about the severity of the losses or the frequency of the losses, are things that we would prefer rather than newer employees.
Yeah, we've seen some wage inflation, I think, in the trucking area particularly. It's still very competitive, and truckers who insure with us have had to raise wages for existing employees somewhat. It's more that than it is new employees.
Okay. Got it. That makes sense. Okay. It's the good type of growth.
Yes.
Right now, we're watching it.
Okay. Got you. I noted there was, just talking kind of at a macro level, I know there's an increasing trend for multi-line carriers to try to tie workers' comp into the larger accounts. Now, are you seeing more aggressive price competitiveness from those multi-line carriers than you would from regionals or mono lines? I mean, are you seeing
Right.
I'm sorry, go ahead.
Yeah, it's a little bit more difficult for me to measure that simply because with a multi-line carrier, they're going to give and take on certain lines of business. I don't really have an apples-to-apples comparison, my price versus what their price was on the workers' comp product. The only way I can really measure that they're being more competitive is the fact that they'll take an account from us. As far as the exact pricing on that account, it's a little bit hard for me to compare because they're pricing it all the lines together as one package. They may say, "Oh, we're giving a 30% discount on the work comp," but really, they're making it up somewhere else in the package.
Okay. Got it. Is there a trend that potentially you're losing more of those head-to-head competitions against the multi-lines than you would the regionals or the mono-lines?
Yeah. We talked a lot about that in third and fourth quarter last year, there really wasn't any change in the first quarter. We've been talking for probably a year now in terms of our retention, the fact that we were losing those, what we call larger accounts, maybe not large accounts to other carriers, but large to us. That has seemed to sort of moderate now. It's just the environment that we work in. It's not more aggressive than it was two quarters ago.
Okay, great. Well, thanks for all the answers, and best of luck in the second quarter.
Thank you, Chris.
Great. Thank you very much.
At this time, I'm showing no further questions. I'd like to turn the call back over to Ms. Janelle Frost for closing remarks.
Thank you for joining us today. I'd like to take this opportunity to publicly wish the AMERISAFE employees happy early anniversary. It is your dedication, expertise, and service that provides quality insurance services to our policyholders, care for the injured, and consistent returns for our shareholders. 32 years of being safe above all. Congratulations.
Thank you.
Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone have a great day.