I'd now like to turn the conference over to your host, Mr. Vincent Gagliano, Chief Risk Officer. Please go ahead.
Good morning again. Welcome to the AMERISAFE 2017 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 the results 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, Vincent. My prepared remarks were so profound, I think I'll share them with you again. Insurance is a cyclical industry. This fact is easily proven looking at historical results regardless if the view is underlying loss costs, premium volume, or profitability. We are currently in a soft market. We're at that point in the cycle when companies begin to have what I call an identity crisis, chasing premiums at prices inadequate to cover long-term losses. AMERISAFE is not having an identity crisis. We are focusing on underwriting discipline and managing our claims to provide returns to our shareholders while providing exceptional service to our policyholders. Our return of capital to shareholders this quarter through our $3.50 per share special dividend is a reflection of our capital strength and our view of current market conditions, which we are well-positioned for the future.
This quarter's operational results are reflective of our consistent approach to workers' compensation throughout market cycles. Premiums written in the quarter were down 2%, driven by a decline in new business as competition remained intense. We were successful in protecting our renewal policies this quarter by increasing renewal policy count. Our policy retention was 93.7%, up from 92.7% in the same quarter last year. What slippage we did have was from policies with greater than $100,000 in annual premium. Our pricing, as represented in our effective loss cost multiplier, was 169 compared to 171 in the third quarter last year. Audit and related premium adjustments decreased premiums $1.1 million, on par with last year. Relative to losses, we remained at a 69% loss in LAE ratio for the current accident year. As projected, frequency was up.
Our claims reported in the calendar year were down 5.8%, yet net earned premiums were down 6.4%. Severity was higher for accident year 2017, which was also projected at the beginning of the year. We have often stated that losses are lumpy, so severity bears monitoring as the accident year progresses into the last quarter. As for prior accident years, we experienced favorable case development in the quarter, which led to a reduction in losses incurred of $10.3 million. Accident years 2013, 2014, and 2015 experienced the most favorable development as we focus on closing claims and returning injured workers to work. Our open claim count at the end of September 30, 2017, was 2.7% lower than the end of third quarter 2016. After the favorable development, our loss and LAE incurred ratio for the quarter was 56.9% compared to 56.2% last third quarter.
The best summary of these operational metrics is a combined ratio of 81.4% and pre-tax underwriting profit of $15.9 million. I will now turn the call over to Neal to discuss the financial results.
Thank you, Janelle. Good morning, everyone. For the third quarter of 2017, AMERISAFE reported net income of $16.6 million, or $0.86 per diluted share, compared with $17.9 million or $0.93 per diluted share in last year's third quarter, a decrease of 7.4%. Operating net income in the third quarter of 2017 totaled $16.7 million or $0.87 per share, lower than last year's $0.93 per share. Revenues in the quarter decreased 5.5% to $92.8 million compared with last year's third quarter. Net premiums earned decreased 5.3% to $85.1 million when compared to the third quarter of 2016. Net investment income was $7.8 million in the third quarter of 2017, a decrease of 2.7% when compared with last year's third quarter. The decrease was due to a large positive change in the value of a limited partnership hedge fund investment in last year's third quarter.
This limited partnership is mark-to-market through net investment income each quarter. The tax equivalent yield on our investment portfolio at the end of the quarter was 3.2%, no change from the end of the third quarter of 2016. There were no impairments or significant realized gains or losses during the quarter. Our investment portfolio continues to be high quality, carrying an average AA rating. Our duration of the portfolio is 3.73, and we hold 55% in municipal bonds, 23% in corporate bonds, 13% in U.S. Treasuries and agencies, and the remainder in cash and other investments. Over the past year, our allocation to municipal bonds and Treasury securities has increased slightly, and our allocation to corporate bonds has decreased slightly. Approximately 52% of our investment portfolio is classified as held-to-maturity, which is in a net unrealized gain position of $11.5 million.
These gains are not reflected in our book value as these bonds are carried at amortized cost. With regard to operating expenses, our total underwriting and other expenses decreased 7.1% in the quarter to $19.3 million, compared with $20.8 million in the same quarter last year. We saw decreases in assessments and commissions this quarter compared with last year's third quarter. By type of expense, the third quarter of 2017 expenses included $6 million of salaries and benefits, $6 million of commissions, and $7.2 million of underwriting and other costs. Our expense ratio for the third quarter was 22.7%, compared with 23.1% in the third quarter of last year. Our tax rate decreased to 29.6% in the quarter, down from 31.2% in the third quarter last year. The decrease reflects the larger proportion of tax-exempt income compared with underwriting income during the quarter.
Return on equity for the third quarter of 2017 was 13.6%, compared to 14.2% for the third quarter of 2016. Operating ROE for the quarter was 13.8%. On October 23rd, 2017, the company's board of directors declared a regular quarterly cash dividend of $0.20 per share, payable on December 28th, 2017, to shareholders of record as of December 14th, 2017. In addition, as part of our ongoing capital management efforts, and as Janelle mentioned earlier, the company's board declared a special dividend of $3.50 per share for shareholders with the same record and payable dates. This brings the total amount of special dividends paid out in the last four years to $11.25 per share. Finally, just a couple of other items to note. Book value per share at September 30th was $25.72, up 8.4% from year-end.
Our statutory surplus was $421.2 million at September 30th, 2017, up $27.2 million from year-end. Finally, our 10-Q will be filed tomorrow after market closes for AMERISAFE. That concludes my remarks, and we'd now like to open the call up for our question-and-answer session. Operator?
Thank you. At this time, if you would like to ask a question, please press star and the number 1 on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Our first question comes from the line of Mark Hughes from SunTrust. Your line is open.
Thank you. Good morning.
Good morning, Mark.
Janelle, the ELCM was 169 in the quarter?
Correct.
You had mentioned that the retention was better. It sounded like it was quite strong. This was obviously quite a turnabout from last two or three quarters where you've seen more of a downdraft in the written premium. Anything different out in the market, new strategies you're undertaking that drove that?
No, not new strategies that we're taking. We just keep trying to maintain our discipline and price our product appropriately. It's still quite competitive in the marketplace.
Any competitors of note that may be backing off a little bit or brokers shifting more of their business elsewhere or anything like that?
Yeah, that's a really good question. We continue to run into the multi-line carriers. As the P&C industry results continue to deteriorate, more and more carriers are seeking workers' compensation, which is unprecedented for our industry. We continue to compete against multi-line carriers.
Right. The down 16 last quarter to the down two, from your perspective, would just be kind of the vagaries of the marketplace?
Yeah. That's a good way to put it. We like to use the word lumpy when we talk about our losses. In this case, from a premium perspective, because there's certainly nothing that has improved in the marketplace as far as competition has gone. You can tell by the ELCM. I think we reported a 168 last quarter. We're at a 169 this quarter. Not a tremendous amount of differentiation in terms of pricing. Yet we were more able to bind more of our renewal policies. That has been a particular focus for us, but it has been throughout this softening cycle, trying to protect that renewal book, making the adjustments necessary to make sure that we're protecting those accounts.
You seen any post-storm bump, any construction activity, Florida, Texas? Is that helping you at all?
Yeah, that's a good question. Keep the premiums or payrolls that are being reported, and those are a month in arrears. At this point, it's starting to suspect that we'd start seeing some increased payrolls. We've seen some anecdotal things thus far, but nothing that of note that I could tell you, I could point to it and say, "Oh yes, we're definitely seeing payroll or exposure growth from those particular areas." Not at this point.
When you said frequency, did you say premium down 6, claims down 5, therefore frequency up a little bit? Was that your point?
Roughly. Yeah. That was when we originally talked about the 69% loss ratio at the beginning of the year. We kind of talked about what our assumptions were about that, frequency being one. Even if my claim count stayed the same on a declining premium base, that would put pressure on frequency to go up. My claim counts have actually gone down, yet it's still putting a pressure on frequency.
With severity, are you seeing a few more large claims? I think you haven't had a kind of a bad quarter in that way in quite a while.
I'm knocking on this table as you say that, Mark. We're up to 12 claims. When I say large claims, that's claims that at this point we're estimating are over $1 million in incurred losses. I think we ended the year last year with 17, if I'm not mistaken, for accident year 2016. That's on par. We picked up a few this quarter, that's expected because summer months are our full employment months, so that's when we have, I think, more people out doing the hazardous things that they do. Not unusual for us. As I mentioned in my prepared remarks, something that bears watching is severity.
Yeah. Investment income was $7.8 million down year-over-year, but up from last quarter and up from Q1. Is this a reasonable run rate without expecting any of these kind of mark-to-market benefits?
Yeah. I think it is. I think our investment income can be a little bit volatile. We've seen that with the hedge fund mark-to-market. I think looking at sort of maybe a trailing 12 months would be maybe a better run rate than just this most recent quarter.
Okay. A little on the expense ratio, a little lower this quarter. Sustainable or is this also just a variability?
I think we saw some variability to a positive, I think from that standpoint. As we talked about, we're continuing to focus on managing our expenses as best we can as we expect in this soft market. Our expectation would be to continue to see the expense ratio running in the 24-25 range. We're trying to do the best we can to manage that down. You can also see that our policyholder dividend ratio is continuing to climb up a little bit because we compete in certain states on the basis of dividends that we pay out to policyholders. We don't mind that because those payouts typically mean that that customer has had a good loss history, but it does affect us in certain states.
Thank you.
Again, if you would like to ask a question, you can press star and the number one on your telephone keypad. Our next question comes from the line of Matthew Carletti from JMP Securities. Your line is open.
Hey, thanks. Good morning.
Good morning, Matt.
Mark covered a lot of what I had, maybe just a couple follow-ups. On the discussion about some potential kind of increased work activity coming out of some of the storm areas, I mean, obviously Texas and Florida are big states for you. Where would you expect to see it the most? I know you aren't big in, say, residential construction, obviously there's a commercial impact. There's trucking to get materials around. What part of your book would you expect to see any impact that might arise?
To your point, I think trucking is someplace we definitely see getting materials in and out, as well as in terms of what we call logging and lumber, our arborists, people that are in part dealing with downed vegetation and cleanup in those regards. I think we would see an uptick from there. You're right, we don't really participate in the residential playing field.
Okay. It would take a few quarters probably to show up just because of the nature of the premium audits and how it comes through. Am I thinking about that right?
Right. Because our insurance report to us a month in arrears. We're still early in the process, so we will definitely keep you posted.
Okay, great. One other question just on premium audits themselves. I know it was, I think the number was $1 million or $2 million negative this quarter, which was kind of equal with what it was a year ago quarter. As we move forward to Q4 and Q1, do you have the premium audit numbers from the year ago periods?
Yes. I do.
That I know what we're stacking up against.
Absolutely. I do have that. I should keep in mind that premium audits themselves were positive. They were basically in line with what they were last quarter.
Oh, positive. Okay.
What makes up that is cancellations, endorsements, that sort of thing. Neal, you want to talk about-
Oh, gotcha.
Yeah. Last year in the third quarter, our premium audit and other adjustments were -$1.2 million. In the fourth quarter of 2016, they were a positive $1.2 million, and in the first quarter of 2017, they were a positive $2.2 million.
Okay, great. Very helpful. Congrats on a nice quarter and best of luck going forward.
Thank you, Matt.
Thanks, Matt.
There are no further questions at this time. I would now like to turn the conference back over to Janelle Frost, Chief Executive Officer.
Well, first and foremost, I'd like to thank you for your patience in staying with us on the line through our technical difficulties. I should tell you, it is a beautiful day here in DeRidder, Louisiana. Obviously why we have phone problems. When we discuss AMERISAFE, I tend to focus on five distinctions. One, our high hazard niche. Two, our focus on small to mid-size employers. Three, our underwriting expertise. Four, our comprehensive safety services. Five, our intensive claims management. We are also consistent and stable. We are frugal with our expenses, and our level of service is critical to our successful retention. These distinctions, coupled with our expert employees, are built to succeed throughout market cycles. Thank you for joining us today.
Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day. You may all disconnect.