Good morning. Oh, that was loud, sorry. Our next company presentation will be AMERISAFE, Inc. AMERISAFE is a specialty provider of workers' compensation insurance to employers in hazardous industries. Joining us today will be Ms. Angela Pearson, the Corporate Chief Financial Officer, and Mr. Vincent Gagliano, the Chief Risk Officer. After the conclusion of this presentation, I will escort everyone across the hall for a Q&A session. Thank you.
Thank you, Srinivas, and good morning, everyone. First of all, thank you for your interest in AMERISAFE. Appreciate you being here. This is principally known for being an oil and gas industry conference, and we're the only insurance company in the Burkenroad universe, so we appreciate your interest. I also want to start off by thanking the students. The students work very hard on these presentations. I can tell you, if you're involved in this process from either the student or the company side, the students come make a visit. They're always well-prepared. They're professional. They ask really good, insightful questions. Speaking of visits, we're located in DeRidder, Louisiana. If you don't know where DeRidder is, it's about three and a half hours west of New Orleans on the far side of the state, or four and a half hours if you catch the Baton Rouge traffic.
To get to DeRidder, you have to travel through sugarcane country, rice fields, crawfish country. It's a pretty long trip. It's not the hardest place to get to. It's also not the easiest. I've been told, I don't know if this is true or not, but I've been told when the students leave for their company visits, Peter makes a special point to pull the AMERISAFE team aside. He gives them some advice on directions, tells them he's enjoyed working with them and hopes to see them again sometime. I'm going to start today by introducing the company and our operations, and then I'll turn things over to Neal, our CFO, to talk about finances and some of the current market conditions. Particularly with respect to market conditions, we've got our standard disclaimer about forward-looking statements. As Srinivas said, AMERISAFE is a specialty workers' compensation insurance company.
We've been underwriting workers' comp for 31 years. Our first policy was written in May 1986, so we'll celebrate our 31st anniversary next week. What makes us a specialty provider is our focus on small to mid-size employers engaged in high-hazard industries. We market our product in 27 states, as you can see from the map. Another important point we like to draw your attention to on the map is the concentration of premium. All of the 27 states are identified. The dark green states are states where we have more than 5% of our written premium. Insurance is regulated at the state level. While the states work together to have some commonality in insurance terms and so forth, regulators, legislatures, and courts can make decisions in individual states that impact the competitive environment and your ability to be successful there.
We think it's very important from an enterprise risk position to not be overly concentrated in any one state. We have some highlights from our first quarter of 2017. We just produced our results on Wednesday. Three numbers here. GPW growth. GPW stands for gross premium written. In the insurance business, that is the principal source of revenue. For the first quarter, our GPW was down 5.3%. You might say, "Well, that does not sound like much of a highlight." It is an important number that we like to display, whether it's up or down, because it's a good indication of what's happening in the market. Neal will speak to that in a few minutes. Combined ratio is a measure of underwriting profit. A number below 100% indicates that you made profit on the underwriting side of your business. Insurance companies generally make money on underwriting and investments.
We believe it is very important to make an underwriting profit year in and year out. Lastly, ROE for the quarter was 11.7%. What are high-hazard industries? Here we have got a pie chart that shows you our distribution based on our definition of high hazard. About two-thirds of our book of business is concentrated in commercial construction, trucking, logging and lumber, agriculture, and manufacturing. Within the construction segment, it is commercial construction with a heavy concentration in commercial roofing. We also pride ourselves on being consistent with respect to the markets we target, the column chart shows four years of history of that consistency. We are not the type of insurance carrier who moves in and out of industries when times are good or bad. We do not try to follow the latest fad. We stay true to the business we know how to underwrite.
Our agents who distribute our product really appreciate us being there for the industries they serve. Our pillars of distinction. This is really essentially our operating strategy in a single slide. We talked about the high hazard focus. These clients tend to be more difficult to serve. We also tend to get higher rates for high hazard insurers or employers, I'm sorry. Small to mid-size employers tend to be less price sensitive. There is also less competition for these accounts. That is where we have our niche focus and have our success. Speaking of success, underwriting is the most crucial decision we make as an insurance company. That is where we decide what risks we are going to take on our books and how much to charge for that risk. Although these employers are small to mid-size, the high hazard exposures are very complex.
It takes a lot of specialized understanding of the exposures and the risks in those industries. Our underwriters are largely homegrown. All of our underwriting operation is at our headquarters in DeRidder. We also do not delegate authority to bind business on our behalf. Lots of other insurance companies allow their agents to put business on their paper. We insist that all of our business is underwritten by our employees. I mentioned our underwriting is headquartered in DeRidder, Louisiana. I mentioned that the risks are complex. You might ask yourself, "Well, how do you know what you are really underwriting?" We get an application, of course, for the insurance, but that generally does not tell us very much about the safety culture and the risk we are truly taking on our books. We have our field safety professionals. These are employees that are in our geographical areas in the 27 states.
They go out and visit the risks we intend to write or we're interested in writing. 90% of the time before we issue a quote on a new piece of business, one of our employees has visited their operations. The field safety professionals produce a report, they send it back to the underwriters, an underwriting and pricing decision is made. Finally is our claims operation. You can have the best underwriters in the world, you can select the best risks, but in high hazard, you're going to have claims, and they're frequently going to be severe claims. Our claims folks, we manage most of our claims with our own employees. They're also located in the territories where we operate, so they can be close to the claimants, close to the medical providers.
Our number one goal in claims resolution is to find a satisfactory outcome for all the people involved. We seek the best medical care for the claimants. We interact with the medical providers to determine the course of treatment to produce the best possible outcome. Our claims adjusters are very focused on settling claims in a timely manner. Many years ago, our former CEO said that insurance claims are not like wine. They don't get better with time. The longer these claims are open, generally, the more they cost. We're very thorough in pursuing satisfactory outcomes to all of these claims. What's not pictured on this chart, but if you could imagine at the bottom, the foundation of our pillars is what makes this all work. We've basically told the world what our operating strategy is. We make no secret of it.
It's really AMERISAFE's culture, and it's the 450 employees, both in DeRidder and spread across the U.S., that make this strategy successful. We're frequently asked who our customers are. The answer is it depends. It principally depends on the size of the policy that we're talking about. Annual premium is the measure of the size of a workers' comp policy. We consider a large policy one that's more than $100,000 in annual premium. You can see from the chart that the bigger the premium, the more intense the competition. We mentioned at the outset, we focus on small to mid-sized employers. We prefer to be insuring employers whose annual premium is under $100,000, and about 93% of our policies are in that bucket. Pricing for profitability. I mentioned earlier that underwriting is the most important decision we make.
Within that, we have to decide what an adequate rate is for the risks we're taking on our books. There's really three parts to a workers' compensation insurance rate in most states. Starts off with the loss costs. The loss cost is a number that's promulgated by the state regulatory departments that estimates for every $100 of payroll, how much claim costs you're going to have in terms of medical benefits and indemnity costs. From there, insurance companies file what they call multipliers. We call it the loss cost multiplier. That's another number that, well, it originates from the carriers. It has to be approved by the state, and that's a multiplier on top of the loss cost that is expected to fund our underwriting and claims operations. Lastly is discretionary pricing.
In most of the states we operate, underwriters can use their discretion, their experience to differentiate better risks from worse risks and adjust the rate accordingly. Those three numbers combined produce a metric we measure internally. We call it our effective LCM. On the chart here, you see about 12 years of history of that metric. I mentioned at the outset, our premium was down in the first quarter. The insurance market is cyclical. It's reliably cyclical. It's not necessarily predictably cyclical. If we knew when the market was going to become more aggressive or less aggressive, that would be nice. Unfortunately, that's not the case. The market cycle has two phases. There's a soft market cycle and a hard market. In fact, if you look at our report the students prepared, their tagline indicates the market is softening, and we're definitely seeing that.
In a soft market, prices are down, competition's up. In a hard market, it's just the opposite. You can see for the last three years, we've come off of peak pricing, and the market is definitely softening. Neal will speak to some of that further in his commentary on the market conditions. What does it all amount to? I mentioned at the outset our combined ratio. That's a measure of underwriting profit. AMERISAFE is committed to producing a profit on its underwriting operations across the market cycle, both in the soft market and the hard market. We do that by executing on our operational pillars that we mentioned previously. Here on the chart, we show about 10 years of our combined ratio history. Remember, a combined ratio under 100% indicates underwriting profitability.
Over the course of the 10 years displayed, 11 years on the chart, our average combined ratio has been 88.2%. Lastly, one thing to point out on the chart is the light green section of each column. That's our expense ratio. The expense ratio for AMERISAFE is truly a competitive advantage. I think it's fair to say other competitors in this space typically have expense ratios in the 30s or near 30. We pride ourselves on being frugal, being efficient with our operations, spending money wisely. When times get tough, having that smaller expense ratio is a pretty comforting position to be in when pressure on pricing impacts the loss ratio that goes into our ultimate underwriting results. With that, I'm going to turn things over to Neal to talk about finances and current market conditions.
Good morning, everyone, and thank you, Vincent. This is a little bit of a math chart for those of you who like calculus. This is our economic model in terms of what drives our return on equity. You can see the loss ratio, the expense ratio that Vincent mentioned before, getting to that combined ratio in the first quarter of 86.6. That's an underwriting profit of 13.4 points. You take that times our operating leverage, which is a measure of our GAAP equity to premiums written, and you translate that into an ROE from underwriting of 10.5%. We also have a fairly substantial investment portfolio. We take the premiums that we've received that we have not yet paid out in claims and invest that, plus the surplus of the company. It's typically in conservative investments. We'll talk about that in a moment.
That right now is generating ROE of 5.8%. Put that together, the effective tax rate for our first quarter was 27.8%, and you get a return on average equity of 11.7%. Our return on equity last year in 2016, which was a record year of earnings, was about 17%. Our goal through this pricing cycle is to average about 15% ROE. That's pretty good for an insurance company. Many of our competitors average ROEs in the eight%, nine%, 10% standpoint. That focus on underwriting is what gets us to that ROE that we can deliver to shareholders. Vince mentioned our focus on underwriting profitability. This is a slide that talks about five-year return on surplus. The surplus is a statutory equivalent of GAAP equity for an insurance company.
You can see that AMERISAFE, through these dark green, which is the underwriting contribution, has a higher contribution from underwriting profitability rather than the light green is in investments. Our light green is sort of an average from an investment standpoint. We're not going to take these dollars and go out and risk them in highly risky investments. We tend to focus on the risk that we're doing from an underwriting standpoint because we're insuring loggers and roofers and people who can have multimillion-dollar claims when they're injured. You can see that AMERISAFE's underwriting profitability is one of the main key focuses that it has. Let's talk a little bit about our investment portfolio. It's about $1.1 billion as of March 31st. We typically invest in bonds, really high-quality bonds. Average credit quality is AA minus.
Municipal bonds are tax-exempt for P&C companies, they tend to be attractive investments for us. We're investing broadly within the country in infrastructure projects, school districts, general obligation bonds of municipalities. We also have a big allocation to corporate bonds. We tend to invest in corporate bonds in industries that we understand. We tend to invest a little bit on the shorter end of the yield curve for those. The investment portfolio tends to be fairly conservative. You can see we don't have a large equity component. That is something that we are moving a little bit towards over the next several years. Our main focus is on municipal bonds, and we've actually increased our allocation over the last year or so. A high-quality investment portfolio to support the maybe riskier underwriting operation.
One of the things that we've been doing from a capital standpoint because we've been generating capital, but we haven't been able to use it because our premium base has not been growing. We haven't been making acquisitions. We've actually been taking that capital and returning to the shareholders. We want to maintain an A A.M. Best rating, you can see that we've paid dividends, both regular dividends and then special dividends over the last several years as we've generated earnings. Our extraordinary dividends started in 2014, where we paid out $28.2 million, and then $57.4 million in 2015, and $62.5 million, or $3.25 per share last year in December. That is something that the board looks at on a quarterly basis to determine, we've got this capital we're generating from earnings. How best should we get it back to shareholders? Recently, that's been through special dividends.
In our history, we have done some share repurchase, but not in the most recent years. This is our historical financial performance from when the company IPO'd in 2005, and you can see that on an annual basis, that's about a 15.3% return for shareholders. There's two components here. One is the growth in book value per share that we're trying to generate higher returns for the shareholders. Recently, with the advent of dividends. The dividends plus book value per share growth represented in the red line, and you can see the return to shareholders has been pretty solid from that standpoint. Let's talk a little bit about the current workers' compensation market. This is the workers' compensation industry's combined ratio in the blue bars here, and AMERISAFE's performance in the green bars.
You can see that we've typically been, as we've stated before, outperforming the industry because of those pillars that we focus on in our high hazard niche. You can also see the red line in this graph is our premium. We've been willing to shrink premium when market conditions get really soft and everybody's going out and giving big rate discounts to customers. We're willing to sort of hold the line and be willing to shrink the top line when we need to. You can see also when we came out of the recession, there was pretty dramatic growth in terms of rate that we were able to operate and get from our insureds. That is typically a definition of a hard market. You can see as we've gotten the last couple of years, premiums have been coming down slightly because the market has been softening.
Our focus is to maintain that green competitive advantage versus the industry focus on underwriting profit and delivering returns to our shareholders rather than chasing premium down the street by offering big discounts on pricing. You can also see the cyclicality in this slide. This is the average workers' comp rate change by The Council of Insurance Agents & Brokers. You can see coming out of the recession back in 2011 and 2012, there were significant rate increases. Then slowly, rates have started to come down to where now we're seeing at the end of the first quarter, or the fourth quarter, sorry, rates on average being down 2.9%. That sort of shows the cyclicality. This is a little bit of a Rorschach test. Sorry about this.
This graph, if you focus on the gray bar, the gray bar is the majority on the far right. Right now, most people are seeing rates go down between 1% and 10% when they're getting a quote on renewals. That's sort of the soft market that we've been seeing. Another measure of the soft market is the residual market activity. There is a market of last resort where people who can't get insurance will go into, and that typically has been fairly steady. Just recently, we've seen that being depopulated, where people are actually being able to find policies in the open market. These typically are customers that maybe don't have enough loss history, or they have some riskiness that makes it difficult for them to get insurance from anyone.
We're starting to see a sign of the soft market here, where the residual market is decreasing slightly. Finally, one of the things that people ask us is, what is the impact of interest rates on the interest rates on the portfolio? We've been in a long declining interest rate trend for many, many years, and only recently have we seen interest rates start to increase. For workers' compensation, this is a chart that shows, because of the long-tail nature of the liabilities, a 1% change in the combined ratio. This is the amount of change versus the 1% decline in investment yield. One of the things that we've seen is that the market has become more and more disciplined as we've gone through this period of low interest rates.
Our cycles have been less violent because people know that they can't make it up by investing in a bond that, say, yields 10%. When interest rates are 2, 3, 4%, it imposes additional discipline on our competitors and makes these pricing cycles more benign, more stable. That's all that we have time for right now. There's a few more slides in the appendix. I want to thank you for your time and your interest in AMERISAFE and encourage you to come across the room to the breakout room for a question and answer session. Thank you very much