Good morning, everyone. Welcome to Morgan Stanley Financial Conference. My name is Kai Pan, I cover property casualty insurance here. It is my pleasure to introduce management from AMERISAFE. With us today we have Allen Bradley, Executive Chairman. Allen has been with the company for more than 20 years, and with the last 12 years as the CEO. We also have Janelle Frost. Janelle was recently appointed as the CEO. Congratulations.
Thank you.
She actually was on the CFO role as well as CEO role since 2013. Thank you for both for coming to our conference. I pass on the microphone to Allen. I remind everyone that there will be some slide presentation, then we will open up for some brief Q&A session afterwards.
Great.
Alan.
Well, good morning. Thank you all for joining us. I guess I really didn't need a mic, but I guess it is for the webcast. We will talk a little bit about AMERISAFE before we get started. Obviously, we are covered by the forward-looking statements. Anything Allen says you can't believe. You know how that goes. Let me tell you a little bit about AMERISAFE. We have been in business 29 years. We are a specialty underwriter of workers' compensation insurance for small to mid-size employers in hazardous industries. You can see from the map on the slide here, we are primarily in the South and Eastern states. Our largest states in terms of premium are Louisiana, Georgia, Pennsylvania, Illinois, Florida, and North Carolina. I have a brief summary of our 2015 first quarter results. Our total revenue growth was 5.8%.
We had a combined ratio of 85% and a ROE of 13.3%. We actively market in about 30 states. As you can see, we're not in California. That's a question we get often. I'll jump ahead to the Q&A and say, "No, we're not in California, and currently have no plans to be there." We don't believe we have more than 5% of the market share in any of these states that we have highlighted here. We know that we have capacity for growth in those states. What type of industries do we write? 42% of our book is in construction, and that's commercial construction, not residential. Followed by trucking, manufacturing, oil and gas, maritime. Logging is down to 1.8% of our book. That was the origin of our company, the genesis of our company. It shrank quite a bit there.
You can see from the chart on the left, the distribution of that premium, or the mix, hasn't really changed over the last few years. It ebbs and flows, obviously, with payroll activity. Who is AMERISAFE and what do we do and how do we do it? This slide sums it up perfectly in my mind. We have a high-hazard niche focus. Why high hazard? We believe it's an underserved market. The rate is higher. Obviously, our employers probably pay somewhere around $0.49 per $100 of payroll for the people sitting in this room. Not saying we're not valuable, but our jobs aren't as risky. Our average employer pays somewhere between $6 and $7, depending on the class, on average, per $100 of payroll. The rate is attractive to many insurance carriers.
What makes AMERISAFE different is our focus on small to mid-size employers. There are lots of carriers that write high hazard, but not to the premium levels that we do. Or not maybe premium levels, the lower levels. Our average policy size varies between $30,000 and $40,000 of premium. These are small carriers. There's less competition. They're less sensitive to pricing, and I'll get to competition in a minute. The other thing that's unique about AMERISAFE is our underwriting expertise. All of our underwriting is done in one room in Destrehan, Louisiana. We don't give the pen to an MGA or MGU. Our expertise is grown in-house, and we're very technically focused on that, and it's part of our secret sauce. The other side of that is our safety organization. In 2014, 92% of our accounts, before we offered a quote, we had a pre-quote safety inspection.
Now, all of our accounts eventually get a safety inspection, but not a pre-quote safety inspection. The safety department serves as not only a avenue for our insureds, but also as the eyes and ears of our underwriting department. As we all know, applications aren't always as forthright as maybe they should be. Given that we're writing high-hazard industries, it's very important for our underwriters to know exactly how you do the business that you do. We have a very high-touch model, and I know a lot of people use the words high touch. To give you an example of that, I'm going to talk about our claims organization. We have field case managers scattered across the U.S., and on average they have 52 files. Or in 2014, on average, they had 52 files per field case manager.
Not a lot of companies publish that number publicly, but I know the lowest number I've ever heard for an insurance company is somewhere a little over 100. Our field case managers have the time and the energy and the resources to spend time with these claims files. It's very important because that's the best resolution for the employer, for the claimant, and for AMERISAFE. When we have a claim that we think is going to cost us over $10,000, our field case manager has 48 hours to be in front of the medical care provider, the insured, and the claimant. That's very important because these claimants do not need to feel alienated by their insurance company. This is a no-fault insurance. Our job is to return you to work at maximum medical improvement. Alienating the claimant and alienating the insured doesn't benefit anyone.
I talked a little bit about our competition. This particular inverted triangle breaks down our competition. Starting at the bottom, 63% of our policies have premium less than $35,000. That's about 25% of our premiums. The competitors there are small. Did I just turn myself off? I apologize. Am I still going?
Yes.
Okay, great. The small single-state writers, self-insured funds, those type of things. Next level up between $35,000 and $100,000. That's 35% of our premiums and 28% of our policies, and that's mid-sized competitors, regional small firms. The larger policies, that's 9% of our policies, but 37% of our premiums. These are national carriers that we all know the names of. That's not AMERISAFE's sweet spot. Our retention average is somewhere over 90%. Where our retention splits is in those larger policies because those are more highly competitive for us. Finally, AMERISAFE is an insurance company, and we want to make money underwriting. How do we do that? This slide, which it's not really all that complicated if you think of it in terms of it's an index. It's an index compared to the pricing that states allow us to charge.
The state sets the price, then we can modify that price and go up and have a surcharge per policy. This chart shows you what our pricing has been since 2003 to the first quarter of 2015. You can see we hit our ultimate high in pricing and in terms of indexing, in 2014, and it's gone down slightly in the first quarter. The key there is we've all heard in the news that workers' comp rates have been on the decline. Yet you can see here, and Allen's going to talk about what's going on in the market, but you can see here that AMERISAFE, the multiplier that we've had on top of those rates really hasn't changed all that much. Our pricing really hasn't changed all that much. This chart here shows since 2006 how we've made money underwriting.
This is our combined ratio. We've only had one year that we were over 100% in combined. As I mentioned in the first quarter, we had an 85% combined ratio. The components of that were our loss ratio of 63.3%. Our current accident year loss ratio was a 69.8%, we had favorable development in the quarter. Our expense ratio is at 21.5%, you can see the history of our expense ratio. It's another aspect of something that we're very proud of, we think gives us a competitive advantage. AMERISAFE's expense ratio compared to those of our competitors and other people in the industry, we probably get somewhere between a 5-10 point advantage in combined ratio just on our expense ratio. How do we do that with our high-touch model? We're very cost sensitive, I will use the word.
Even though half of our employees are scattered across the U.S., we make sure that we have a geographic density where they are. Windshield time is not productive for us. When we have a safety person, we have a claims person, we make sure they're placed in the region or the geography that our claimants are going to be, our insureds are working. Finally, this is sort of our economic model, how an insurance company makes money, but more importantly, how AMERISAFE makes money. We talked about the 85% combined ratio. You multiply that time our leverage, premium to surplus at 0.8. This is a point that we've really been spending a lot of time talking about with investors and shareholders over the last few quarters because a 0.8 premium to surplus when you have an 85% combined ratio, it's not multiplying.
We would like that to be higher. Why is that not higher? Because we're making money faster than we're writing premium. Where would we ideally like to be? We'd like to be at a 1.2, a 1.3. I think AM Best would allow us to go to at least a 1.5 and still keep our A rating. That's an issue. It's a high-class problem to have, it's an issue that we're tremendously focused on. I'll talk about a little bit of that when we get to capital management. That those two together get you our ROE from underwriting. We have our pretax investment yield at 2.4% times our investment leverage, and our effective tax rate in the first quarter was 28.6%. I talked about our AM Best rating. We are an A-rated company.
This particular chart shows you AMERISAFE compared to other composite ratings. The far left is AMERISAFE. The thing I'd like you to focus on here is the green area. That is profits or contributions or return to surplus based on underwriting for AMERISAFE versus the other composites. The first one is A++ and A+, then A- and B++. You can see how AMERISAFE is distinguished from those other companies because we're actually making money underwriting, there's a lot of insurance companies that their profits generally come from their investment portfolio. We like to make money both ways. Here's our investment portfolio. At the end of the first quarter, we had $1.2 billion of assets. The makeup of that is mostly 50% of that is municipal.
We have corporate at 32%, cash and cash equivalents at 6.9%. Let's see, commercial MBS is at 4%. Off to the right, you'll see that we have a large portion of our portfolio is held to maturity. The unrealized gains and losses do not flow through the income statement. That's relatively unique to the insurance industry. We're one of the few companies that still do that, and that's simply because it's not an accounting mastermind. It really is because we really hold those bonds to their maturity. We have no intention of selling them. In this rate environment, it's worked out very well for us because those have had a much higher rate than what we can put our new money in.
The point is that there's $24.6 million of unrealized gains that have not gone through the income statement or even the balance sheet, not included in book value. Capital management. Our goal is to maintain and balance our capital, and maintain our A rating. We've had a history of being what we consider to be proactive in capital management. We've repaid debt, we've purchased shares, we've paid dividends, we've had extraordinary dividends. In 2014, we paid $1.50 in extraordinary dividends, and our current quarterly dividend is $0.15. Obviously, the way we'd like to manage that capital is to grow organically if the market cycle is right. We're not opposed to acquisitions, but those are difficult for us to find a company that we believe would fit into our culture and the way we like to do business.
We would love to do a renew of rights, because then we're not picking up someone else's balance sheet. We will continue to pay dividends. Our board considers that every quarter. We talk about dividends because obviously we talk about that premium to surplus ratio and how we can better manage that for our shareholders. Finally, from my perspective, just the historical financial performance of the company. AMERISAFE, we always like to tell people, yes, we're a growth company, and that we consider growth in book value as growth. We went public in November of 2005. At the end of 2005, you can see the book value per share was $7.42. At the end of the first quarter, that book value was $24.32. If you adjust it for the capital that we've returned, it'd be $27.98.
This is a number that we're very focused on, returning to our shareholders, making sure that they're making money. The compound aggregate growth rate would be 15.6 if you include the capital that we returned, or 13.8 just on a pure book value basis. This chart also kind of shows you the contributions to ROE underwriting versus investing. You can see in 2005, the underwriting was actually below the line, so it was negative. That was because we did a large commutation before we went public, and those losses came through in that 2005 number. Since then, as we talked about earlier, the company has been profitable. Allen's going to show you how that compares to the industry.
Keep in mind, we're a specialty carrier. We expect to be much better than the industry. It's still important for us to know how we compare to the industry, particularly in the market cycle. When the industry's making money, we should be making more. There was a time in our history where we actually had to contract. It turned out to be profitable for the company. With that, Allen's going to talk about the market.
Okay. Thank you, Janelle.
If you want this.
How do I do it?
It's right here.
Oh, that one. Okay.
It's complicated.
I can push one button. Just don't have two.
We didn't have training ahead of time, so apologize.
The slide on the screen now shows you AMERISAFE's performance versus the industry. The green columns, of course, are AMERISAFE, the blue is the industry, and the red is our premium volume, and we'll talk about that in a second. Gosh, I guess this looks real good because we put ourselves up against the industry, which is, by the way, a terrible industry in terms of making money. Why is that? Well, a lot of multiline carriers will use workers' comp as a loss leader to try to secure a whole account to bring in other lines that they consider more profitable, commercial auto, property, umbrella, general liability, other lines of coverage. I think the real reason is it's such a long tail business. Claims can go on for a long period of time, develop adversely. They don't get better.
If a claim stays open, it is not going to get better. It's probably going to get worse. Many companies will use a starve amount of just pay it as you go along sort of attitude toward the administration of claims. That's an approach that we definitely reject. We believe that you need to be proactive. You need to get in and understand what's driving the claim and get the matter resolved because it's not going to get any better. Our performance over the years has been good. One of the things I think is interesting when you consider the chart that Janelle just showed about the growth in book value, that red line, when it dropped from $332 million to $228 million, you would not have normally expected the company to continue to grow its book value.
If you look back at that other chart, you'll see that we did indeed grow. That is because it's not necessarily volume that determines your growth in book value. If you're selling a product below its cost, it is not advantageous to write more. We concentrate on making an underwriting profit, hopefully in every single year. The CIAB reports rate changes by quarter. Remember, these policies are year-long policies. You see the three years plus of rate increases. If you look every fourth bar, that will be the renewals on the ones that expired the year before. You'll come to a 20%-25%, in some case, 30% rate increase that occurred over that time period. We now have reached a time period where the prices are beginning to go down.
These changes are not surprising. As you saw from page seven, where you saw our effective LCM, the pricing dip is at a point where we've reached record pricing. The fact that it's now coming down is not terribly surprising. By the way, that does not signal a soft market. I had a very interesting discussion with an investor some time ago about, well, if prices are lower, that's a soft market. Not unless you're below where it is profitable to write it. Okay? It is less expensive, but it is still a very good time in the workers' comp market to write business. This is the same information on a more granular basis. Somebody told me when they looked at that chart, it reminded them of a sweater they had in college.
The gray lines, the lines that are at the top of the chart indicate rate increases. The light gray and anything below that are zero and rate decreases. The point of this chart is you can see a pricing cycle. You see the light gray that goes up near the top. That is a soft market. You see the pricing, the dark gray that shoots toward the bottom. That's when these rate increases occur. Okay? Clearly, the market's in the changing metric, and it's very interesting to see just exactly where that's occurring. Let me see. Before I get to that slide, let me talk a little bit about what happened last year in workers' comp in the industry. The industry reported, what is known as private carriers, as reported by the NCCI.
That doesn't mean non-public companies, that means non-state funds, reported a 98% combined. That is the third underwriting profit in 29 years. Third time. Okay? Just barely at that, 98%. If we reported a 98%, our board would be very unhappy with management. It did report an underwriting profit, and that gives concern to whether or not that's going to bring about more aggressive behavior in the marketplace. The premium last year in NCCI states grew about 4.5%. What were the components of growth? Now, that's just net premiums written or direct premium written. That's just totaling the premium up. Where do you think the growth came from? It came from increased exposures, more people working, slightly higher wages. Those exposures, that's the exposure unit for workers' comp is payroll. Those exposure units pushed the total amount of premium up 4.5% in the NCCI states.
That increase was 4.7% of the total premium. Something offset some of that, and what it was the loss cost. What the state said were the basic building block for rates. That means that the frequency of claims has been down, the severity of claims has been down, that the actual expected losses per $100 of payroll have shrunk. That shrunk about 1.4% across those 35, 37 states. What other changes happened? This was what was so very interesting. Carriers have the right to discount the rate that they charge to an account. That discounting practice is generally what precedes a soft market. People start cutting their rates to try to get more volume, cash flow underwriting. The discounting between 2013 and 2014 actually was reduced. They actually pushed for higher rates.
I've been in this business 21 years, that's only the second time I've seen that at this particular point in cycle. What's interesting about it is that the loss cost started trending down, yet the carriers were discounting less. What does that mean? That means they were trying to hold on to the rate. That's an indication of underwriting discipline. Why do you think that is? Well, the reason is this slide. Workers' compensation is the second most sensitive line to investment returns, investment returns are paltry. The outlook for long-term investor returns are paltry. Therefore, underwriters are saying, we're not going to make it up on investment income. We have got to make an underwriting profit.
I can tell you the top 20 writers of workers' compensation in America write 70% of the premium, you will not find a lot of aggressive behavior at all among those top 20 writers. That makes for an overall attractive market at this particular point in time. AMERISAFE, I believe, is very well-positioned. I want to touch one more minute on capital management, over the years, we've eliminated debt, we've eliminated preferred shares, we've repurchased stock, although we currently have a repurchase program on the books. Trading at 1.78 times book doesn't make a whole lot of sense to repurchase shares. We've tried to manage our capital. Two years ago, we started our first common shareholder dividend, $0.08 a share per quarter. Last year, we moved that to $0.12 a share per quarter.
In March, the board declared an extraordinary dividend of $0.50. They came back in the third quarter and said, "That $0.50 wasn't enough." They supplemented that extraordinary dividend by another $1.00. Last year, we returned $1.98 to our shareholders. I think that we have not improved that operational leverage, the premium written, as regards the policyholder surplus or the capital and surplus. I suspect, and I believe, our board will review our capital allocation, our capital resources each and every quarter. I suspect in the later part of this year, probably the third quarter, maybe the fourth quarter, but certainly before then, we'll look to readjust the capital that we have at the company, because we want to maintain an attractive ROE. We want to maintain an attractive return for our shareholders.
If we cannot adequately put that premium to work, we're going to return some to the shareholders. Okay. With that, I'll stop and see if there's any questions.
Thank you very much. We got about three minutes.
I have a question now, just kind of big picture. If you think about payrolls increasing, perhaps wages going up, and the impact of the portfolio yield interest rates, which of those three would you deem to be most important?
I would say if the economy recovers, that's the real driver for us, okay? I'm going to pick an industry.
The idea that might pick up all three.
That would. Let me give you a great example. The transportation industry. We do 20% or so of our business is in the wheels business, we're calling them, trucking. Because of the adoption of certain federal regulations, which limit the number of hours truckers are on the road, the use of electronic logbooks and the sort that limit the number of hours drivers can be behind the wheel, that has required trucking companies to hire more drivers to get the same number of miles driven, okay? It becomes a demand for drivers. What happens to your experienced drivers that have been with you a long time? You've just cut their salary because you're not letting them drive as much. There's an upward pressure on the compensation for those drivers.
From our perspective, let's see, we've got drivers that don't drive as many miles, so they're less fatigued and they're going to get paid more. That's a pretty good situation for us. That's the sort of pressure. We're beginning to see some pressure on wages overall in the economy, and those increases in wages are very good. Economic activity is a real driver.
Have you factored in any increase in portfolio yield into your outlook?
No.
No.
We have not.
We're pretty cautious. We'll write the most dangerous jobs in the world, explosives, commercial divers, iron and steel erectors. We're not real aggressive on the investment yield. The board has discussed perhaps. We have board guidelines that set out investment criteria. They've looked at some of those.
Having quite a bit of knowledge and experience with market cycles, there is some investor sentiment where people believe that when the economy is really tricky, people don't really want to go on workers' comp because they're worried their job's not going to be there when they come back. Now that we're coming out of that, are you seeing any increase in frequency, any uptick in claims and the rest of that activity?
How does that affect where you guys are pricing and how you're thinking?
Sure. I mentioned our current accident year loss ratio pick is 69.8, which is down from last year's 71.5. However, we have not seen frequency. When we measure frequency, we measure in terms of earned premium. We have not seen an uptick in frequency in our own book, and I don't think the industry has reported an uptick in frequency. However, that 69.8 that I mentioned, we assume that frequency will flatten in 2015.
We always kind of start the year with that assumption. It hasn't played out over the last few years.
That's right.
Do remember this: we measure frequency in claims per million dollars of earned premium. To the extent that rates flatten, that in and of itself can cause that metric to flatten, okay? We have not seen what you typically see. I'll give you an example. After a hurricane, you'll see frequency go up. Why? Because they're looking for workers wherever they can find them, and the working conditions aren't good. They may be living in tents and those sorts of things. You see frequency spike up. We have not seen that sort of increase in frequency.
We've seen more extended work week.
More tired workers now.
Right.
Yeah. Well, with the length of work week right now, they shouldn't be terribly tired.
Got one in the back. Yes, sir.
In 2011, you clearly performed better than the industry with your combined 100%. Was there any lessons you learned from that period that you took from on the operational side? Hopefully, your expenses were up a little bit.
Yeah. It's called 2010.
Yeah. Good answer.
What happened, the impacts of the recession really came to fruition then, it's hard to send somebody back to work when the company he worked for is out of business. In my less than polite conversation, I will tell you that it's hard to beat tax-free income and free OxyContin. At that point, we had a lot of people, that source of income was workers' comp, and the possibility of returning them to productive life was not very good because jobs didn't exist. That's why you see that spike up. You will also notice that there has been a spike up now of the reserves that have been taken down, where we've had excess reserves.
That comes about, in my opinion, because our adjusters, our field case managers, looking back at those bad years, say, "I'm pushing the numbers way up." Now the economy's improving, and we're being able to return those people back to work.
That's a good point. In accident year 2010, when we reserve, our reserving practice is, we like to call it most likely outcome. In 2010, we were still planning on returning injured workers to work. What we learned after the Great Recession was that wasn't the case. So now I don't want to say that we're less pessimistic about setting our reserves. We're more realistic about setting our reserves. We have a better feel for the impact of return to work, for extended pain management, and those type of things that are really driving our workers' comp case costs. What we've come to realize now is that we're actually building that into our case reserves. So we were having a discussion before we came in about the favorable prior development that we've experienced in the first quarter.
I said in the earnings call, I should've emphasized it more, I talked about the $6 million that we had in favorable development came from case reserves. In other words, it wasn't us playing with IBNR or moving IBNR. It was simply cases that we had reserved on an individual basis that returned favorably to us, and we were able to close those cases. I think it all stems from what you just brought up, which was accident year 2010 and the lessons that we learned.
If you do the math on the effective LCM, you'll notice that our current accident year loss pick is high. That's because we're looking at what we experienced in those years. I've come to the belief after 10 years in a public company that investors like surprises as long as they're good ones. They don't like the other kind. So we're trying to be very cautious with our reserving in the current accident year.
Well, with that, I'm afraid we're running out of time.
Sorry.
With that said, thank you so much for your time with you.
Thank you.