Good day, ladies and gentlemen, and welcome to your AMERISAFE, Inc. first quarter earnings call. At this time, all participants via the phone lines have been placed on mute. Later, we will conduct a question and answer session, and the instructions will be given at that time. Should anyone require assistance during the conference, you may press the star and the zero on your touch-tone telephone to be connected with an operator. Please note today's call is being recorded. I'd like to now introduce your host for today's program, Mr. Michael Grasher, Chief Financial Officer. Sir, please begin.
Thank you, Roland. Good morning, everyone. Welcome to the AMERISAFE first quarter 2015 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 could materially differ because of 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 Allen Bradley, AMERISAFE's Chairman.
Thanks, Mike. Good morning, ladies and gentlemen. Thank you for joining us for our first quarter 2015 earnings call. I'll make a few remarks about the marketplace and then turn the call over to our CEO, Janelle Frost, and our CFO, Mike Grasher, for details on the company's performance during the quarter. Industry pricing surveys by both the Council of Insurance Agents & Brokers and MarketScout during the quarter indicated slight decreases in the pricing of workers' compensation insurance. As is usually the case, the pricing reductions favored large accounts, those over $100,000, while reductions in smaller accounts were very slight. We continue to believe that there will be a drift downwards in pricing over the next few quarters.
Considering that prices on an effective LCM basis have been at historical highs, we consider this decline in pricing to be normal, and it does not negatively impact our view of the market, which we view as attractive. The improvement in employment levels should increase the total written workers' compensation premium. However, the most recent GDP data does create some concern relative to the strength of the economy. On the favorable side, currently claims frequency and severity are trending in the right direction. However, as lower pricing earns out over policy periods, claim frequency may flatten and could increase on an earned premium basis. The potential for an increase in frequency, doubts about the strength of the nation's economy, and the continued lower investment returns should cause prudent underwriters to limit pricing concessions to employers. All things considered, the market should remain relatively stable for the near term.
With those comments, I'm going to turn the call over to our new CEO, Janelle Frost.
Thank you, Allen, good morning, everyone. We were extremely pleased to start 2015 with an 85% combined ratio. Our continued focus on our core disciplines of underwriting, safety, claims handling, and expense management resulted in a successful quarter. As we discussed on our last call, it is our intention to grow in terms of premium. I reported a decline in our new business in the fourth quarter, and that decline continued in 2015. As a result, top line decreased 4.6% in the quarter. Partially offsetting the new business decline was our renewal premium. Renewal premium grew 7.9% in the quarter. Policy retention was 91.7% for the first quarter of 2015, compared to 90.9% in the same quarter last year. Pricing on policies written in the quarter was 1.83 on an effective LCM basis. This compares to 1.86 in the first quarter of 2014.
Finally, audit premium and related adjustments remained positive this quarter at $4.4 million, an increase of $1.1 million from last year's first quarter. This increase reflects growth in payrolls for our insureds. I continue to feel we are making appropriate price adjustments while maintaining our underwriting integrity. In addition, in mid-April, David Morton joined our company as Head of Sales and Marketing following the 2014 retirement of longtime employee Craig Leach. I make these points to reiterate that our intention to profitably grow has not wavered. Relative to losses, we continue to experience a decrease in claims frequency on an earned premium basis. Our claims reported in calendar year 2015 were down 5.2% to 1,251 claims from 1,320.
The encouraging frequency trend, coupled with sustained pricing, led to our loss and loss adjustment expense ratio for the current accident year of 69.8%, down 1.7 percentage points from accident year 2014. While frequency is currently downward, our loss selection does assume frequency will flatten in the near future. Another positive impact in the quarter was favorable development from prior accident years. Case development, once again, led to $6.1 million of favorable loss development in the quarter compared to $2.5 million in the first quarter of 2014. This year's favorable development was primarily attributable to accident years 2009, 2011, and 2012. Our loss experience, coupled with strong pricing and expenses, delivered an end result of 43.4% growth in net income for the quarter. Our commitment is to remain focused on producing and servicing profitable business. That concludes my prepared remarks. Will now turn the call over to Mike.
Thank you, Janelle. For the first quarter of 2015, fully diluted earnings rose 43.4%, as AMERISAFE reported net income of $15.1 million, or $0.79 per diluted share, compared to $10.5 million, or $0.56 per diluted share in the first quarter of 2014. Operating earnings, a non-GAAP measure, were also $15.1 million and $0.79 per share in the first quarter, each rising over 40%. Revenues for the first quarter of 2015 grew to $101.8 million, up 5.8% from $96.2 million one year ago. Net premiums earned increased 6.2% from the year-ago quarter to $94.8 million, reflecting net premium written growth over the past year. Our net investment income totaled $6.8 million in the first quarter of 2015, a 1.9% increase from last year's first quarter.
The tax equivalent yield on our investment portfolio was 3.5% in the first quarter of 2015, down 30 basis points from the first quarter of 2014. Including cash and cash equivalents, the company's portfolio is now valued at roughly $1.2 billion, with 59.5% in securities classified as held to maturity, carrying an unrealized gain of $24.6 million. As of March 31, 2015, municipal bonds comprise 51.3% of the investment portfolio. Overall, the investment portfolio continues to carry a double A minus rating with an average duration of approximately 2.9 years. Turning to expenses, our current accident year loss ratio for the quarter was 69.8%, 170 basis points lower than 2014's loss pick of 71.5%. The incurred loss and loss adjustment expenses totaled $60 million for the quarter, which included $6.1 million of favorable prior year development.
This compares to loss and loss adjustment expenses of $61.3 million in last year's first quarter, which included $2.5 million of favorable prior year development. In total, our net calendar year loss ratio for the first quarter of 2015 was 63.3%, compared to 68.7% one year ago. With regard to operating expenses, total underwriting and other expenses declined 4.6% to $20.4 million from $21.4 million in the first quarter of 2014. The decline in expenses reflects a few specific items for the quarter. In particular, lower premium-based assessments out of the state of Pennsylvania, which resulted in a $632,000 reduction, a $453,000 adjustment for premium taxes due to lower than anticipated premium tax rates. Finally, the overaccrual of 2014 bonus compensation in the amount of $398,000. Recall that the first quarter of 2014 included a $400,000 underaccrual for bonus compensation.
Net-net compensation expense was favorably impacted by roughly $800,000 in the year-over-year comparison. These benefits were offset in part by no contingent profit commission being recorded in the quarter, compared to $900,000 in the first quarter of 2014. This was due to the company experiencing a large claim in the quarter. By category, the 2015 first quarter expense components include $5.9 million of salaries and benefits, $7 million of commissions, and $7.5 million of underwriting and other costs. Overall, the expense ratio declined 240 basis points to 21.5% from 23.9% in the same quarter a year ago. If you exclude the impact of the one-time items previously discussed, the expense ratio would have been 23.2% in the quarter. In total, our combined ratio was 85% for the first quarter versus 92.7% for the same period in 2014.
You may have noted our tax rate climbed to 28.6% in the quarter from 21.3% a year ago. The increase largely reflects the increase in taxable income relative to tax-exempt interest income, as that ratio rose in the quarter due to the $6.1 million of favorable development.
Cash flows from operations remained strong during the first quarter of 2015 at $32.3 million. Return on average equity for the first quarter of 2015 was 13.3%, compared to 10.1% for the first quarter of 2014. On the capital management front, the company paid a regular quarterly cash dividend of $0.15 per share on March 28th, 2015, a 25% increase from the regular cash dividend of $0.12 per share paid in prior quarters. On April 28th, 2015, the board of directors declared a quarterly cash dividend of $0.15 per share, payable on June 26th, 2015, to shareholders of record as of June [12th, 31,] 2015, was $24.32, an increase of 7.9% from March 31, 2014's reported book value of $22.54. Finally, our statutory surplus was $391.7 million at quarter end.
That concludes my prepared remarks on the financials, and I will now turn the discussion back to Janelle for closing comments. Janelle?
Thank you, Mike. This was a remarkable quarter. We will continue our diligence and are looking forward to the remainder of 2015. We'll now open the call to questions.
Thank you. Ladies and gentlemen, if you have a question at this time, you may press the star and the number one key to place yourself into the queue. If your question has been answered or you wish to remove yourself from the queue, you may press the pound key. Again, to ask a question via the phone lines at this time, that's the star and the number one on your touch-tone telephone. Our first question comes from the line of Matthew Carletti with JMP Securities. Your line is now open. Your question please.
Thanks. Good morning.
Good morning, Matt.
I have two questions. First one relates to just top line, and Janelle, I appreciate the comments. Thank you for the color. Really what it is, I know that as we discussed last quarter, in Q4 and Q1, even prior to David arriving, you guys have taken some efforts to kind of push price a little less where warranted and some other things. How long do those take to become implemented? Are those complete now, and therefore maybe going forward, start to get a little traction before even David really gets a chance to get his hands into things? Or are those still being formulated and implemented and maybe it takes a little longer?
Great question, Matt. Yeah, I wish it were as easy as making a decision today and I saw it tomorrow. It doesn't happen that way. We are constantly making adjustments. I will say it does take time, and without being too forward-looking, but we are seeing improvements. If you remember in the fourth quarter call, I talked about October actually was looking pretty good, and then things started slipping mid-November, December. We started really digging in, making those changes, and we are seeing some improvement. Yeah, as I said in my prepared comments, it is our intention to grow.
Great. My second question relates to just capital management, and if we just for argument's sake, assume that top line's flat this year, makes it a kind of easy math. Can you give us maybe some insight into how the, I know it's tough to speak for the Board, but how you guys and potentially the Board are thinking about capital management in regards of if there's not imminent growth opportunity of any size, should we expect to see the capital management, which at this point has been regular and some special dividends, approximate earnings? Is there a reason for the company to build capital at this point, and that it might be somewhat less and you want to have more capital going forward?
Matt, this is Allen. I think the best way for me to answer that and remain in the good graces of the Board.
Sorry to put you on the spot.
You're not putting us on the spot. The board has demonstrated an interest in maintaining adequate capital, but managing that capital to serve the needs of the company. We watch our operational leverage closely and a quarter like the first quarter exacerbates the lack of leverage in the operations.
If you can't grow to manage that or grow more than you're growing premium, then you will have to make adjustments in capital. I think as we've indicated at the last year, we did two extraordinary dividends last year, one in March and then another one announced on the third quarter earnings call. I tried to indicate then, that's more of a later part of the year, third or fourth quarter sort of adjustment.
Right.
I would anticipate that we look at capital every quarter and certainly later in the year, the board would have a much better look at how much capital we need, what we need. We have no debt, so there's-
Right
certainly that if we wanted to. I do believe the board is very focused on that. They're focused on the regular dividend as well as managing capital via extraordinary dividends.
Great. Thank you very much for the answers and congrats on a very nice start to the year.
Thank you, Matt.
Thanks, Matt.
Thank you. As a reminder, ladies and gentlemen, that's the star and the number 1 on your telephone keypad to ask a question. Our next question comes from the line of Mark Hughes with SunTrust. Your line is now open. Your question, please.
Yeah, thank you. Good morning.
Good morning.
Touching again on the sales and pricing trends, your effective LCM has been up sequentially the last couple of quarters. It's a little bit below the peak, but you're still at very healthy levels in historical terms, but you've been pushing it even higher in a market that's gotten a bit more competitive. Can you talk about your thinking in doing that? I hear what you're saying. It sounds like you say you're seeing improvements in sales trends in the first quarter. How are you going to be striking that balance through the remainder of 2015?
A great question. I think it's safe for me to say you will not find us being aggressive on pricing, Mark. It's just not what we do. As I mentioned on the previous calls, from a renewal perspective, we are really focusing on those tenured accounts that we know the best. From a new perspective, as I think all companies do, we go back through our history and figure out what are the things we've done well on, and those are the ones that we are willing to maybe provide more price concession to. Then from that same side of the equation, those are also the accounts that we're trying to pursue in terms of submissions for new business. What are those types of businesses, classes of businesses, and states that we know that we do well in and that we can offer pricing concessions?
I will not say that we're going to be aggressive on price. It's just not who we are.
Well, maybe aggressive as in aggressive in getting price increases or good pricing, that your ELCM has been moving up. Seems pretty striking that you're-
Yes, keep in mind, the underlying loss costs for states are declining. We look at that continually, and Allen talked about the CIAB study that shows how rates are declining. With the January 1 rate renewals, 29 states' rates or loss costs were down, and only six were up and one was flat. Yes, while that ELCM may not be moving down into the high 170s, keep in mind the underlying loss costs have declined.
Right. Would it be fair to think that Q1 gross written premium could be steady or up?
Q2, you mean?
Yes, I'm sorry, Q2.
Well, I only know April, so I can tell you that we've seen progress in the changes that we've made.
Okay, that's helpful. On the tax rate, assuming you continue to have a comparable or better level of profitability, the tax rate of the 28%, 29%, should that be sustained through the balance of the year?
I think that's a fair assumption on your part. Our business is lumpy to the extent that we continue to see favorable development. That ratio of the taxable versus tax exempt, it's going to ebb and flow with that.
Right. Then the expense ratio, I think you said 23% excluding one-timers. That included no contingent commission, is that correct?
That's correct.
The normal is a percentage of the premium.
Yeah. Last year, we had it on a quarterly run rate of about $900,000. Remember that we changed our reinsurance structure, our reinsurance program in 2014. I think that's the run rate that you're looking for.
Right. Assuming no large claims, $900K might be a useful number.
Correct.
Yep. Okay. Then, Janelle, you had said your loss selection assumes that frequency will flatten. Are you talking about on an earned premium basis?
Yes. Yes, I am. I think it's important since at one point in my comment said frequency is down, which is absolutely true. I didn't want people to think that our loss selection for 2015 was all roses and flowers. We do expect frequency to flatten.
Mark, this is Allen. As you know, the industry reports that metric on a payroll basis as well as a premium basis. I know people can get confused about that. There's a 70-year trend declining on a payroll basis. On the other hand, on a premium basis, the market is somewhat cyclical. We measure it on a premium basis, and that's how we always report it, because quite frankly, we don't pay claims with payroll. We pay it with premium. We want to know what the frequency is per million dollars of earned premium and the average severity, and that helps us in our projections and selection. I think what Janelle's saying is that in terms of how we're looking forward, we're assuming some flattening in that slope. If that doesn't occur, that will be better news in terms of results.
Right. My final question escaped me, so if I can remember it, I'll get back and oh, no, I'm sorry. I just remembered. You have been willing to sort of name names and talk about the behavior of
competitors. Maybe you don't have to do it on a name basis, but any comments on what you're seeing in the competitive environment? Kind of who's in, who's out, just some observations there.
I usually take the market, let me give a shot at that. In looking both at our data as well as national data, the top 20 writers of workers' compensation insurance in terms of premium volume write 70% of the market. Okay? I would say with almost no exception, those people are not being very aggressive. Most of the competition comes in the remainder portion, which are smaller companies like ours and smaller. What we see is, of that regard, and what reported in the industry, is largely it is smaller companies in regional carriers or single state writers, self-insurance funds, and some of those types of carriers that are being more aggressive. That doesn't mean a carrier maybe not on a particular account may not be real aggressive.
As a general rule, it's not the major carriers, and we're not seeing the widespread irrationality that we saw 48 months of insurance funds, which is where it counts. They are now able to buy reinsurance. In the past, they bought an excess of loss, kind of just an excess policy. Now they buy reinsurance and some of the new alternative reinsurance markets are pursuing those. That can provide fuel for folks that don't have the capital otherwise to write the business. I don't see behavior being widespread, overly aggressive.
Thank you.
Sure.
Thank you. Our next question comes from the line of Randy Binner with FBR Capital Markets. Your line is now open. Your question, please.
Hi, this is actually Jason Oetting on for Randy this morning.
Good morning, Jason Oetting.
Good morning. My first question kind of goes back to this, the idea of operating leverage in the form of net premiums written to surplus. Obviously, we each have to make our own assumptions on premium growth and potential capital deployment in the form of a special later in the year if that ends up happening. The ratio has been hovering around 1x to just under 1 lately. Is there a kind of target range that you have, or maybe how do you broadly think about operating leverage?
Jason Oetting, this is Michael Grasher. I think by and large, we'd love to move that needle on the operating leverage front. I think we've spoken about that in the past, but I think maybe the metric to keep in mind is ROE. To the extent that we can continue to generate these sorts of ROEs, I think that's the key ingredient for us in terms of whether or not we're losing ground in terms of our capital management. By and large on the operating leverage front, that's, as you said, an assumption that you all need to make in terms of the growth in premium throughout the year.
Okay, fair enough. We appreciate the comments, obviously, on premium growth and there's some improvements being made there. If it takes a while to restore growth, does at some point M&A start looking more attractive or maybe even spreading organically into other geographies? I know in the past we've asked about California, and I assume your stance is the same there, but maybe just other areas like perhaps Northeast U.S. exposure. How do you think about growth outside of just the typical route?
This is Janelle. First of all, yes, you're correct about California, our stance has not changed. We are not going into California. We focus on operating leverage, as Mike was just talking about. We would like to expand organically. We continually look at M&A, as you mentioned, but there's just nothing out there that we've been able to find a fit for. Yes, we would like to grow organically. If that were to mean expanding geographies, we're not opposed to that. We know and we believe that we can expand in our markets that we're in now, that we haven't reached the market shares that we would like to be, particularly in certain classes of business in particular states.
Okay. My last one was just on the $6.1 million of favorable PYD in the quarter. Can you just give the split between the 2009, 2011, and 2012 accident years?
Yes, sure.
Was it partly equal or?
Yeah, hold on a second. Let me get that. 2009 was $350,000 rounded, 2011 was $1.1 million, and 2012 was $4.7 million.
Okay, it was mostly 2012 then.
Yes.
How do you guys think about 2012 and more recent years shaping up versus kind of initial expectations? Is it reasonable to think there might be more coming out of there?
We have been very fortunate, as I said in my earlier comments, that these changes were led by case development, where we had on an individual case basis had, I guess you would say, over-reserved. We've had some things go our direction and go favorably. At the same time, I'd be foolish to say, I think we at AMERISAFE and the industry learned quite a few lessons from accident year 2010. I know it was very uncomfortable here to have that year develop adversely for us. I think that trickled down even to the case level, where maybe field case managers and senior field case managers are maybe a little more prudent about their reserves in thinking forward and things that could go wrong.
We've benefited from case development, particularly in accident year 2012.
Jason, this is Allen. Let me add an industry color on that. The industry itself is seeing some improvement in the claims metrics. The NCCI will report its workers' compensation results next Thursday. No, two Thursdays from now, on the 14th.
Yes.
I think what you're going to see is you're going to see a marked drop, and there's already been reports, a marked drop, an 11% drop in the use of opioids, Schedule II narcotics for claimants. I think you'll start to see some shortening of claim duration and the ability to return people to work, which was something that was very lacking during the Great Recession. I think the reserves of the 2011 and 2012 and 2013 years, as Janelle has pointed out, were made, and the estimates were made with a view back towards the Great Recession. As employment changes and opportunity expands, the ability to get these matters closed improves, and they improve not only in being able to get them closed, but to get them closed and returning people to work and taking down those excess reserves.
Okay. That's very helpful. Thank you.
Thank you. I'm showing no further questions in the queue at this time. I'd like to hand the call over to Ms. Janelle Frost, Chief Executive Officer, for any additional remarks.
Thank you for your questions today. Tomorrow, we will celebrate our 29th anniversary of writing our first policy. I would like to use this public forum to acknowledge our greatest asset. Thank you, AMERISAFE employees. Your hard work and dedication are the foundation of our success. Thank you all for joining us today.
Ladies and gentlemen, thank you very much for your participation. This does conclude the program. You may now disconnect.