Let's get started. If some people come in, they'll miss my introduction, but they'll hear the main event. We're here with AMERISAFE today. Come on in. As most of you know, AMERISAFE is a workers' comp company focused in the high hazard industries based in Louisiana. The company wrote its first policy in 1985, went public in 2005, and has had a very impressive track record since then. The stock up almost 40% in the last two years. With us today, we have the CEO and CFO. Allen Bradley has been the CEO and Chairman. He's been with the company for 30 years or so.
20.
20 years. Mike, who is the CFO, is here with us today. With that, I'll turn it over to you guys.
Okay. Thank you very much. Good morning. We appreciate you joining us today. Before I begin my comments, we'll remind you that we are making these comments taking advantage of the Private Securities Litigation Reform Act of 1995. As Noel said, AMERISAFE is a specialty workers' compensation carrier. We are focused on writing high hazard business for small to mid-size employers. On page three of the presentation, if I can advance to there, you'll see a map of where we write most of our premium. We have 28 year operating history in this business, and last year we had a gross written premium increase of about 13.2% with a combined ratio of 90 and an ROE of 10.9. What do we write? In terms of industries, construction is our largest industry. We tend to focus on commercial construction, not residential construction.
Trucking is the second largest group, followed by manufacturing and agriculture and logging. Our genesis was actually in the logging business. That's where we came from. Hence, when you see our emblem, it has a pine tree in the center of it, and we have some clients that would sure like to cut that one down. As they cut down everything else that seems to be around. We do things a little bit differently than a typical insurance company. Let me give you sort of the motto of the founder. We want to write the cream of the crop. We want to write the absolute best operators in the worst industries. What do we mean by worst? We mean most hazardous. Workers' compensation risks are divided into seven categories, A through G. We like to write D, E, F, and G.
Those are the really tough lines of business. In that particular business, you have to understand exactly the nature of how people do what they do, whether it be the trucking business or the logging business or the construction business. Our largest single governing class code is roofing. Most people shy away from roofing because it's a very hazardous business. It's actually our best loss ratio, and it's because within the roofing class, as within any of those roofing classes, the loss cost and the rates are derived by an average of the best to the worst. Therefore, risk selection, understanding the risk, pricing the risk appropriately, employing adequate safety services and advice gives you an opportunity to produce a superior return for your shareholders. We deploy safety services in the field where we look at our accounts before we write them.
I know to you're going to say, "Of course, you look at it before you write them." Well, in the insurance industry, that's the exception, not the norm. People don't generally look at it. They depend upon information contained in the submission as well as their previous experience in that business. The only thing I would tell you about the information in the submission, sometimes the agents may exaggerate things just a little bit. You want to go out and verify that the particular roofing operation is what you think it is. We own one building in America. That's where our operations center is in Louisiana. We have three insurance companies, two of which are domiciled in Omaha, Nebraska, and one is in Austin, Texas. AMERISAFE is a Dallas, Texas company. We're kind of spread out.
230 of our 450 employees are in Louisiana. The other 220 are scattered across our service area. Those people include our safety folks, our claims people, our premium auditors, as well as the sales and distribution folks. What do we write in terms of accounts? How do they look? The funnel gives you a good example of that. About 8% of our policies are over $100,000, but they constitute 35% of our premium. That's the toughest business for us to keep because those are the companies that a lot of large insurers would like to write. On the midsize and small competitors are where the bulk of our business is. In those particular areas, the competitive landscape changes from the very large companies. From the very large accounts, you see a typical national companies that will try to write those.
As the policy size goes down, the competitive landscape changes, and changes in favor of smaller carriers, single state writers, self-insurance funds, small regional companies, and changes a lot. Let's talk about pricing. What I'm going to do is make some comments about the company generally. I'm going to turn it over to Mike, who's going to talk about financial performance, and then I'm going to come back and talk a little bit about the landscape within the workers' compensation market today. One of the things we report on a quarterly basis is our pricing. We do not report net rate change, because if you were undercharging last year and you get a big increase in net rate change, you may still not be at an adequate rate. This chart shows a historical pricing of AMERISAFE calculated on an effective LCM basis. What does that mean?
The LC part of it is the loss cost. In virtually every state, with the exception of two, Wisconsin and Florida, loss costs are determined by the states based upon the average expected losses within a given class code. Every insurer in that state has to use that loss cost. Each company can adopt a loss cost multiplier. What do they get to apply against that loss cost to come to a manual rate, which gives them an expected profit, an expected return on that premium? In virtually every state, the companies have discretionary pricing above and below that filed LCM. In most states, that's 25%. If your filed LCM is a 1.4, 140% of the loss cost, you can go to 175 on the top, you can go to 105 on the bottom.
You can vary it based upon the characteristics of the given account. What we do is we report our aggregate pricing across all states. You see the history here, and you will notice the dip in the 2008, 2009, and 2010 years, which did correspond in a poor outcome for us, poor on a relative basis. On the next slide, you'll see that result. You see our combined ratio as it has been reported from 2004 to the end of 2013, and then for the first quarter of 2014. Notice the rise from the 80.9% to 86 to 92 to 100.4. Those follow the years of the lower pricing. Correspondingly, there's a period of rising pricing coming behind that, and we hope that that is an indicator in the future of opportunities for us to produce a superior return for our shareholders.
To talk about the financial performance of the company, Mike Brasher, our Chief Financial Officer, will make a few comments.
Thank you, Allen. Thank you, Morgan Stanley, for having us here today. Really appreciate the opportunity to present our story to you. The combined ratio, as Allen was just speaking to, I think noteworthy there is the light green portion of that combined ratio. You can see the expense ratio, pretty consistent there as you run across the years, generally in the mid to low 20s. For us, that's a competitive advantage, and Allen spoke to it a little bit from the standpoint that we're located in DeRidder, Louisiana. We own one building. That's the building that our operations are located in. We supply a lot of folks in the field with technology to be able to operate out of their home or out of their automobile as they're out looking at claims and servicing the field. That's a big driver behind our expense ratio.
It's a big driver behind the combined ratio, which in general allows us to outperform the industry overall. Allen will show that in a slide in the future here in terms of over time, how much we've really outperformed the industry overall. When we flip over to the next slide, the economic model, here are the ROE drivers of the business. This is how we make money. It's divided really into two components, our underwriting opportunity as well as the investment opportunity. That's driven by the amount of leverage that you can put on your books and be able to drive that home. A couple of interesting points here. These numbers are from first quarter. The operating leverage, the underwriting leverage here is sitting at about 0.85. Where could we go or how much risk could we actually put on our books? That could go to about 1.4.
It's not an issue of us not trying to put business on the books. It's a matter of us also making E or the earnings along the way. We're kind of spinning our wheels from that standpoint. In addition to that, we've had the price increases and that. We've been able to grow the top line. It's just that the earnings have come through as well. Right now, as you can see, the operating leverage at 0.85. We are certainly, I guess, under-levered from the standpoint of where we could be on the other hand. The other component here is the investment leverage. 2.4 times the yield out there, as you all know, not a lot going on with investment yields. We're at 2.7% right now with our portfolio. It's a conservative portfolio.
We'll show you a little bit more of that here in the slides to come. In fact, it's the next slide. As we look at the investment portfolio, as I said, a conservative portfolio is AA minus rated. The duration on the portfolio is about 3.9 in terms of years. The tail risk on our book of business is somewhat closer to five years. Again, maintaining that liquidity, that asset liability balance that's needed here to pay claims and meet liquidity needs. Noteworthy on the investment portfolio is the held-to-maturity portion of the portfolio. It contains about $26 million. As you can see, $26.6 million as of 3/31 in terms of unrealized gains. That does not show up in our book value. I think that's something to consider as you look at the overall balance sheet on AMERISAFE.
The next slide really speaks to seeing the leverage that we have out there right now in the capital management process. Over the years, we've been very proactive in terms of managing our capital. Allen likes to point out back when AMERISAFE came public in 2005, we had seven series of stock in one way, shape, or form. Since that time, we've refined it down to one. During that time, we've actually repurchased and retired a lot of debt, a lot of tranches. Along the way, we've also executed on share repurchase. We have authorization in place today of about $25 million. A year ago in March, we executed our first dividend, our regular quarterly dividend, now at $0.12 a share. This past year, we actually came forward with a special one-time extraordinary dividend of $0.50 per share.
Again, the management team focused on returning capital to shareholders, taking a good look, a good picture at what opportunities are out there in the marketplace for us to really put capital to work and how does that measure out as you look over a couple of years, how much capital are we going to need to maintain to really grow our business and perform as we have. That's a good picture here on the following slide from a financial performance perspective. If you look and Compound Annual Growth Rate over this time, 14.8%, nearly 15% of book value per share growth. Really gets to the fact that as you look at the different makeup of it in the yellow and the green there, you can see that we really are an underwriting company looking to produce an underwriting profit.
That's very important when you get to times like these, where the investment yield is much lower than what we would really like to see. All that being said, I'll now turn it over to C. Allen with comments on the industry overall.
Thank you, Mike. Let's talk a little bit about the workers' comp industry. This slide indicates the workers' compensation industry's combined ratio since 2000. The green bars are AMERISAFE, the blue bars are the industry as a whole. I like to show this picture. It's always helpful to have a low bar so that you look a lot better. That's why they put a diamond on black velvet. It just looks better that way. We added another point to this slide, and that is our premium growth. I wanted to show that for a reason. Part of the reason is, there's a lot of emphasis on public companies on growth. The worst thing a public company can do is grow at a time the pricing is inadequate, because all you're doing is aggregating risk on your books.
During the soft cycle that would go from 2005, 2006 to 2010, we chose to shrink our business. We chose to shrink our business because we knew the pricing for the business was not adequate. If you remember back to the growth of book value, you saw a continued growth of book value of AMERISAFE, even though we were shrinking our business. That was because we intend to produce an underwriting profit every single year. We have missed that one time in 2011 when we reported a 100.4% combined ratio, and that was quite disappointing for us. We expect to outperform the industry by 1,200-1,500 basis points. It's not exactly the greatest industry in the world to be comparing against, but it sure makes us look good.
Currently, ever since the fourth quarter of 2010, we have experienced increased pricing and increased volume as the market turned back to a bit more rational pricing model. You see the combined ratios. This data is from AM Best and the III, and the numbers are based upon a combination of what is called private carriers, which is the industry as a whole, as well as the state funds. Okay? These are the people we compete against. You see that those particular groups' combined ratio deteriorated to 117%. One thing to remember is that workers' comp is a long-tail line of business, is one of the most susceptible industries to drops in the investment yield. We hold our reserves for a long period of time.
Therefore, 100 basis point drop in the investment yield for the average company in the workers' comp industry would have to drop their combined ratio by 5.7%, 570 basis points to maintain a constant ROE. The only other line of business that is worse or is more sensitive to the investment yield is the reinsurance business, which of course has a much longer tail of business. Our operating performance indicates that we have not only increased or maintained our margin of performance over the industry, but we've also grown our premium, which if you recall what I was talking about before in terms of the pricing, we believe will give us an opportunity in the coming years to produce even more superior results than what we've had in the past.
For the industry as a whole, there was a report out yesterday by MarketScout, reporting a 3% increase in workers' comp rates in the most recent quarter. This is the CIAB survey, which indicates that we've had about three years of increases in rates. Remember, these are cumulative, and the policies are annual policies, so when you look at the first quarter of 2012, you have to look at the first quarter of 2013 to see what the change was for those policies as they came up for renewals. We're looking at 20% or better increase in rates reported by the industry as a whole. I would tell you ours probably aren't quite that high because we didn't drop our pricing quite as low during the last off cycle. I will tell you that I believe our rates are extremely opportunistic.
I've been warned about this slide. People have told me it looks like a sweater they had in college. I'm trying to make a point here, but I'll probably fail. I'm going to make a stab at it anyway. You see this dark gray bar on there? Those are increases, percentage of increases over 1% in rates. Therefore, anything that is above that dark gray line is an increase, and anything below it is a decrease. If you follow this chart from the third quarter of 2000 on the far left to the first quarter of 2014, you see a pricing cycle. At this point here in 2007, you saw that virtually everybody was getting significant rate reductions, and now you see that the bulk of accounts are getting rate increases. You'll notice that has begun to swing back the other way, and that's true.
I do not think that rates are going down. You're not seeing a whole lot of decreases because a no change area comes down to about 75% of the accounts or even have either no change or an increase. I do think we can look for pricing to plateau in the coming years and we can see perhaps a bit more competition in the marketplace. One of the things that may drive that, by the way, is the move to a new reinsurance mechanism that's common in the P&C area, driven by hedge funds, and others that have a different sort of approach to risk than traditional reinsurers. It's yet to be determined how big an impact, if any, that will have, but it is certainly something to watch on the horizon.
There's another very sure indicator of how soft or how hard the market is, and it's this chart. These are the residual markets. I told you we wanted to write the cream of the crop. This is the other part. Okay? This is not so good business. When this goes up, when the amount of dollars in the residual market goes up, the financial performance of the voluntary market improves. That simple. If you take the bad business off your books, your results will improve. This is a picture of where this bad business goes. It goes into the residual pool, the assigned risk pool. In some states, that's in a competitive state fund. This is a clear indication of changing in that market, and it is projected to maybe rise slightly again this year as a percentage of the total workers' comp market.
We're looking forward to that continuing. I kind of covered the last slide here, which shows the lines of business which are most susceptible to drops in investment yield. Mike talked about our 2.7% return on our investment portfolio. Historically, it's been significantly higher than that. It is not now because of the drop in yields. I'm going to leave you with a thought before we open it up for questions. I spent the first 18 years of my professional career suing insurance companies for a living. I'm a recovering plaintiff's lawyer. I used to stand in front of juries and talk about those terrible folks in the insurance industry. I am one. You can get a lawyer to do anything, right? The key to success, I believe, in our business is really fairly simple. Number one, understand what you write.
Number two, look at it in advance so you make sure that what you think you see is what you see. Price it appropriately. Most importantly, handle your claims well. Handle your claims well, because if you bring people like I used to be in the plaintiffs bar back in to the claims resolution process, it's going to be expensive. When I was a plaintiff lawyer, there was always a defense lawyer involved, and he didn't make enough money if I didn't sue. You had an interest in sort of a symbiotic relationship there. Not that they were acting against their client's best interests, but it is the cost of doing business. We pride ourselves on putting our claims professionals in front of seriously injured people within 72 hours of receiving that notice.
That is a key, along with understanding the nature of the risk, write them appropriately, collect your money, resolve your claims, and don't waste money. Back to the expense ratio comment that Mike made. AMERISAFE is a pretty simplistic company. We write one coverage, and we do it pretty well, and we're quite proud of that. With that, I'm going to stop and open it up for questions. We have four minutes and 20 seconds left. Yes, sir.
Can you just talk about the general loss trends you're seeing within workers' comp?
Okay.
If you're seeing something different than what you think the industry might be seeing a little bit.
Good. Loss trends. That's a question. What are we seeing in loss trends? We're seeing that losses have been stable. Every year, a broken leg costs more than it did the year before. Medical cost inflation is not rising dramatically. In fact, it's well below the 20-year norm in that area. There is still wage inflation. You may not think of it as much, but there's a slight wage inflation, so you're going to see a rise in the indemnity component. We consider the loss trends very acceptable, positive right now. We also see, with respect to our reserves, now I'm not going to talk about the industry as whole, I'll just tell you with respect to our approach to it, we're not seeing surprises in terms of adverse development in prior year reserves.
Part of that is because we try to take a very cautious approach to our reserves. We're seeing an opportunity there. We don't see loss cost falling dramatically. I think last year, the NCCI reported a 0.3% decline in the aggregate loss cost filings, we're seeing that. We're seeing good trends in losses. We're seeing expansion of exposures as the economy recovers. That's a critical component of it. We're seeing an opportunity with respect to the loss cost trends. Yes, sir.
Two questions. First for Allen. If you see your map, and interestingly, you're not in a few of the large states like California-
Yeah.
-New York. Just wonder what's your view on that, and is that a potential growth opportunity for you to get into?
We're not in California, and we don't write in New York. We're licensed in New York and California. We don't choose to write in either one of them. Part of the answer to that lies in how we approach our business. We want to see the accounts before we write them, we want to handle the claims face-to-face, and we want to audit the premium on their site. There needs to be a certain geographical density for us to do it. The second part, perhaps, is a little less flattering. We're concerned about the stability of the workers' comp system in those states. California has left a lot of corporate insurance bodies behind, and we'd really rather not be one of those. We see there's greater opportunity to pursue our business in other areas.
Okay.
Could we expand? You bet. Have we expanded? You go back to that slide. We've written business in California. We write in Alaska, Hawaii, non-state business in Washington, Idaho, all of those states. We've been in those states one time or another.
Okay. Second question, probably for Mike. Your investment leverage 2.4 times seems a little bit low for some long tail workers' comp business.
I'm sorry. Investment leverage.
The investment leverage of 2.4 times seems a bit low for the sort of the business you write. Workers' comp to be longer term, you have longer time to holding onto the float.
From a leverage standpoint, we're doing what we can from the standpoint of getting premium in the house and then putting it to work. From a investing standpoint, we're staying short, just because of the environment that we're in. There's a lot of uncertainty as to when rates rise. We don't want to get locked into a long-term yield here that's subpar if we look out a year or two years from now. From a yield standpoint, yes, I would agree from that. From a leverage standpoint, we're doing what we can do. That's part of it too, is that, again, we're making some E here, right? We're growing our book. The equity is growing, so that's part of what is offsetting that.
Thanks.
I think we're out of time. I'll be happy to stay around and answer any questions if anyone should want to.