Thank you for standing by, and welcome to the AMERISAFE Inc first quarter earnings conference call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session, and instructions will be given at that time. Should you require assistance during the call, you may press star then zero on your touch-tone telephone for a live operator. As a reminder, today's conference may be recorded. Now I'll turn the program over to Janelle Frost. Please go ahead.
Good afternoon. Welcome to AMERISAFE's first quarter 2012 investor call. If you've not received the earnings release, it is available on our website at amerisafe.com. This call is being recorded. A replay of today's call will be available. Details on how to access the replay are on 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 of our Forms 10-K, Form 10-Q, and other reports filed with the Securities and Exchange Commission. We do not undertake any duty to update any forward-looking statements. I will now turn the call over to Allen Bradley, AMERISAFE's Chairman and CEO.
Thank you, Janelle, and thank you, ladies and gentlemen. Thanks for joining our first quarter earnings call. After my initial remarks, I will turn the call over to Geoff Banta and Janelle Frost, who will talk about additional operational and financial details. For AMERISAFE, the first quarter continued to show improvement in the workers' compensation market. Pricing increased markedly over the same quarter a year ago, and demand for the product remains strong, as indicated by our 19% growth. We are in the middle of a change in the marketplace, which continues as we have discussed with you in the past four quarters. Suffice it to say, none of the information that was released this morning by the NCCI in their Annual Issues Symposium State of the Line address could give any proof of any need to reduce pricing or any adequacy in terms of the existing loss cost.
With that, I'm going to turn it over to Geoff to talk about operational details.
Thank you, Allen. Good afternoon, everyone. I'll make a few comments about our operational performance and trends before turning things over to Janelle to present a summary of our financials. I'll begin by discussing our top line. As Allen noted, gross premiums written were up strongly in the first quarter by 19.0% year-over-year. This is the sixth straight quarter in which our top line has grown. Our first quarter increase in top line was due to two factors. First, an 11.3% increase in premium on policies written during the quarter, what we refer to as deck sheet premium. Secondly, a strong year-over-year increase in payroll audits and related premium adjustments. Our deck sheet premium has now grown for five straight quarters, we have had six straight quarters of year-over-year increases in premium adjustments.
Very importantly, these increases have occurred while we have continued to increase our pricing. We have also benefited from substantially higher average premium for both new and renewal business, as well as markedly higher renewal premium retention. Regarding our renewal business, our first quarter premium retention was a very strong 97.2% versus 83.3% for the year-ago quarter. This was due to increases in average per policy premium. We believe this provides more evidence of an overall firming of prices in our high hazard market segments. Our policy retention, meanwhile, was 91.4% in the 2012 first quarter, lower than the 92.7% in the 2011 first quarter, but a strong figure nonetheless. As mentioned above, our average premium for new and renewal business went up year-over-year in the first quarter from $30,800 per policy to $37,200, a 20.8% increase.
This increase was due to a rise in both average payroll and to increased pricing for policies written during the quarter. Relative to pricing, our effective LCM for voluntary work comp in the first quarter was 1.59 or 159% of the approved loss cost of the states that use that mechanism for pricing. This compared to an ELCM of 1.45 in the first quarter of 2011 for a 9.7% increase. This compares to an increase of less than 1% year-over-year in Q1 2011. We are encouraged by the fact that our business is growing even in the face of this significant increase in our pricing. Relative to losses, our 2012 accident year has begun with both lower severity and lower premium-based frequency than our 2011 accident year at three months or at the first quarter.
As a result, we have made an initial estimate for 2012 that assumes a slightly lower net loss ratio, 76.5%, than we estimated for the first quarter of accident year 2011. If we are correct, 2012 will become the fourth consecutive year in which AMERISAFE has posted accident year loss ratios higher than 70%. We firmly believe that our results and the results of the industry as a whole have been significantly impacted by the cumulative effects of the deficient loss cost and increases in claims duration. That the impact of these factors won't really be known until the end of 2012 at the earliest. In the meantime, we are going to continue to push our pricing, tighten our underwriting, and adjust claims as aggressively as we have in the past.
In terms of prior year losses, our first quarter financial results benefited from favorable overall development for accident years prior to 2012. The loss ratio for our 2011 accident year, which is still green, remained at the 78.2% estimate we established in Q3 2011. Accident year 2010, the worst in our public history, is still developing on a case basis but at a much slower rate. Case development for accident years 2009 and prior have been basically flat for the past four quarters. We believe that our combination of prudent bulk reserving and aggressive claim management will serve us well as we work through all of our open accident years. We face very tough conditions in the claims world, characterized by high medical cost inflation, increased medical and pharmaceutical utilization, and increased difficulty in returning injured claimants to work in times of high unemployment.
With that, I will turn to Janelle to present details on our financials.
Thank you, Geoff. For the first quarter of 2012, AMERISAFE reported net income of $9.6 million, or $0.52 per share, compared to $6.6 million or $0.35 per share in the first quarter of 2011. As Geoff discussed, gross premiums written rose 19% from the year-ago quarter, attributable to 11.3% growth in policies written in the quarter and over $5 million of positive audit and related adjustments. Keep in mind, last year's first quarter included gross premiums written of $4 million from a renewal rights and assumption agreement with Cooperative Mutual. Net premiums earned increased 16.1% from the year-ago quarter. Our net investment income totaled $6.9 million in the first quarter of 2012, an increase of 5.6% from the first quarter of 2011. Average invested assets were $863 million, compared to an average of $825 million in the first quarter of 2011.
The tax equivalent yield on our investment portfolio was 4.5%, compared to 4.6% for the first quarter of 2011. In total, revenue for the first quarter of 2012 was $78.7 million, up 17.5% from the year-ago period. Our current accident year loss ratio for the quarter was 76.5%, compared to 77% a year ago and 78.2% for the full year 2011. Our incurred loss and loss adjustment expenses totaled $51.8 million for the quarter, which included $1.6 million of favorable prior year development, attributable to favorable development of $5.2 million in accident years prior to 2010, and unfavorable development of $3.6 million for accident year 2010 in the quarter. This compares to loss and loss adjustment expenses of $44.2 million in last year's first quarter, which included $2.1 million of favorable prior year development.
In total, our net loss ratio for the first quarter of 2012 was 74.3%, compared to 73.5% in the first quarter of 2011. Total underwriting and other expenses increased 1.1% to $14.7 million, compared to $14.6 million in the first quarter of 2011. The 2012 first quarter expense components included $5.1 million of salaries and benefits, $5.3 million of commissions, and $4.3 million of underwriting and other costs. The expense ratio decreased to 21.1% from 24.2% in the same quarter a year ago. One element benefiting our expenses is our experience-rated commission, which contributed a 4.1 percentage point decrease to the expense ratio in the first quarter of 2012, compared to a 2.2 percentage point decrease in the first quarter of 2011. In total, our combined ratio was 96% for the first quarter versus 98.3% for the same period in 2011.
Return on average equity for the first quarter of 2012 was 10.8%, compared to 8% for the first quarter of 2011. Book value per share at March 31st, 2012 was $19.78, an increase of 8.4% compared to $18.24 at the first quarter a year ago. While discussing book value per share, I'd like to point out that in the first quarter of 2012, we retrospectively adopted the new accounting standard for deferred acquisition costs. The adjustment to shareholders' equity reduced book value per share $0.08 as of December 31st, 2011. Deferred policy acquisition costs were decreased $2.2 million, and deferred tax liabilities decreased $0.8 million. Finally, our statutory surplus was $302 million after paying a $21 million dividend to the holding company. Cash at our holding company is held for our share repurchase program, retiring debt, or future acquisitions.
As previously announced, we will retire $12.9 million of our debt in the second quarter of 2012. Our board has now authorized us to retire the remaining $12.9 million in the third quarter of 2012. That concludes my prepared remarks. I now turn the call back to Allen.
Thank you, Janelle. This afternoon, we are speaking to you from the National Council on Compensation Insurance's Annual Issues Symposium in Orlando, Florida. As I mentioned earlier, this morning, the NCCI released their annual State of the Line presentation, which provides an exhaustive and complete examination of the full workers' compensation line across this country. NCCI's CEO characterized the 2011 workers' comp market as conflicted, with both positive and negative factors emerging during 2011. On the positive side, he noted that lost time claims frequency decreased, it was by only 1%. Net written premiums rose by 7.9% for the first time in five years. There was a slight improvement in the accident year combined ratio for private carriers. By the way, private carriers, for them, means anyone other than a state fund. That the industry had an extremely strong capital position.
There were other factors that were not positive. Underwriting results for private carriers and state funds across the country was essentially the same as it was last year at 117%. Frequency, while down 1%, did not match up with the 3% increase that occurred in 2010. Medical cost inflation, while moderate at 4%, did increase, along with an indemnity cost increase of 2%. A number of those factors indicate that the workers' compensation market has yet to come to the point that it recognizes the rates that the industry is charging are not adequate. Discounting on workers' comp premiums this year by the voluntary market continued to be at roughly 8%, although that's markedly less than the previous three years. For our position, we have anticipated for some time that the market would decline and would go into this sort of capital destructive phase.
AMERISAFE continues to operate with the human resources, with the capital, with the distribution capacity, and with the reputation to meet the challenges. Now, please remember the same caveat we discussed last quarter. Just because the market is improving does not mean there is no remaining competition, nor do I in any way want to imply that the loss costs are adequate. Writing more premium doesn't necessarily mean you'll have better results. Of course, our national economy may falter, and that would cause problems across the workers' compensation industry. However, we believe that the market has made a significant turn, even to a hardening cycle, at least with respect to the high hazard workers' comp industry, and we're prepared to meet that opportunity. With that, let's open it up for questions.
Thank you, sir. Ladies and gentlemen on the phone lines, to queue up for a question at this time, please press star then one on your touch-tone phone. If your question has been answered or wish to remove yourself from the queue, you may press the pound key. Again, if you would like to ask a question at this time, please press star then one on your touch-tone phone. One moment for questioners to queue. All right, our first questioner in queue is Matt Carletti with JMP Securities. Your line is open. Please go ahead.
Hey, good afternoon.
Good afternoon.
Hey, Matt.
Hey, just have a few questions. First, I guess, Allen, I'll start off on the last topic you ended with, which was NCCI. Was there anything in what was discussed this morning in the State of the Line that you would find particularly surprising, that you didn't expect, or maybe said it another way that might be a trend that the market's seeing that maybe AMERISAFE isn't?
I wasn't particularly surprised with anything. If anything, I would've thought that perhaps the combined ratio may have climbed from 117 to 118, 119. Some were projecting 120 previous to this. Suffice it to say that a 115 on private carriers and 117 for the market as a whole, which was 117.6 last year, by the way, Matt, is not an improvement. It's not something upon which people can build capital. It shows that there's a lot of pain being felt out across the market. It was interesting also to note that the filed rate changes across this country, and I'll look it up for you real quickly, but I think it was 7.5% when you consider the country as a whole. Largely that's driven by the state of California.
When you excluded them, the loss cost changes across the remaining states was 2.5%. I anticipate that's going to continue for the next several years. The same things we've talked about before, that is that you have several years of unsustainable underwriting losses, which is what we have. When you couple that with the lower investment income, which we have. That you must produce a lower combined ratio in order to return the cost of capital. The industry coming in at 117 is certainly not going to produce anything close to the cost of capital. In fact, I think when NCCI talks about operating results, unlike the folks in the capital markets, they include investment income, they include realized gains.
All pre-tax.
All on a pre-tax basis. That number was,
I think it was one.
negative 1%. It certainly doesn't portend a good performance in the upcoming year.
One other thing, Matt, the multi-year decrease in the residual market appears to be at an inflection point. It has now begun growing, that is normally an early predictor for the hardening of the market, of course.
Right. Thanks for mentioning that, Geoff. That was one thing that they pointed out, that in the first quarter of 2012 as compared to the first quarter of 2011, the residual market in this country rose 47% in one quarter. That's a pretty good run rate, it was in the 30% range for the second half of 2011.
Okay.
That market's growing.
In terms of competition, I know, Allen, you've talked in recent quarters about how some of the larger markets have pulled back or pulled out. Have you seen that continue? Has it kind of happened and quieted down a little, or are you continuing to see kind of an acceleration on that side?
I wouldn't say acceleration, but it is definitely continuing. There doesn't seem to be any abatement on that. Now, on the pricing side, we continue to push pricing. We're going to continue to push pricing. I think you know us well enough that we always prefer margin over volume. There'll probably be at some point where we push it too far. But it certainly wasn't in the first quarter as the premium grew dramatically. One other thing I'd like to point out to you, and we mentioned this in our last call, so it's another indication that the market continues to change. We had an increase of 22.6% in applications for new business in the first quarter of 2012 over the first quarter of 2011. Those applications are coming in not because we've dramatically expanded our distribution that far.
They're coming in because other carriers are getting out.
If I recall, that's maybe an acceleration from the number you gave last quarter. It was more like, I want to say 14 or something closer to that.
It is. It's a marked acceleration, but remember now January 1st is a big day in the insurance business, so-
Very true
That accounts for some of that. On a percentage basis, there was a January 1st last year, too.
Absolutely. Just one last numbers question, if I could. This one probably for Janelle. On the expense ratio, is 21 a reasonable run rate for us to expect going forward this year? Or was anything in the quarter, kind of the two-point step down from last year, more one-time in nature?
There are a couple of, I'd say, not one-time things, a little bit different from first quarter this year versus first quarter last year. Obviously, we still had the experience-rated commission. At first quarter last year, we weren't accruing that on the 5X5 layer because of some of the losses that we had had in the IBNR that flowed into those layers. This year, it does include the 5X5, which is why you partially see the increase in the percentage point difference because it's the same. The 5X5 is a slightly different treaty this year, but the fourth was one of the same treaty that was in place last year.
Very helpful. Thanks a lot, and congrats on a really nice quarter.
Thank you.
Okay, thanks.
Thank you, sir. Next questioner in queue is Mark Hughes with SunTrust. Please go ahead. Your line is open.
Thank you very much.
Hey, Mark.
Hello. In the first quarter, pricing is up, frequency and severity are down, your loss pick is only 50 basis points improved over Q1 last year. Is that conservatism? Is there something else that's driving that?
I think the lawyers won't let me use the C word, Mark. We're being cautious.
Prudence.
Perhaps. No, last year was at 78 too at the end of the year. The first quarter last year was, I think, 77, and then it deteriorated somewhat. We're trying to not be overly optimistic.
Right. The expense ratio, Janelle, how much worse would losses have to get in order for that ceding commission arrangement not to keep the expense ratio that low? You were up in the mid-20s up until last year.
Yeah, that's a really good question. We'd have to penetrate that $15 million-$20 million annual aggregate deductible, which we did not do last year. Should the over million-dollar claims perform as they did last year or slightly better, then that wouldn't happen.
Therefore, one would think the expense ratio should stay at about the same level.
It would have to be a frequency and severity problem, I guess, is my point.
Yeah.
It's been so best for us.
Geoff, what did you say the deck sheet premium comparison was in Q1, and then what was it in the Q4?
It was up 10.3%, Mark, in Q1. I don't remember. Do you have-
I think it was 11.3%.
11.3%, yeah.
11.3% last year. Do I have last year's?
Mark, let me remind you of this. Last year in the first quarter, we booked the Cooperative Mutual transaction, which had both some policies written during the quarter, which were not that big a deal, but we assumed the tail on some in-force policies.
Did that show up in the deck sheet premium?
That showed up in deck sheet premium last year.
Okay.
Last year.
What was that amount again in this quarter last year?
About $4.1 million, about $4 million for Co-op last year.
That's correct.
Right. When you adjust for that, it was a nice acceleration in Q1.
Right. It was even bigger than the 19%.
Yeah. Okay. All right. Thank you.
Thank you.
You're welcome.
Thank you, sir. Just as a reminder, ladies and gentlemen, to queue for a question, please press star then one on your touch-tone phone. Next question in queue is Randy Binner with FBR. Please go ahead. Your line is now open.
Open. Okay, good. Thanks. I'm going to try and follow up on the expense ratio question and maybe ask the question more in layman's terms. Is it safe to say that if your claim experience for more severe claims stays similar to how it's been, then we can plan on expense ratio closer to the level that we saw in this quarter? Is that the way we should think about the expense ratio for this year?
Right. As far as accruing the experience-rated commission related to the reinsurance contracts, that'd be correct.
Okay, good. I appreciate all the commentary and the reference to NCCI. The question is this. There's kind of a flattish, if you will, combined ratio trend, which is clearly not adequate. All the commentary that you've said on the call makes me think that accident year 2010 probably was the worst. Is that how you're feeling? Things aren't solved, and they're certainly not adequate from a cost of capital perspective. Can we feel like accident year 2010 was probably rock bottom for this cycle?
Well, in all probability, Randy, let me point out a couple of things. Number one, policy year, not accident year. Policy year 2010 will turn out not to be as bad as accident year 2010 was because of the negative audit premiums that were attributable to 2009. At the same token, there will probably be some changes for the policy year 2011. Policy year, now not reported, not financial year, but policy year as the tailwind of the audits for 2010, which were actually much more positive, were reported in 2011. That's those audit adjustments we've been talking about for the last six quarters, you see.
What happens is when you use accident year data, you're still talking about calendar year premium to a certain extent when you're talking about these audits. It makes the information a little muted. In fact, last year, the reported frequency was 9% based on the raw data, a 9% increase in frequency. The NCCI went in and identified the audits and adjusted that downward to 3%. This year, the frequency was indicated in the raw data as a 4% decrease. Actually, this year they adjusted last year up to sub 10, and this year it's the down four. When they took the audits out and made those adjustments, the actual frequency decrease was only 1%. There's a little noise in that number. I think the point of your question is, what was the bottom of the cycle?
It certainly feels like to us 2010 was the bottom of the cycle.
Yeah. That's the question because it's looking at the result this quarter, you were favorable prior to 2010. You had some adverse in 2010. 2011 picks up better pricing in the audit premiums, as you mentioned. It's just helpful for us as analysts when we look at all the companies together to think about if 2010 was the worst, because that looks like it's the case. I had a detailed question just on the tax rate.
Before you get to that, let me give you one caveat on that last comment.
Oh, sure. Of course.
We're in a severity-driven business. It's not necessarily a straight line. There can be some lumpiness around quarters. I'm not saying there is in the future, I'm just warning that that can happen when we insure people that handle things that blow up and work high off the ground and those sorts of things. I think as the industry, it should move into a more positive fashion.
Understood. Just on the tax rate, I guess, at least for us, we planned on 20% and maybe that was being cautious or conservative about. It pops around quarter to quarter. Just wanted to get some color on what drove the tax rate in the quarter and if we should think about it differently going forward.
Sure. The fluctuation in this tax rate, if you're comparing it to first quarter 2011, is really just the level of underwriting income because our tax-free income has stayed relatively steady state. The more money we make on an underwriting basis, obviously the tax rate's going to rise slightly. Not saying that your 20% is a bad number, but you're right, it does bounce from quarter to quarter depending on what that combined ratio is for the quarter itself. Of course, it's a year-to-date calculation. That's the driver.
Got it. Thanks so much.
Thank you, sir. At this time, there appears to be no additional questions in the queue. I'd like to turn the program back over to Mr. Bradley for any additional or closing remarks.
Thank you. Thank you, ladies and gentlemen, for joining us this afternoon. I would encourage you to access the NCCI's website at www.ncci.com and download the State of the Line address if you are really interested in finding out more as to what their view is on the state of the workers' compensation market in America. Thank you for your attendance and interest today.
Thank you, sir. Again, ladies and gentlemen, this does conclude today's program. Thank you for your participation and have a wonderful day. Attendees, you may disconnect at this time.