Good morning, ladies and gentlemen. Thanks for standing by. Welcome to AMERISAFE's fourth quarter earnings conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. If you have a question, please press star followed by the one on your touch-tone phone. If you'd like to withdraw your question, please press the star followed by the two. If you're using speaker equipment, please lift the handset before making a selection. This conference is being recorded Friday, March 4th, 2011. I will hand the conference over to Mr. Ken Dennard. Please go ahead, sir.
Thank you, Chardonn. Good morning, everyone. Welcome to the AMERISAFE's conference call to review 2010 fourth quarter results. We'd also like to welcome the internet participants, as this call is obviously being simulcast over the web. Before I turn the call over to management, I have the normal housekeeping details to run through. You could have received an email of the earnings release yesterday afternoon from me, but occasionally there are technical difficulties. If you did not receive your email with the release or would like to be placed on that email distribution list, please call our offices at DRG&L, and that number is 713-529-6600. There will also be a replay of today's call. It'll be available via webcast by going to the company's website, which of course is amerisafe.com. There'll also be a telephonic recorded replay available for seven days, 24 hours a day.
Details how to access that is in the earnings release. Please note that this call speaks as of only today, March 4th, 2011, and therefore, you are advised that time-sensitive information may be no longer accurate as of the time of any replay listening. Statements made in the press release or this conference call that are not historical facts, including statements accompanied by words such as will, believe, anticipate, expect, estimate, or similar words, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 regarding AMERISAFE's plans and performance. These statements are based upon management's estimates, assumptions, and projections as of the date of this call and are not guarantees of future performance.
Actual results may differ from the results expressed or implied in these statements as a result of risks, uncertainties, and other factors, including but not limited to, the factors set forth in the company's filing with the Securities and Exchange Commission, including AMERISAFE's 10K for the year ended December 31st, 2009, and future and other filings. AMERISAFE cautions that you do not place undue reliance upon forward-looking statements contained in the release or in this conference call. AMERISAFE does not undertake any obligation to update or publicly revise any forward-looking information or statements to reflect future events, information, or circumstances that may arise after the date of this release and call. For further information, please see the company's filings with the SEC. With that behind us, I'd like to turn the call over to Allen Bradley, the company's Chairman and Chief Executive Officer. Allen.
Thanks, Ken, and good morning, ladies and gentlemen. Thank you for joining us for our fourth quarter 2010 conference call. As usual, I'll make a few comments before turning it over to Jeff Banta, our President and Chief Operating Officer, who will then in turn introduce Janelle Frost, our Chief Financial Officer, for additional details. 2010 was our most difficult year since becoming a public company. However, we did end with an encouraging fourth quarter, and I'm optimistic that the market is improving and moving in the right direction for AMERISAFE. While there is still robust competition in the marketplace, we do see less aggressive pricing for high hazard risk in many markets. Additionally, while the demand for our product is somewhat muted, we have noted the improvement in our nation's economy has increased the work activity on our in-force policies.
In my view, the most important development during the fourth quarter was the growth in gross premiums written compared to the fourth quarter of 2009. Prior to the fourth quarter of 2010, we had experienced seven consecutive quarters of year-over-year declines in gross premiums written. Largely, this decline in gross premiums written has been the result of the headwinds generated by negative audit adjustments spurred by the national economy. Number two, lower loss cost, and number three, irrational competitive pricing. We see improvement on both the premium adjustments and the aggressive pricing fronts. As you saw in yesterday's press release, we produced a net combined ratio of 92.6 for the fourth quarter and 93.3% for the calendar year. Our underwriting profit this year was primarily driven by favorable prior year developments in our loss reserves.
As we mentioned last quarter, we have recently launched a number of initiatives aimed at increasing our pricing and improving our risk selection. We saw some effect of these initiatives in the fourth quarter. Additionally, we expect to see improvement in risk selection and the opportunity to write profitable business as competitors exit the high hazard space. Another aspect of improved risk selection is a focus on profitable business in targeted industries, in targeted geographies. The positive impact of improved risk selection should become apparent as the current policy year unfolds. With that, I'm going to turn the call over to Jeff for an update on operations.
Thank you, Alan, and good morning, 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. In terms of underwriting results, as Alan mentioned, we increased our top line for the first quarter since the fourth quarter of 2008, and we returned to underwriting profitability in the fourth quarter after last quarter's underwriting loss. In the fourth quarter, both reported claims and premium-based claim frequency were down from the third quarter by 19% and 23% respectively. Additionally, in the fourth quarter, we had only nine claims with estimated incurred totals greater than $500,000, versus 17 in the third quarter. We have always maintained that our high-hazard business is lumpy in terms of loss experience, and the contrast between the third and fourth quarter certainly illustrates that fact.
In terms of losses, our 2010 accident year loss ratio at 81.8% was the highest we have recorded since going public and eight percentage points higher than 2009. That ratio stood at 81.2% as of September 30, 2010. As a result of some late severe losses and an increase in year-over-year frequency in quarter four, we made the decision to increase the final ratio to 81.8%. Relative to the 2010 accident year, we attribute our unusually high 2010 loss experience to two factors. First, our net premiums earned for the year fell 12.8%, or about $32 million lower than 2009. Secondly, reported claims increased by 8.5% in 2010, which in turn increased our premium-based frequency by 12.7%. This increase in claims did not result from severe claims, as in the fourth quarter of 2009.
In fact, almost all of the increase was in the incurred layer from $10,000 to $100,000. We analyzed and have identified subsegments of our business that led to this increase, and we have taken targeted underwriting and pricing actions as a result. Due to the large number of reported claims and a slightly lower closure rate, our open workers' compensation claims as of 12/31/2010 totaled 5,076, 13.6% higher than year-end 2009, but down from the third quarter of 2010. While 2010 was certainly a tough accident year for us, the magnitude of favorable loss development for 2009 and prior accident years was one of the best in our history. We firmly believe that this is the result of our overall approach to claims, which includes a low volume of claims per adjuster, face-to-face adjusting, prudent case reserving, and our aggressive approach to closing claims.
Relative to premiums, we saw our top line, our gross premiums written increase year-over-year by 5.6%, the first such increase in seven quarters, as Allen mentioned. The increase was due mainly to a year-over-year improvement in negative premium adjustments. These negative adjustments, made up of audits, cancellations, and endorsements, have now improved for five straight months. In terms of renewal business, our retention results continue to be excellent. In the fourth quarter, our policy retention was 93.2%, the same as reported in the third quarter, and above the 91.7% we reported in the fourth quarter of 2009. As a result of the strength of our policy retention, our in-force policy count has increased 2.3% over the last 12 months.
In terms of pricing, our effective LCM for voluntary workers' comp in the fourth quarter was 1.43 or 143% of the approved loss costs in the states that use that mechanism for pricing. This compared to 1.45 for the fourth quarter of 2009. More significantly, it represents an increase in pricing over both the second and third quarters of 2010. As a result of our loss experience over the last two accident years, we have strengthened our pricing in various subsegments of our business, and you can expect this trend to continue into 2011. With that, I'll turn the discussion over to Janelle to present details on our financials.
Thank you, Jeff, and good morning, everyone. In the fourth quarter of 2010, AMERISAFE reported net income of $7.3 million or $0.39 per share compared to $6.6 million or $0.28 per share in the fourth quarter of 2009. As Jeff discussed, gross premiums written were up 5.6%, driven by less negative payroll audits and related adjustments. Net premiums earned decreased 1% from the year-ago quarter. Our net investment income totaled $6.5 million or a 4.8% decrease from the prior year period. Monthly average invested assets declined slightly from 2009 to $206.7 million, due primarily to our share repurchases and the cash redemption of our preferred shares at the end of 2009. The tax equivalent yield of our investment portfolio was 4.4% compared to 4.8% in the fourth quarter of 2009.
In total, revenue for the fourth quarter of 2010 was $63.1 million, down 1.3% from the year-ago period. Our current accident year loss ratio increased slightly to 81.8% for 2010, which resulted in an 83.5% loss ratio for the quarter. This compares to 90.2% in the fourth quarter of last year and 73.8% for the full year of 2009. Our incurred loss and loss adjustment expenses totaled $39.4 million for the quarter, which included $7.7 million of favorable prior year development, primarily attributable to accident years 2006, 2007, and 2008. This compares to loss and loss adjustment expenses of $42.7 million in last year's fourth quarter, which included $8.7 million of favorable prior year development. In total, our net loss ratio for the fourth quarter of 2010 was 69.8%, compared to 74.9% for the fourth quarter of 2009.
For the full year, our net loss ratio was 71.9% in 2010, compared to 65.1% in 2009. Total underwriting and other expenses were $12.8 million, compared to $12.2 million in the fourth quarter of 2009. Expenses included $6.1 million of salaries and benefits, $4.3 million of commissions, and $2.4 million of underwriting and other costs. In the quarter, we updated forfeiture assumptions for certain stock options granted in conjunction with our November 2005 IPO. This resulted in additional non-cash compensation expense of $1.2 million. Offsetting this expense were lower fixed costs. The expense ratio increased to 22.6%, from 21.4% in the same quarter a year-ago. For 2010, the expense ratio was 21%, down from 21.5% in 2009. In total, our combined ratio was 92.6% for the fourth quarter versus 96.7% for the same period in 2009.
For all of 2010, our net combined ratio was 93.3%, compared to 86.9% in 2009. Return on average equity for the fourth quarter of 2010 was 9.1%, compared to 8.5% for the fourth quarter of 2009. For the full year, ROE was 10.6%, compared to 16% for 2009. Book value per share at December 31st, 2010, was $17.72, an increase of 10.8% compared to 2009 year-end. We also had $20 million of unrealized gains in our held-to-maturity investment portfolio at December 31st, which were not included in ROE or book value. Our statutory surplus at year-end was $320.4 million. In the fourth quarter, we repurchased 96,000 shares at an average price of $17.98, including commissions. For all of 2010, we repurchased 709,000 shares at an average price of $17.08. As of December 31st, 2010, we had spent approximately $12.1 million of our share repurchase program, leaving $23.3 million authorized.
That concludes my prepared remarks on the financials, and we now turn the discussion back to Allen.
Thanks, Janelle. As you are well aware, AMERISAFE targets small to mid-size employers engaged in hazardous occupations. Under normal underwriting conditions, this combination of smaller policy size and higher risk profile represents an underserved segment of the market. When the pricing cycle is soft, as it has been for an extended period of time, many carriers who normally shy away from these high-hazard risks are lured into the niche by relatively high rates. As the losses accumulate and the market stabilizes, this high-hazard market's niche is typically the one that those carriers abandon first. Clearly, the 2009 and 2010 calendar year financial performance of the workers' compensation line in the U.S. has been poor. The number of companies reporting significant underwriting losses or adverse prior year development in workers' compensation has increased markedly.
We believe that the trend of adverse development will continue over the next 12-18 months. We also believe that calendar year 2011 will be worse than 2010 for the workers' compensation line nationally. This performance will be driven by adverse prior year development coming from underpriced business placed during the last few years. Current investment opportunities will not compensate these carriers for these underwriting results. From our perspective, these conditions represent an opportunity for AMERISAFE. Over the last four years, we have lowered our written premiums as we judged the market lacking in profitable underwriting opportunities. We believe that market is changing today. AMERISAFE is now poised with a solid balance sheet, available capital, a credible brand, and the excess operational capacity to seize upon the opportunity for rational, sustainable, and profitable growth.
We do not expect these opportunities will result in immediate short-term benefits, rather to form the foundation for a sustained period of expansion for this company over the next few years. Now, operator, let's open the call for questions.
Thank you, sir. We'll now begin the question answer session. As a reminder, if you have a question, please press star followed by the one on your touch-tone phone. If I do withdraw your question, please press the star followed by the two. If you're using speaker equipment, you'll need to handset before making a selection. Please ask one question and one follow-up and queue for additional questions. Our first question comes in at Beth Malone with Wunderlich Securities. Please go ahead.
Thank you. Good morning.
Good morning, Beth.
Hey. On the claims closure trend, do you see the pattern being affected by the economy, like companies not having jobs for these people to go back to and not wanting to modify workplace for the returning workers that are injured and factors like that?
Beth, this is Allen. Yes, we have seen that. That is one of the reasons you saw the loss ratio in 2009 claims, that calendar year or that accident year climb and as well as in 2010. We monitor temporary total disability duration, which is a problem. I euphemistically say sometimes that it's hard to convince a guy to go back to a job that doesn't exist, and that's particularly true in the construction industry. When a company is down, they don't have the excess capacity in their payroll to bring somebody back to less than full productive work. Some of your return to work programs are problems. We do see some improvement, however, in the payrolls being reported on the in-force policies, as I mentioned earlier. We believe we have been proactive in identifying this expansion and duration of the claims.
I would refer you, Beth, to a recent report was released the week of the 22nd or 21st of February by the NCCI, a study on duration, and I'll be happy to forward it to you if you'd like to see it. It's public. It's available at their website that discusses this duration phenomenon. As the economy improves, we would expect that duration situation to improve as well.
Beth, one more phenomenon we see, and I think we've discussed this on prior conference calls. If you think about all our claims being in a pie chart, we've mentioned that the more difficult claims have increased in the percentage of that pie. As that has happened, that's naturally increased our closure rate as well. Okay. Then, the follow-up on the competitive environment. You suggest that there's some indication that we're going to see that competition is moving away from this. Are you predicting this based on historical experience when losses get to be this much? Because frankly, the companies I follow, no one seems to want to admit that they have written bad business or that their reserve development is likely to end anytime soon, the positive reserve development offsetting it.
Could you just, I guess I'm looking for a little bit more clarity of timing of when you think this is all taking place.
Beth, I think this management team has always taken a very cautious and measured approach to making too many optimistic statements. I'm generally by our investors not known to be a big optimist. What I'm referring to is what we're currently seeing. I'm not referring to a traditional cycle because quite frankly, I don't think this recessionary period we've been through with the extreme high unemployment and the length of time that this slowdown in our economy has occurred is comparable to anything since World War II. I do see, and you've seen it in one of our competitors, a major competitor, AIG. They have announced in the marketplace that they're stepping back from workers' comp, particularly from the high hazard workers' comp. Quite frankly, I have to tell you honestly, they are doing just exactly what they say they're doing. We're seeing that.
We're seeing that from other carriers. The other thing, last year, the calendar year combined ratio for the workers' compensation industry was 110, as reported by the NCCI. I think AM Best reported 111 or modified it to 111. The projections this year are anywhere from 116 to 120. When you get above 115%, you're getting to the action level. You're getting to a level that companies cannot continue to operate in that area. We have seen competitors step back away from the high hazard business. We're encouraged by that because quite frankly, we bided our time for four years to wait until the opportunity came. We believe that we'll be successful in increasing pricing, that there will be less pricing resistance. We think there'll be more demand for the product.
Quite frankly, there'll be fewer people with the appetite to get in and to write the high hazard business.
Thank you. Our next question comes out of Michael Rosner, Piper Jaffray. Please go ahead.
Good morning, everyone.
Mike.
Jeff, I wanted to follow up around your claims frequency analysis and that, and just thinking about it. If we think about the employment situation and that most of your experienced workers would retain or be the ones that were retained, what can we point to in terms of what's causing higher frequency?
Mike, we've analyzed this backwards and forwards. I can't tell you that I can see, besides anecdotal information, that we've got a lot more new employees getting hurt. We do track average tenure of claimants, and we've seen that go down, but I wouldn't say enough to drive this frequency the way we've seen it. I just think that we are getting more frequency in certain sub-segments of our market. Our big finding when we did the analysis was that based on various criteria, including geography and class code, there are certain sub-segments that were not doing well, and for whatever reason, frequency was going up and going up much more than our average frequency. While I wish I could tell you exactly why we're getting more claims in some of those sub-segments, I really don't have a good explanation.
I can only tell you that we've taken strong actions to increase our pricing in those segments.
Mike, this is Allen. One other thought on that point. As you know, in the third quarter and fourth quarter of 2010, we saw an improvement on a year-over-year basis of the audit premium adjustments. One of the things that may be driving this is that there's a mismatch between when the premium is reported and when the exposures are actually out in the marketplace.
Yeah, that's very true.
We've noticed monthly payroll reports being higher than anticipated based upon the estimated premiums. We're not going to release what those numbers are across our business. We do notice that cash is coming in greater than expected, which would indicate that they're increasing the number of people working. Back to the tenure question, the people that are more recently hired generally are less experienced and more likely to have claims. We think that's happening. The anomaly in all of this is that in 2010, our severity of claims was significantly below our severity of claims in 2009. The mix of claims is changing a little bit. There are smaller claims, not as many large claims.
Okay, fair enough. Just, I guess the other issue that's sort of out there and making folks squirm a little bit, or management team squirm, is that around inflation and medical cost inflation. Where do you stand on that? What are you seeing in the trends there?
Our approach to medical cost inflation and to our assumptions for what future benefits will cost us is slightly above what the industry is expecting. The other thing I think our claims folks do a particularly good job at, is they approach a claim with not an overly optimistic view of what the most likely outcome of that claim will be. We tie in all sorts of contingencies. For example, people that have to have a prosthesis, an artificial limb of some sort applied. We will assume a life expectancy of those limbs and book in for the length of the claim replacements of those with some inflationary cost.
I think the other thing that helps us a lot with respect to managing the inflation risk is the aggressive claims handling and a claim's closure duration of our average claims, which is significantly below the industry, which is something that you would expect to be higher given the nature of the business we write.
Thank you. Our next question comes on the line of Mark Hughes with SunTrust. Please go ahead.
Thank you. In terms of the claims severity, the nine claims higher than $500K, definitely down sequentially. How was that in the fourth quarter of last year, and what would be the normal trend in that measure?
Well, I don't know if there is, in our crazy lumpy business, Mark, I don't know if there is a normal trend. If you remember last fourth quarter, it was, Alan, I want to say it was almost $16 million in-
It was $16 million.
-in severe claims, which we define as over $500,000.
Right. Oh, yeah.
This year in the fourth quarter, it totaled just around $3 million for not the fourth quarter claims, but the late claims that occurred in December. We had one catastrophic claim, that we call catastrophic when more than one claimant is involved, which was an explosion. That actually occurred on the last day of the year, strangely enough. We had some late claims, but not nearly the level. The number of claims was cut almost in half from the third quarter.
It was a fairly benign fourth quarter in terms of the large losses. Like I said in my prepared remarks, most of our increased frequency was in the $10,000-$100,000 range. It wasn't in the large, severe losses. If you break down that sub-segment, Mark, the $10,000-$40,000 part of that $10,000-$100,000 was the largest mover in there.
Have those trends sort of continued in the first quarter here? Any market change over the first couple of months?
I don't want to give specific remarks. I will say that in market change, we've seen an improvement. Let's put it that way.
I would agree with that.
Yes. Final question. As you look at this cycle and you see what's happening in terms of reserve strengthening and claims frequency and pricing and competitive dynamics, how does this compare with the last cycle in terms of speed or developments in the market? Can you compare and contrast?
Yes. I would tell you that there are some things that this cycle is very much like the last cycle in that the combined ratios are rising, medical cost inflation is pushing up claims. There was an excessive amount of competition driving rates to many cases below where the actual rate was below the loss cost, which is not sustainable. There's some things that are different here. Number one, the reinsurance industry has not dropped down to the levels of coverage that were true in the Unicover days, in the late 1990s and the early 2000 time period. What does that mean? It means that the pain will be felt sooner by the primary carriers. They cannot pass it off to a reinsurer and maintain a low net loss ratio. The net loss ratio and the gross loss ratios are more correlated at this particular point.
I think the other thing that's much different about this turn of the market cycle is that it's a question of demand. The unemployment rate, even at 8.9%, as was announced this morning, is very high. The recovery period has been more gradual and I would anticipate would be more gradual. It has been more severe in terms of the high hazard businesses, particularly the construction business. A lot of ways it's the same in terms of people making pricing decisions that are non-sustainable. That's definitely different. The other big difference now is you can't get the investment return, the investment yield that you could get in the late 1990s or early 2000s.
Thank you.
Thank you. Our next question comes in Matthew Carletti with JMP Securities. Please go ahead.
Thanks. Good morning.
Morning.
Good morning.
I just had a quick numbers question on the renewal rights transaction that you announced later, or I guess several months ago, late last year. Should we expect to see that kind of evenly spread throughout the year? Is it more weighted towards a particular renewal period?
The renewal rights transaction itself, which began January 1st, those policies actually surprised me a little bit. They were a little bit more weighted in the second half of the year. There's some obviously in the first half of the year, especially January 1st, and then there were some in the second half of the year. The other part of that transaction is there's an assumption of in-force policies that will push some of it more into the first quarter.
Okay. If I recall, that was about $6 million of premium. Is that right?
We don't know exactly. There was about $6 million they had written. What we're willing to write may be, and what we do get may be something less than that. I wouldn't expect it would be that much.
Okay. Thanks a lot.
Thank you. Ladies and gentlemen, if there are additional questions, please press the star followed by the one at this time. As a reminder, if you're using speaker equipment, please raise your hands up before making a selection. Please ask one question and one follow-up and re-queue for additional questions. Our next question comes in Ron Boudreaux with Capital Returns. Please go ahead.
Good morning. That was supposed to be Ron Boudreaux.
Well, look, this is C. Allen Bradley. Go ahead.
That's right. I had two questions. One is sort of on the production front and recent developments there. I don't know if your submission volume is large enough and thus the quote volume is large enough and thus the bind rate is based on enough data. If it were, do you have any figures that sort of compare the trend of late January and February's bind rates as compared to, let's say, last September, October, sort of most recent trends about this market dynamic with people pulling back from the high hazard class that you could be more specific on?
We'll try our best. I will tell you that submission volume has been
Pretty constant and pretty healthy, but not growing by leaps and bounds. Decline ratios are up somewhat, and were up throughout the year. On the other hand, success ratios, which is the ratio of all our quotes that we actually bind, was also up. Are we getting better and better at quoting the accounts we really think will bind? I don't know the answer to that question, throughout the year, there is no doubt that the hit ratio, which in the final analysis is all of those thrown together, the number we bind divided by the total submissions, has gone down. One of the things I'm really gratified about is when we started increasing prices in, I'll say, late third quarter, we expected some hit ratios, especially in those sub-segments, to kind of fall off the table. As low as they were, to go even lower.
We have not seen that, which to me is another sign that the market may be hardening. That it may be such that we can make these price increases, and even when our agents scream about it and talk to our competition and try to get quotes from them, that is not having a material impact on our final quote and hit ratios. I think that's a great sign.
Ron, let me put a little color around that. The hit ratio declining is not, to me, as important as what % of the quotes that we put out there were people willing to accept.
Right.
That has shown a significant increase. That part of it. The decline ratio going up is largely a reflection of the underwriting initiatives.
Is the-
Go ahead. I'm sorry.
I'm sorry to cut you off.
Okay. That's all right. Go ahead.
You point out the more meaningful, in your opinion, bind-to-quote ratio going up. Is that accelerating? Is it the early indications in 2011 that it's even improving over late 2010?
There's some improvement. I don't know that I would say it was accelerating. You have to compare certain months to that same month in the prior year because of the lumpiness of submissions. For example, January is always a month in which you get the highest number of submissions, the highest number of quotes, and the lowest ratio. You have to compare it to a January. We're seeing an improvement in that metric, particularly when you take into account the pricing initiatives. It ain't as cheap this year as it was last year.
Not that it was cheap.
Not that it was cheap before, but it's costing more.
Thank you. Our next question comes from John Grimstad with Piper Jaffray. Please go ahead.
Good morning. Thank you for taking my questions.
Oh, no problem.
Morning, John.
Listen, I realize oil and gas is only about 5% of gross premium, but wondering here if the current oil price run-up and the outlook going forward, if historically, those elevated prices has helped your drilling business from an exposure and/or price standpoint.
The rise in the oil price will probably increase activity in the domestic oil field. Largely what we're seeing activity around, John, is more the natural gas aspect of it. We don't really focus on the over-the-hole drilling exposures, but there's a huge amount of pipeline, site preparation, trucking, and other related activity around that. Those natural gas operations are indicating picking up in activity.
Great. Thank you. Just one follow-up, if I could. I was wondering if you could update us here on your current views on share repurchases, considering not only share prices at this level, but also other capital deployment opportunities going forward here.
Sure. Really our view on share repurchases hasn't really changed from what we discussed last quarter. We kind of look one to two quarters out on book value. Our goal is not to dilute the common shareholder. Do we have excess capital? Obviously, I believe the answer is yes. Our operating leverage at year-end was 0.7 times premiums to surplus, so plenty of capacity there. As Jeff and Alan have indicated, if we believe the market is turning, we hope to deploy that capital doing what we do best, is writing insurance.
Thank you. Our next question is a follow-up question from Beth Malone with Wunderlich Securities. Please go ahead.
Okay. Thank you. I just wanted to get some clarification. I'm not sure if I heard this right. When you were talking about the frequency trend rising, you mentioned that it was composed of younger workers. If that's correct, isn't that one of the factors that you look for in terms of an improving audit or employment count because the younger workers are getting rehired?
In fact, frequency would go up in a better economy because all the experienced workers were able to keep their jobs, and the new jobs are going to younger, less experienced workers that have a higher incidence of claim.
Beth, that's an outstanding observation. I believe that is true. I think I mentioned maybe on one or two calls ago, and this is Jeff, that I think this is going to be quite a big trend and a serious trend for the industry as a whole, and unfortunately, one that NCCI probably won't recognize. Well, will recognize, but in a two-year lag fashion. When these new employees come into the workplace, they are, especially in small businesses which can't afford sophisticated training and on-the-job training work programs. Their frequency is going to be higher than the experienced workers.
We have, as a result of some of what we saw this year in terms of these new employees, we have refocused or focused even more carefully our safety professionals to asking more and more questions about how do you hire, how do you train, how long do you supervise as they start actually doing their work? That's becoming more of a underwriting criteria. We think it's going to be a serious trend. It's a good news, bad news story. As the employment rate goes down, these new employees are going to get jobs in these industries, and they're going to get injured more frequently. I'm sure of it.
Okay. A follow-up on the-- Are you seeing any specific geographies where business is better or pricing is better, or are there certain markets, or is it across the board?
Well, there seems to be more opportunity in some of the states that, shall we say, are a bit more troubled in the workers' comp arena, states that have exhibited higher industry loss ratios or a less favorable regulatory environment or a more hostile litigation environment. Those are not really the ones we're particularly interested, Beth, in growing in. We are seeing throughout our service area opportunities. It's not uniform. As I said in my opening remarks, it's in many markets, not in all markets. There's clearly some carriers, larger national carriers, that have taken dramatic steps in stepping back away from the risk of trucking and construction and oil and gas risk across many states. Even in the places where they're not the competitor, we see a declining competitive pressure from self-insurance funds, from other forms of alternative market risk transfer.
We also see some of the mutuals pulling back dramatically on the workers' comp business. It's more driven that way than it is to specific markets. There's a lot of opportunity in Florida, but quite frankly, they've raised rates, what, 7.8%, I think, on average this year, but that's after a sixty-something % drop. If you make a profit more than 5%, they want to take it back. That's not an area that we've had a lot of interest in, although there's a great amount of opportunity to write premium there.
Thank you. Our next question is a follow-up question from the line of Mark Hughes with SunTrust. Please go ahead.
Yeah. The expense ratio, there is a tie into your reinsurance, as I understand it. Any material changes in that over the next 12 months?
We have signed our 2011 reinsurance contract for the 4X of one. As you know, our three-year contract expired as of end of December 2010. There is a slight difference. It still has an AAD, a little bit lower than the 2010, and it does have an experience-rated commission, again, at a lower percentage. For example, I think this year our experience-rated commission came in closer to 4.3% of net earned, and that will probably come down to two percentage points or so in 2011.
Does that say your reported operating expense ratio go up a couple points?
Yeah. Well, it would if that were the only basis. Hopefully, it will have more premium.
Yeah. Exactly. Okay. When you talked about seeing increase in frequency in certain subsegments, is that because those subsegments have just gotten more dangerous, or is it your underwriting? You haven't been as careful as you could be, or these are just new segments that you're pushing into now. When something flares up like that, what's the issue?
I think it's what Jeff Banta alluded to earlier is they start to recover, there begins to be more work activity. They're hiring new workers, which are less experienced. I think there may be some compromise on attention to safety in the workplace. Trying to do a little bit more with fewer people or with less expense or- I know, not long ago, talking to a gentleman who was in charge of the construction of a building. We had commented on the roofers and how they were not using fall protection on it. His contractor said, "Do you want it at the price we quoted it, or do you want it safely?" Well, we're not looking for that employer. We didn't write that account.
Right.
I think there's a little bit of that as pressure comes on these employers to do more with less. Some of those folks are compromising safety.
One other thing, Mark, this is strictly anecdotal, our head of safety tells me from time to time that, this was especially true in 2008 and 2009, that companies with safety directors who needed to cut back on expenses were often laying off the safety director as one of the first folks to go. That's not a good sign.
Right. Thank you.
Thank you. I'm sure there are further questions at this time. I'll turn the call back to management for any closing remarks.
Okay. Thank you, and thank you, ladies and gentlemen, for your participation today. It's been a long time since we've been able to talk to our investors about a growth in gross premiums written. We are pleased to see this turn of opportunity, we believe that we have positioned ourselves appropriately to continue on with a growth in gross premiums written, so long as we can write that at appropriate pricing and in the industries and under the sectors that we're most interested in writing. We believe that's going to occur and going to continue. Keep tuned, and we'll talk to you at the end of the first quarter and see whether or not our projections are right.
Thank you, sir. Ladies and gentlemen, this concludes AMERISAFE fourth quarter earnings conference call.