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spk01: Good day, everyone, and welcome to the AmeriSafe 2020 Third Quarter Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Catherine Shirley, Chief Administrator, Officer. Please go ahead.
spk02: Good morning. Welcome to the AmeriSafe 2020 Third Quarter Investor Call. If you have not received the earnings release, It is available on our website at www.amerisave.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 may differ materially from the results expressed or implied in these statements if the underlying assumptions prove to be incorrect or as the result of risk, uncertainties, and other factors, including the impact of the COVID-19 pandemic on the business and operations of the company and our policyholders and the market value of the securities in our investment portfolio. Other factors that may affect our results are discussed in today's earnings release. in the comments made during this call, and in the risk factor section of our Form 10-K, Form 10-Q, 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 Janelle Frost, AmeriSafe's President and CEO.
spk03: Thank you, Catherine, and good morning, everyone. We are now nine months into a global pandemic. The long-term impact to workers' compensation rates is yet to be determined. While there are plenty of opinions regarding what will influence ultimate costs, I believe there is not enough pandemic-specific or identified trends to influence near-term loss costs. Therefore, declining loss costs can continue to pressure the industry's revenue and support robust competition. An important distinction is that competition varies by state, given that workers' compensation is a state-regulated financial product. Two factors influencing the variation between states are approved loss costs and the mix of industries underwriting in any given state. To illustrate the differences in state markets, consider the latest approved loss costs, which ranged from a 20% decrease in Virginia to a 9% increase in Hawaii. Industry mix is also impactful. Unemployment increases were more heavily weighted towards service and hospitality industries, which were not where AmeriSafe writes business. State mandates related to stay-at-home orders and essential business operations temporarily impacted payrolls, and for some businesses, altered their long-term business outlook. For the states we actively market, competition remained robust in the third quarter. Our ELCM is one measure of AmeriSafe's response to competition. Our ELCM for the third quarter was a 159, down from a 162 in the third quarter of 2019. The resulting premiums for policies written in the quarter were down 10.7%. Loss cost changes were the primary driver. Based on our states and industries, our loss costs were down 7.8% on average. Voluntary policy count in the quarter was down only 2%, supported by healthy policy retention of 94.6%. New business was suppressed, in part due to disruption to the distribution network. The pandemic hampered independent agents' ability to prospect new business, which impacted our premiums during the quarter. Less robust payrolls from policies written in prior quarters also impacted our quarterly revenue slightly. Payroll audit premiums were positive in the quarter. However, audit premium and other adjustments were $0.9 million lower than the third quarter of 2019. In total, our gross premiums written were down 12.1% from the quarter. Turning to losses incurred, our loss and LAE ratio for the quarter was 53.2%, down slightly from the third quarter of 2019. Our current accident year loss ratio remained at 72.54%, the same as the first two quarters of 2020 and the full year of 2019. Frequency trends were favorable, with reported claim counts in the quarter down 18% from the third quarter of 2019 and below our expectations for the accident year. However, I will take this opportunity to circle back to industry mix. AmeriSafe's operating model focuses on high-severity, low-frequency industries. Severity for the current accident year has been within our expectation, and we still have one quarter to go. The timing of severe accidents is not particular to any given quarter. We continue to reach favorable outcomes for prior year claims attributable to our extensive claims management and aided by lower claim counts. Case reserve changes led to overall favorable development of 14.4 million or a 19.3 basis points decrease in the loss ratio. Accident years to note were Accident Year 2018 with $2.6 million of favorable development, Accident Year 2017 with $4.8 million of favorable development, and Accident Year 2014 with $2.9 million of favorable development. Before I turn the call over to Neil to discuss expenses and other financial metrics, I would like to conclude my prepared remarks by reiterating our strong value to shareholders. Earnings and our ability to pay dividends are founded in our long-term commitment to underwriting disciplines throughout the insurance cycle. We remain dedicated to our mission of providing quality insurance product while profitably serving our stakeholders. I now turn the call over to Neal.
spk05: Thank you, Janelle, and good morning, everyone. For the third quarter of 2020, AmeriSafe reported net income of $23.4 million, or $1.21 per diluted share, compared with $21.4 million, or $1.11 per diluted share, in last year's third quarter. Operating net income for the third quarter was $22.4 million, or $1.16 per share, an increase of 7 cents, or 6.4%, from the third quarter of 2019. Revenues in the quarter decreased to $83 million, compared with $91.5 million in the third quarter of 2019. Net premiums earned decreased 9.6% to $74.8 million when compared to last year's third quarter. Turning to our investment portfolio, net investment income decreased 14.5% in the third quarter to $7.1 million compared with $8.3 million in the third quarter of 2019. Last year's third quarter was a high point for investment income, and the decrease was driven by lower interest rate on fixed income securities, particularly on cash and short-term investment securities. The tax equivalent yield on our investment portfolio was 2.8% at the end of the third quarter. The pre-tax yield on the portfolio was 2.49% at the end of the quarter, down 30 basis points from 2.79% one year ago. There were no significant realized gains or losses for the portfolio during the quarter. The investment portfolio remains high quality, carrying an average AA credit rating with a duration of 3.81 and with 63% in municipal bonds, 15% in corporate bonds, 12% in U.S. treasuries and agencies, 3% in equity securities, and 7% in cash and other investments. The 63% in municipal bonds includes taxable municipal bonds, which now make up 12% of the overall portfolio. Approximately 57% of our bond portfolio is comprised of held to maturity securities, which were in a net unrealized gain position of $34.8 million at quarter end. These unrealized gains are not reflected in our book value as the bonds are carried at amortized cost, less than allowance for credit losses. Moving now to operating expenses, our total underwriting and other expenses were $13.9 million in the quarter, compared with $19.3 million in the third quarter of 2019. The decrease in expenses was due to a $5.7 million reduction in loss assessments due to the early termination of an assessment related to a state multiple injury trust fund. By category, The 2020 third quarter expenses included $7 million of salary and benefits, $5.6 million in commissions, and $1.3 million of underwriting and other costs. As a result of the change in assessments and the associated expense benefit, our expense ratio was 18.6% for the quarter, compared with 23.3% in the third quarter of 2019. Without the change in assessment, the expense ratio for the quarter would have been 26.2%. Our tax rate for the quarter was 18.5% compared to 19.6% for last year's third quarter. This is largely due to more tax-exempt income on our investment portfolio than last year. Return on equity for the third quarter of 2020 was 19.8% compared to 18.6% for the third quarter of 2019. Operating ROE for the quarter was also 19.8%. Now, turning to capital management, and as announced in conjunction with our earnings release, the company's Board of Directors declared a special dividend of $3.50 per share for shareholders, payable on November 18, 2020, to shareholders of record as of November 11, 2020. This brings the total amount of special dividends paid out in the last eight years to $21.75 per share. In addition, the company's board of directors also declared a regular quarterly cash dividend of $0.27 per share, payable on December 18, 2020, to shareholders of record as of December 4, 2020. And finally, just a couple of other items. Book value per share at September 30, 2020 was $24.93, up 11.8% from $22.29 at year end. Our statutory surplus was $338 million at quarter end. The amount of surplus was lower this quarter due to dividends paid up to the parent company for the special dividend. And lastly, we will be filing our Form 10-Q with the SEC tomorrow after the market closes. That concludes my remarks, and we would now like to open the call up for the question and answer session. Operator?
spk01: Thank you. And if you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. If your question has been answered, you may remove yourself from the queue by pressing star two. As a reminder, it is star one if you would like to ask a question. And we'll take our first question from Mark Hughes from Truist. Please go ahead.
spk06: Yeah, thank you. Good morning, Janelle. Good morning, Neil. Good morning, Mark. On the claims, obviously a sharp drop in the claims for this year. When you think about claims that are still being worked from last year to the year before, is there any impact from COVID on those? Are people deferring treatment? Are you seeing any benefit on older claims?
spk03: Yeah, you know, Mark, that's a great question. Early on in the pandemic, we certainly saw, just like everyone else in the country, saw delays in appointments, deferred surgeries. I think that has more returned to normal in terms of procedures. But that's a great question regarding what happens to the older claims. So we focus a lot on the current acts of the year. But those claims that we still have open, I do – I do have concerns, and we've talked about this on prior calls, about what happens to the ultimate severity of those claims. Certainly, there's been a decline in frequency for the current accident year, but as claims have been out there, procedures have been delayed, medical care has been delayed, does that somehow alter the maximum medical improvement and the time of which that happens? So it's something that we're keeping our eyes on. I will say, you know, we've had lower claim inventories thus far in 2020, less than we expected. And so certainly we've seen some acceleration in our claim closure rates for most of the older accident years.
spk06: Is there any administrative or judicial impediments to that if the courts are closed? One of your competitors talked about getting a you know, sign off from the administrative judges or what have you, that that might make it a little harder to close out some of those old claims. Do you see anything like that?
spk03: Yes. Certainly, again, certainly early on in the pandemic, that was indeed the case. But, you know, it took states and those regulatory bodies a while to adjust. But they found ways to get it done. So, I mean, there was a delay. But, again, I think most of that is back on track.
spk06: Okay. The 1.59 is pretty similar to what you had in 2019. It was 1.59. Is the competitive environment stabilizing? Could we assume that?
spk03: It is still competitive out there. You know, we've heard lots of talk amongst workers' comp carriers of what's going to drive increases in rates. I think there's been a few articles put out there about increases in rates. I think that's very state-specific and industry-specific. So I can tell you from the states that we actively market in and the industries that we write, competition is alive and well. It's not... irrational competition that, you know, we spoke of in prior soft sectors where people were just buying books of business. But it's certainly there, and it's very, very competitive.
spk06: And you had mentioned distribution. There was some disruption in prospecting for new accounts, things like that. Is that back to normal, or is that still –
spk03: You know, it's improving. It's certainly improving. When you think about the pandemic and stay-at-home orders and remote work and the agent distribution, it certainly was an obstacle for agents. I feel for them. So certainly with stay-at-home orders, it was very difficult for them to prospect new business. So they were working their renewals, but that prospecting new business, and you think about agents typically work you know 90 days out so early on in the pandemic we were still getting a pretty good flow of new business submissions but that dwindled as stay-at-home orders lingered so when you think about third quarter specifically those would have been accounts that agents typically would have been out in may and june uh prospecting and so and we all know what the state of the country was at that point so i do think it's improved Anecdotally, it seemed like Labor Day was a cutoff point for a lot of different people for a lot of different reasons. So, yeah, we started seeing improvement later in the quarter.
spk06: And then one final question. You have talked about the construction, how everybody has continued to be busy, but it's kind of the next job that is the question for some. Any updated perspective on. On that next job for a construction company.
spk03: Yeah, so I hear the word uncertainty a lot. I think there's a lot of uncertainty out there a related to the pandemic and vaccines and what's going to happen. I think the election has a lot to do with the uncertainty. The recession has a lot to do with the uncertainty. So I hear uncertainty and postponement. I haven't heard, and again, this is more anecdotal than trends that I can read, but when you read different articles in different papers and talk to different people in the industry, I keep hearing the word postponed. I don't think people are willing to call it a day and say, we're absolutely not going to make that capital expenditure. I think there's just enough uncertainty out there to keep it in the mix of just postponement. But, you know, kudos to our clientele. They are still working.
spk06: Very good. Thank you.
spk01: Thank you, Mark.
spk06: Thanks, Mark.
spk01: We'll now take our next question from Randy Benner from B. Riley. Please go ahead.
spk07: Hey, good morning. In Mark's questions there – I know we talked about frequency, but I guess, could you repeat the actual percentage it was lowered by in the quarter? I think I've kind of missed that in the conversation.
spk03: The percentage that frequency was down? Is that what you were referring to? Yes. Yeah, so for the accident year, our claims reported in the quarter were down 18% for accident year 2020.
spk07: Yeah, for accident year, gotcha. And then... Just on the expense ratio, the termination of the trust, I guess a second injury or multi-injury fund, I think that's a discrete matter, meaning it's complete, right? But the follow-on question would be, you know, to the extent that the function of kind of generally better claim results, are there – Are there other such funds out there that might have early terminations?
spk05: Yeah, that's a really good question, Randy. This was one of the bigger funds. This was the Georgia Subsequent Injury Trust Fund, and they had been assessing the industry about $100 million a year for pretty much the last 20 years. And I think they finally got to the point where actuarially they ended that assessment a little bit early than scheduled. So we had a full accrual up for that, and that's why we had the one-time item. Another fund that we had a similar event like this was actually in the last year in the fourth quarter, and that was South Carolina. But there's not too many other funds out there that have been shut down that are still assessing the industry like this. We typically take a conservative view towards those loss-based assessments and put them up, and then this was a one-time benefit.
spk07: Okay, understood. And then just on the tax rate, you all have shown good profitability, but I guess the tax rate's been a little bit slower or a little bit lower than expected. And I think in years past where you've had good earnings, there's been kind of a true up at the end of the year. And so I'm wondering if that might be the same dynamic this year in the fourth quarter.
spk05: Yeah, no. Yeah, we try to forecast net income for the full year when doing our quarterly provision. So that is a forecasted rate. Typically, I don't know that we see as big a true-up in the fourth quarter. The true-up in the quarter that we do see is really around assessments, and that's why typically we see our expense ratio tends to be lower in the fourth quarter than it is in other quarters during the year.
spk07: Okay, that works. Thank you. Thanks, Randy.
spk01: And as a reminder, if you would like to ask a question, please signal by pressing star 1 on your telephone keypad. And we'll now take our next question from Matt Carletti from JMP Securities. Please go ahead.
spk08: Hey, thanks. Good morning.
spk01: Good morning, Matt.
spk08: Neil. Good morning. Neil, maybe I'll actually start off right where Randy left off, just a follow-up question on kind of the expenses and the activity in the quarter. On your comment about, you know, for a while now, you know, Q4 is often a time when, you know, you provision for these potential, you know, assessments, and then if they don't happen, you know, bring that down. Should we view kind of what happened in Georgia, you know, this quarter as a little bit of a pull forward of that, or is it kind of an independent thing from that normal process that takes place in Q4?
spk05: Yeah, it's a good question. It's an independent thing in that that was a loss-based assessment that wasn't subject to that seasonality.
spk08: Got it. Perfect. That's very helpful. And then can we talk about investments a little bit? And just, you know, I appreciate the commentary you gave. Just curious, like, what – Where is the new money yield currently? Just trying to get a better feel for kind of where you're reinvesting dollars as they roll off versus the book yield today.
spk05: You know, that's been tough. The new money yield is quite a bit lower than what's been rolling off of the portfolio. We also, though, have seen a pretty significant decline in the short term because we have cash that we use for dividends and other purposes that that is in that zero to one year timeframe, and that particularly is where we've seen a big hit with the reduction in the federal interest rates, particularly on a year-over-year basis. I expect that that will continue for a couple more quarters in terms of it being an unfavorable comparison, and then it should stabilize and then with lower interest rates gradually roll down.
spk08: Okay, that's helpful. And then maybe a question for Janelle. You know, I appreciate your commentary around kind of pricing and how what states you're in and industries, you know, really do matter. And obviously your mix probably, we know, looks a bit different than the industry. Can you give us some color how it looks by size, account size? You know, are you seeing signs, good, bad, or otherwise in certain parts of your book that might not be apparent in the aggregate number?
spk03: Yeah, that's a really good question. For this quarter, we had really strong policy retention of 94.6%. And it really was, I would say, for most of our policy, when I think about our policy size and most of our policy size, probably with the exception of the larger account. And when I say larger, that would be 250, 150 plus. Not that we have a large number of those claims or those policies, but that's probably where, and again, that sort of makes sense, right? That's where it's most competitive for us. You know, our sweet spot is a smaller policy size than that average.
spk08: Got it. Perfect. And then last question, you've given us kind of, I think, kind of claim count in the past of the large claims. I think you define them as north of a million claims. How is that running this year versus last year or this year versus expectations, whatever the right metric is?
spk03: At the end of the quarter, we had 11 claims that were over that million dollars. And if you compare that, I think at year-end last year, we had something like 16 or 18 of those claims. So nothing unusual about that and still a quarter to go. And as I said in my opening remarks, we never know which quarter it's going to happen in. Right. It's certainly within expectations.
spk08: Yeah, I think we all remember years where last week of the year you get surprised. So hopefully that's not the case. Not one would. Thank you for the color. Best of luck going forward. And I really do hope that you guys and everybody at Maristate are getting back on your feet after the recent storms.
spk03: Thank you, Matt.
spk01: We appreciate that.
spk05: Thanks, Matt.
spk01: And we'll now take our next question from Mark Hughes from Truist. Please go ahead.
spk06: Just a quick follow-up on the frequency question. Do you see it more in some areas as opposed to others? You know, when you think about your construction accounts that have been working pretty consistently with steady payroll through this period, do you even see them with frequency down? I know there's some phenomenon of... In volatile times, people are less likely to report maybe smaller claims. Just any more granularity on where you're seeing it, why you're seeing it, any mixed issues would be great.
spk03: Yeah, the why part of that question, Mark, is an excellent one that I wish I had clearer insight into. Why something doesn't happen, in particular in this quarter, why are the claim counts Why is it 18% lower when our insureds are working, they're reporting payrolls to us? To your point about industry mix, it was down across the board. So it was not like it was particular to a certain group or type of industry. I can only tell you what my speculation is and what my thoughts are about it. I think insureds are, we know our insureds are working. I believe we may be working in, you know, I think we're more conscious of safety. We're more conscious of our surroundings, maybe working at a different pace. I speculate, and this is, again, Janelle speculating, not that I have hard, fast data. You know, I speculate that we have probably fewer new workers in our industries right now. And, you know, we often talk about it's the newer workers that tend to drive up frequency. I think right now it's steady as you go. They're not adding staff. So maybe that's contributing to the lower claim counts. It's certainly happening, but it's hard for me to measure why something doesn't happen.
spk06: And I guess it wouldn't be the low severity claims that are not being reported. Otherwise, you would see that in your severity numbers, correct?
spk03: Right. Right. That's right. It's a very good point.
spk06: Yeah. Okay. All right. Thank you.
spk01: Thank you, Mark.
spk06: Thanks, Mark.
spk01: And we have no further questions. That does conclude our question and answer session. I would now like to turn the call back over to Janelle for any additional or closing remarks.
spk03: Thank you. It is great to speak to you today from our beloved Southwest Louisiana. There's nothing like two hurricanes and a global pandemic to serve as a reminder of the dedication of the AmeriSafe family. Thank you to all of our employees across the country for your commitment to our mission. Stay safe and stay well.
spk01: And with that, that does conclude today's call. Thank you for your participation. You may now disconnect.
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