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spk01: Good day, everyone, and welcome to the AmeriSafe 2020 Fourth Quarter and Full Year Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Catherine Shirley, Chief Administrator Officer. Please go ahead.
spk02: Good morning. Welcome to the AmeriSafe 2020 Fourth Quarter Investor Call. If you have not received the earnings release, it is available on our website at www.amerisafe.com. This call is being recorded. A replay of today's call will be available. Details on how to access the replay are in the earnings release. During this call, we will be making forward-looking statements. These statements are based on current expectations and assumptions that are subject to various risks and uncertainties. Actual results may differ materially from the results expressed or implied in these statements if the underlying assumptions prove to be incorrect or as the results of risks, 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-Qs, and other reports and filings 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 Janelle Frost, AmeriSafe's president and CEO.
spk03: Thank you, Katherine, and good morning, everyone. It is my pleasure during this call to use the words looking back, and I emphasis on back, at 2020. The year presented us with a global health crisis, social unrest, political divisions, a competitive workers' compensation market, natural disasters, and an economic shutdown. The strength of the human spirit was tested as we were forced to interact and work differently. Looking back at 2020 for the industry, approved loss costs continued to decline. The industry experienced a decline of insured payrolls as unemployment in certain sectors dramatically increased. At the same time, there was significant drop in non-COVID-19 reported claims. The analysis of the impact of COVID-19 on the industry has only just begun. Taking account the many factors of 2020, NCCI anticipated a one percentage point deterioration in the industry's combined ratio through the third quarter. If the estimate is accurate, then workers' compensation will remain a profitable property and casualty line. This will keep competition robust in 2021. Looking back at 2020 for AmeriSafe, we successfully met the year's challenges through our employees' dedication to service and the strong foundation built over years of discipline in underwriting and claims management. The sectors we focus on were less impacted during the pandemic, with our insurers' high-hazard work deemed essential and much of the work taking place outdoors. As a result, the impact to the industry due to unemployment was less impactful to our book. For Amerisafe, audit premium in the quarter remained positive, and this included policy periods impacted by the pandemic. However, audit premium in the fourth quarter of 2020 was less robust than prior year's fourth quarter. Thus, audit premium combined with other adjustments decreased top line $2.8 million by comparison. Looking forward into 2021, the economic recovery in sectors we insure will be impactful to this component of premium. Also, premium for policies written in the quarter was down 7.9%. This decrease aligned with lost cost decreases averaging at 7.4%. Our ELCM for the quarter was a 157, down from 159 in the fourth quarter of 2019. I believe this drop in ELCM illustrates our commitment to remain competitive while remaining disciplined in a declining rate environment. Policy count was relatively flat, with strong retention of 94.4% for those policies for which we offered renewal. We continued to work with our agent network as pandemic-related disruptions hampered new business prospecting and policy count growth. During 2020, we implemented some county expansion and filed for additional pricing tiers in states to help achieve our goal of policy growth. Altogether, these various elements of premium resulted in gross premiums written decreasing 10.8% from the prior year quarter. Continuing to look back at 2020, AmeriSafe, like the industry, also saw fewer reported claims. However, our niche tends toward low-frequency, high-severity claims. The ultimate impact to claim severity due to the pandemic and the strain on the healthcare system is far from being known. As a result, we did not change our current accident year loss ratio of 72.5% in the fourth quarter. We also had significant favorable case development from accident years 2014 through 2018, which resulted in 17.9 million or 24 basis points of favorable prior year losses incurred. We continue to positively be surprised by the amount of favorable case reserve development we see across our accident years, including the more recent accident years. As we look forward to 2021, our initial pick for 2021 will be 72% down a half percentage point from accident year 2020. I'll now turn the call over to Neil to discuss expenses, investments, capital, and other financial metrics.
spk04: Thank you, Janelle. Good morning, everyone. For the fourth quarter of 2020, AmeriSafe reported net income of $28.5 million or $1.47 per diluted share compared with $34 million or $1.76 per diluted share in last year's fourth quarter. Operating net income was $23.6 million for the quarter or $1.22 per share. For the full year 2020, AmeriSafe produced net income of $86.6 million or $4.47 per share Operating net income for the full year 2020 was $82.4 million, or $4.25 per share, down just $6.6 million from last year, despite the considerable and unique challenges of 2020. Revenues in the quarter were down 4% to $88.2 million compared with the fourth quarter of 2019. Net premiums earned decreased 9.2% to $74.7 million when compared to last year's fourth quarter. For the full year, net premiums earned were lowered by 8.5%, totaling some $304.4 million. These premium trends were driven by the continued decline in workers' compensation loss costs in 2019 and 2020. Turning to investments, we saw a continuation of the impact of lower short-term yields, with net investment income down 10% in the fourth quarter, to $7.2 million compared with $8 million in the fourth quarter of 2019. Net investment income for the full year was down 9.6% to $29.4 million compared with $32.5 million in 2019, again due to the lower interest rate environment. The tax equivalent yield on our investment portfolio was 2.85% at year end. The pre-tax yield on the portfolio at year end was 2.53%. These rates are almost identical to the rates on the portfolio at the end of 2017 before the Federal Reserve began raising rates. There were no significant credit losses on any of the securities held in the portfolio during the quarter or for the full year of 2020. There were no significant realized gains or losses during the quarter or full year. Unrealized gains on our equity securities contributed $6.5 million to net income in the quarter and $4.2 million for the full year 2020. The investment portfolio is high quality, carrying an average AA rating with a current duration of 3.96, and the portfolio is composed of 68% in municipal bonds, including 15% in taxable municipal bonds, 14% in corporate bonds, 9% in U.S. treasuries and agencies, 4% in equities, and 5% in cash and short-term investments. Approximately 60% of our bond portfolio is comprised of held-to-maturity securities, which were in an overall net unrealized gain position of $36.5 million at year-end. These gains are not reflected in our year-end book value, as the bonds are carried at amortized costs. Moving now to operating expenses, our total underwriting and other expenses were $15.6 million in the quarter compared with $14.7 million in the fourth quarter of 2019. The increase in operating expenses was primarily due to last year's $3.5 million expense benefit in the fourth quarter due to the end of a multiple injury fund assessment. By category, The 2020 fourth quarter expenses included $6.4 million of salaries and benefits, $5.7 million of commissions, and $3.5 million of underwriting and other costs. Our expense ratio for the quarter was 20.9%, compared with 17.8% for the fourth quarter of 2019. For the full year of 2020, operating expenses decreased $2.4 million, or 3.3%, Recall that in the third quarter, we recognized a 5.6 million expense benefit as the result of a termination of a subsequent injury fund assessment. Our expense ratio for the full year as a result was 23.6%. Without the expense benefit mentioned previously, our expense ratio for the full year would have been 25.5%. Our tax rate for the fourth quarter was 20% and 19% for the full year. both lower than in 2019 as a result of a higher proportion of tax-exempt interest income on our investment portfolio. Return on average equity for the fourth quarter of 2020 was 24.8%, compared to 30.3% for the fourth quarter of 2019. For the full year, ROE was 19.9%, compared with 22.1% last year. Operating ROE for the quarter was 21.4%, and for the full year was 19.7%. And now to capital management. During the fourth quarter, the company paid its regular quarterly cash dividend of 27 cents per share, as well as an extraordinary dividend of $3.50 per share. This quarter, the Board of Directors declared a quarterly cash dividend of 29 cents per share, payable on March 26, 2021, to shareholders of record as of March 12, 2021, This represents a 7.4% increase in the regular quarterly dividend. And finally, just a few other items. Book value per share at December 31, 2020 was $22.70, up slightly compared with last year's $22.29 per share, and we paid out $4.58 per share in dividends to shareholders during the year. Our statutory surplus was $366 million at December 31, 2020, compared with $360 million at the end of 2019. And finally, we will be filing our Form 10-K with the SEC tomorrow after market close. That concludes my remarks, and we would now like to open the call up for the question and answer session. Operator?
spk01: Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speaker phone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star 1 to ask a question. We can go ahead and take our first question from Matt Carletti. Please go ahead.
spk08: Hey, thanks. Good morning.
spk01: Good morning, Matt.
spk08: Good morning, Matt. Janelle, I was hoping you could maybe just jump in a little bit deeper into what you're seeing in the competitive landscape. You know, when we look at some of the numbers out there, whether it be, you know, surveys and otherwise, while it's still certainly competitive, it looks like things are maybe normalizing a little bit in comp. What are you seeing in kind of your landscape? I mean, and obviously keeping in mind that, you know, that was a very happy to see the guidance for the accident-year loss ratio would at least imply to me that it's not getting too out of hand or at least, you know, consistent with favorable frequency severity trends you're seeing.
spk03: Yeah, I think your terminology of not getting too out of hand is probably a good way to summarize it, Matt. You know, competition hasn't really changed that much. It's still very competitive. But we're not seeing, I would not say we're seeing irrational competition either. I read the same things you've been reading about there's people hopeful or maybe have seen some rate increases. You know, I can say Amerisafe's not seeing that. I do think it's very state-focused. I think it's very, it depends on the hazard groups that you're underwriting if you're seeing more elasticity or less elasticity. But for Amerisafe, it's still the same level of competition we've been experiencing for over a year.
spk08: Great. And the other area I wanted to focus on was just the, maybe if you could peel back the onion a little bit on the the 8% decline in voluntary premiums. And really, I appreciate your comments about hopefully as the economy reopens, you should get a little bit of tailwind from that. Can you help us understand as we think about that top line, whether it be through payrolls or pricing or otherwise, is there any way that you can quantify or even just throw a dart at what the kind of COVID-related exposure headwind impact might have been in 2020. Thinking of that as something that could come back in 21, 22 as things normalize versus what might be more of a kind of competitive pricing impact on that number.
spk03: Yeah, yeah. So economic speculation by Janelle. I love it. Wonderful. That's something we think about. It's a great question, Matt. When you think about our major industries, I'll start with construction, for example. We were pleased early on in the pandemic that our insurers were working. They were reporting payrolls to us. But if you look at the construction industry as a whole and as part of the economy, certainly commercial construction has met with delays in 2020. I still hear the word delay, not postpone, so that gives me some hope that there could be some, I think your term was bounce back, some bounce back in that line, no question. Residential construction, we all see residential construction is booming, and while that might not impact my construction book in and of itself, I do ensure, happen to ensure, logging and lumber. So we saw positive trends in 2020, from the logging and lumber industry. Matter of fact, when the 10 case published, you'll see that actually grew as a percentage of our book from, let me see, from 7.8% to 9.3%. So that's strictly based on things that were happening in the economy in 19 and 20. So those are positives for us. Oil and gas, we all know what's happening there. So I imagine that will continue to shrink as a percentage of our book. Agriculture, I think, will have some bounce back. Certainly there was some delays in the pandemic related to the agricultural fields. Let me think of another. Trucking is another great example. You know, there's a lot of speculation about trucking because obviously there were a lot of goods being moved across this country in 2020. And it's funny, our trucking book doesn't seem to fluctuate as much as the other lines, maybe in some regards. And so I have to remind myself of who we insure, small to midsize employers. So these national carriers that are moving these goods across the country, yeah, they probably did see more of a boom in 2020 than we probably would have seen in our book. So again, if the economy picks up, I would expect I would hope to see an increase in even our trucking payrolls, because I don't think they were as resilient in 2020 as, say, national carriers or larger trucking carriers. Does that address your question?
spk08: No, that helps. I mean, I guess in terms of, would a way, I know it's a very rough kind of way to think about it, but numbers-wise, I mean, if we think about kind of some of the change in audit premium, full year 20 versus full year 19. I mean, is that, A, do you have those numbers? I know you're giving them by quarter. I just don't have them all in front of me for the full year. And is that a reasonable way to think about kind of maybe the magnitude of the impact?
spk03: Yeah, I think it is, Matt. It'll be interesting to see as we start comparing everything to 19 to 20 and 20 to 21 because 20 is just such an unusual year for a number of reasons, right? So it'll be interesting to see. The point is, our audit premiums, even in 2020, remain positive. So in other words, the premium from what we originally estimated at the beginning of the policy period to what it was at the end of the policy period was positive. So that was tremendous. That's a good sign for us. It was not as robust as it was in 2019. So we saw declines in, as you can imagine, we saw declines in construction. But we saw year-over-year increases in farm, logging lumber, even in the subset of roofing, even though that was, no, not in roofing. But we saw declines in trucking, we saw declines in construction. And I guess that's why I was pointing to, and again, economic outlooks according to Janelle, Pointing to we do think there's a capacity for some bounce back in those lines.
spk04: Hey, Matt, this is Neil Fuller. Just to give you those full year numbers, this is audit and other adjustments. We're positive 6.4 million in 2020, positive 12.3 million in 2019, and positive 7.3 million in 2018. Okay, great. That's very helpful.
spk08: Wonderful. Well, thank you for all the economic outlook and the color, and congrats on a really nice bottom line result in what I think for everybody is a very tough year.
spk03: Great. Thank you, Matt.
spk01: All right. Again, that is star one to ask a question. If you find your question has been answered, you may remove yourself from the queue by pressing star two. We'll go ahead and take our next question from Mark Hughes. Please go ahead.
spk06: Yeah, thank you. Good morning.
spk01: Good morning, Mark.
spk06: Janelle, when you think about accident year 2020, I think historically you've said you want to have about 36 months in the books before you start evaluating whether or not to take development. But with 2020, as I understand it, you know, it's a question of frequency, frequency is down meaningfully. So if you don't have the case reserves, if you're sitting on a lot of high DNR, presumably, will you not know a little bit more quickly whether or not those losses are going to develop as you've reserved for?
spk03: You know, Mark, we write... Our industry type, low frequency, high severity. So I don't want to say frequency is not important. Obviously, frequency is important. And there is no denying that we had fewer reported claims in 2020. Severity is where the question mark comes for us with 2020, in particular because of all the things that happened in calendar year 2020 with the pandemic and what that could mean on a go-forward basis. You know, we had 18 cases. severe claim, what we on these calls have been calling severe claims, claims over a million dollars. We had 16 at the end of 19 for accident year 19. So from a severity standpoint, 2020 severity was slightly up as we would have expected severity to be slightly up. So I don't know the unknown, the question mark for me, and to your point, do we know this sooner because of everything that happened in 2020? is what ultimately happens to the outcome of those claims. Because I do think there was a strain on the healthcare industry and how that's going to impact our claims experience going forward. I think we ended the year with 40% or so of the claims for 2020 were closed, so the other 60% still remaining open. How those are going to be impacted on a go-forward basis, because these are severe claims. They're not... you know, one and done, a couple of doctor appointments, a procedure, and I'm over with. These are the ones that have lasting effects over many years. So I am cautious to say that, yeah, we would be able to know sooner than in our prior experience based on the severity of our claims.
spk06: Understood. Is it possible, more likely for 2020 than after 12 months you may... be able to look at it and draw some firmer conclusions. I assume that's possible.
spk03: Well, yeah. As any accident year ages, we know more and more, right?
spk06: Yeah, yeah. Okay. And then, Neil, on the expense ratio, it seems pretty low this quarter. Am I missing something? If the full year was a 25-5, excluding the one-timers and this quarter was, what was it, 21. Were there any unusual items here or is this the new normal?
spk04: No, I would say there were some unusual items. You may recall that typically our fourth quarter expense ratio is a little bit lower than other quarters just because we accrue for assessments throughout the year and then if the states are not going to assess us, those typically come down in the fourth quarter. But we did also see decreases in compensation expense, commission expense, and in professional fees in the quarter. But I would look to that run rate of 25.5 for the full year as a guide going forward, because most of these were one time in nature. The 25.5, obviously, we also expect that, although we'll try to hold expenses in line with the decline in premiums, we would expect that the expense ratio would tend to trend upwards.
spk06: And then the dividends, have they been running about a point? I'm sorry, I don't have that right in front of me.
spk04: Yeah, the dividends have been running about a point. They've reached a high of 1.5 in the third quarter of 19. So they've been between a point and 1.3 points over the last five quarters.
spk05: Yeah.
spk06: And then, Janelle, thank you for the, I think, 7.4% decline in lost costs. Was that the ones you got in Q4, or was that for the year as a whole? And in any case, could you comment on kind of what you've been seeing lately in terms of those lost cost numbers as they have been coming out from NCCI?
spk03: Yeah, good question. Yeah, the 7.4 I quoted you was fourth quarter, the impact of fourth quarter 2020. So to recap, first quarter was 8.9, then 8.3, 7.8, and then 7.4. And we've been, the loss cost that we've been seeing come through, the approved loss cost we've been coming through is sort of mid-single digit-ish. So I think we talked about this on the last call. We anticipated and it looks like we're seeing a slowing of the decline, which we're happy to see.
spk06: And I think you point out that that's in the face of frequency, which was down meaningfully for you and for the industry as a whole.
spk03: Yeah, you know, it would be interesting to see how that works its way or if it works its way into rates, this anomaly that happened in 2020 with frequency. Yeah. It's going to be a great case study for someone.
spk06: Do I remember properly that they said they weren't going to pay much attention to 2020?
spk03: That's my understanding. Yeah, that's my understanding. But, you know, I think there's just so many still – Things we don't know yet, right? We haven't had to think about all the different impacts of a pandemic yet, but you're right. Word is, initial numbers that we're seeing, it doesn't seem to be, they're just going to throw it out and not really have that influential.
spk06: And if this kind of notional infrastructure spending ramps up, I think that's always over the horizon, but In times past where you have had infrastructure pushes, has that been meaningful for your business?
spk03: Yeah, it can be, particularly if it's like roads, bridges, those sort of things. But we believe it when we see it because it seems to come around every election cycle.
spk05: Yeah, exactly.
spk06: Okay, and then I'll just ask you, I think you've addressed this, but you've used the formulation about the your construction exposure, that it's the next job that is important. I think you said there haven't been cancellations. What do you feel about the next job?
spk03: Yeah, you know, it all hinges on does the economy bounce back? You know, the closer we get to vaccines being out there and people feeling better about the economic outlook, and willing to commit those capital dollars to projects, the better. But I think there's an overall optimism about people feel like we should be able to bounce back because we were on the precipice, right, pre-pandemic. So I don't know if we go back to that level, but I think the opportunities, I think we're all hoping the opportunities are going to be there.
spk06: Yeah, the precipice being the good precipice thing for... Yeah, you're exactly right.
spk03: I should have clarified. Good point, Mark.
spk05: Okay, thank you. Thank you.
spk01: All right, we'll go ahead and take our next question from Randy Beiner. Randy, please go ahead.
spk07: Oh, hey, good morning. Thanks. Good morning, Randy. Good morning, Randy. I... I guess my question is, and I apologize because I came in late, but I have one just detailed question, which is if you did share the ELCM. And then, you know, I guess kind of putting together what Matt and Mark are talking about, if you look at some of the other, you know, the bigger writers of work comp earlier this earnings season, everyone's kind of saying there's going to be this inflection in work comp. pricing, right? Because commercial lines has been firm, but workers' comp has been soft, and that's kind of, you know, reflected in the valuation and the performance of Mirasafe. But, frankly, when I listen to this whole conversation, I don't really see why I would think the rate environment's going to switch. So, ELCM is just kind of the numbers question, but, you know, any commentary on this notion of price turn, I would love to hear from you all, because, frankly, I just don't, it just doesn't seem like there's It ought to happen, I guess, but there's no real evidence.
spk03: Yeah, that's a nice way to look at it. To answer your ELC question 157, for fourth quarter of 2020 versus 159, fourth quarter of 2019. Here's what I'll say about what we're all reading about what's going to happen with the rates and is there going to be an inflection. We've been in this very prolonged soft market, and then 2020 happens. It adds a lot of unknowns. It has an economic impact. It has a payroll impact. It has just the livelihood of some sectors impact, right? So I think the things we've been reading, you really have to think about workers' comp as a whole, which includes main street business, hospitality, services, and then working its way up to the more hazardous classes that we underwrite. It is not one size fits all. And I keep going back to, and workers' comp is very much state regulated. So a rate environment, a pricing environment in one state does not mean the same rate environment, pricing environment in another state. So I think When you read these articles, and to your point, I think you said, in these larger carriers, I think it's a very wide swath of a lot of different factors. I can only speak to AmeriSafe's classes of business and AmeriSafe's book of business, and we're not seeing rate increases. Obviously, the approved loss costs that are coming in are still declines, but even in the competitive environment, those opportunity for rate increases are not there. It's still very, very competitive in the types of things that we underwrite. That, you know, I can certainly see where another carrier whose business is hospitality may be feeling differently about that. Because, again, I write low frequency high security. Yeah, if you write a business that is, very frequency-oriented, and that's where your profit margin's coming from, and that's where your losses incurred are coming from, that's a totally different animal than what happens at AmeriSafe, right? And they had this tremendous drop in frequency in 2020. Granted, hopefully it was an anomaly, and it's going to bounce back, and that's wonderful for them. But I think they think about the rate differently than I think about that rate. Does that Make sense to you?
spk07: Yeah, no, it does. But I guess across that whole spectrum of workers' comp, there just seems to be a lack of pain on claims. And, you know, that's what turns cycles. And so, you know, if it – you all have so much excess capital, and these special dividends are great, but, I mean, will you ever – would you ever take another look at how you're – I mean, you're waiting – you're kind of waiting for an opportunity with all your capital that just keeps not happening in workers' comp, if you know what I mean, right? I mean, you'd love to use the capital for a distressed book or buying the right business at the right price, but it keeps not happening. Is there any other way to kind of deploy more of your franchise from a capital perspective?
spk03: Yeah, you know, I do think we are working diligently to, and I kind of said this in our opening comments, working diligently with our agent network to find ways. Because let me tell you, they took a hit in 2020 as well. So find ways to get policy count growth. You know, that's sort of been our mantra throughout the soft market in terms of, okay, lost costs are what lost costs are. We feel like we're disciplined underwriting. We can write profitable business. But really trying to maintain and grow that policy count, I think, is important for us. And I do think there are ways that we can to make that happen, even in this soft market. Because, of course, we have the ability now of hindsight. You look back, the industry has been profitable. And Amerisafe has been profitable. So the opportunity is there. I agree with you about the industry hasn't seen the pain yet. I think 2020... it'll be interesting to see what the impact of 2020 is. Like, are we going to see that pain going forward? And I assume by pain, when I think of pain for the industry, I think of adverse development. I assume that's what you're talking about as well. You know, NCCI has already indicated, based on what they see, incrementally the combined ratio is going up from a percentage point. That's been happening over the last couple of years, right? So, It is, while it's not coming in the wow factor yet, it is incrementally getting there. So I can see where there's some optimism.
spk07: All right. I really appreciate the comments. Thanks. It was a great quarter.
spk03: Thank you, Randy. Thank you, Randy.
spk01: All right. It appears there are no further questions at this time. Ms. Frost, I'd like to turn the conference back to you for any additional or closing remarks.
spk03: Thank you. I recognize some of the challenges from 2020 continued into 2021. The pandemic is not over. We're still in a soft workers' compensation market. The economy has not recovered. Nevertheless, we are looking forward in 2021. I can do so because I'm part of an organization with a foundation supported by remarkable people, strong financials, and now the lessons learned over an unprecedented year. Thank you for joining us today.
spk01: This does conclude today's conference. Thank you all for your participation. You may now disconnect.
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