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spk05: ladies and gentlemen, and welcome to the AmeriSafe 2021 Second Quarter Earnings Conference Call. Today's conference is being recorded. At this time, I've turned the conference over to Catherine Shirley, Chief Administrative Officer. Please go ahead.
spk01: Good morning. Welcome to the AmeriSafe 2021 Second 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 risk, uncertainties, and other factors including factors 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 statement. I will now turn the call over to Janelle Frost, AmeriSafe's President and CEO.
spk06: Thank you, Catherine, and good morning, everyone. I generally begin these calls with an update on the workers' compensation market. This quarter, there are no substantial changes in the market for which to provide an update. Approved loss cost decreases are averaging in mid-single digits, and competition is strong. As for AmeriSafe, our combined ratio of 74.4% for the quarter resulted from favorable case development from accident years 2019 and prior and a competitive expense ratio. Our long view approach to underwriting discipline and claims management continue to produce underwriting margins above industry levels. We are focused on remaining competitive and disciplined in our underwriting. In the quarter, this resulted in flat policy count with pricing down from the prior year quarter. Our ELCM was a 152. New business binds in the quarter were less than the prior year quarter but we had strong renewal retention of 93.9%. Combined, premium for policies written in the quarter was down 8.9%, with average loss costs down 6.5%. Audit premium in the quarter remained positive, despite that the audited policy period covered the full impact of the COVID-19 pandemic. We view this as a strong economic sign for our insurers and their respective industries. In total, gross premiums written were down 8.2% from the prior year quarter. Turning to losses, we experienced favorable case development in the quarter from accident years 2015 through 2019. This favorable case development comes from our focus on injured workers' medical care and their potential to return to work starting from the first report of injury until the claim is settled. Experience in reserving and handling claims by our claims staff is one of the many differentiators for AmeriSafe. As a reminder, our field case managers on average handle less than 50 indemnity claims. This is well below industry averages and allows for extensive claims management. This quarter, that focus decreased prior accident year losses incurred by $17.9 million, or 25.6 basis points. That same experience and consistency also contributed to our loss estimate for the current accident year of 72%. Frequency for the current accident year returned to pre-pandemic levels as expected. We do not know if the Delta variant surge will impact claim counts later in the year. Severity for the current accident year was also within our expectations. The pandemic did not materially impact severity in our book of business. We also refer to the number of large claims as a measure of severity. At the end of the second quarter, we had three claims with case incurred over a million dollars. The timing of when these claims occur can be random, so I offer as comparison 18 claims reported at the end of 2020 and 16 claims reported at the end of 2019. I will now turn the call over to Neal to discuss investments, expenses, and capital.
spk02: Neal? Thank you, Janelle, and good morning, everyone. For the second quarter of 2021, AmeriSafe reported net income of $23.8 million or $1.23 per diluted share compared with $23.9 million or $1.24 per diluted share in last year's second quarter. Operating net income for the second quarter was $20.2 million or $1.04 per share, an increase of 4 cents from the second quarter of 2020. Revenues in the quarter decreased to $81.2 million compared with $89.1 million in the second quarter of 2020. Net premiums earned decreased 8% to $69.9 million when compared to last year's second quarter. Turning to our investment portfolio, net investment income decreased 8.1% in the second quarter to $6.7 million, compared with $7.3 million in the second quarter of 2020. The decrease was driven by lower interest rates on fixed income securities. The tax equivalent yield on our investment portfolio was 2.60% at the end of the second quarter. The pre-tax yield on the portfolio was 2.30% at the end of the quarter, down from 2.55% one year ago. Realized gains for the portfolio on securities sold during the quarter were 1.2 million, compared with 163,000 during the second quarter of 2020. The investment portfolio is high quality, carrying an average AA minus credit rating with a duration of 3.67 and with 63% in municipal bonds, which includes 14% in taxable munis, 20% in corporate bonds, 7% in U.S. Treasuries and agencies, 5% in equity securities, and 5% in cash and other investments. Approximately 60% of our bond portfolio is comprised of held to maturity securities, which were in a net unrealized gain position of $31.2 million at quarter end. These unrealized gains are not reflected in our book value, as these bonds are carried at amortized costs. Moving now to operating expenses, our total underwriting and other expenses were $18.5 million in the quarter, compared with $21.1 million in the second quarter of 2020. The decrease was largely due to lower loss-based and premium-based insurance-related assessments. By category, the 2021 second quarter expenses included $6.8 million of salaries and benefits, $5.3 million in commissions, and $6.3 million of underwriting and other costs. As a result of the favorable decline in expenses, our expense ratio for the quarter was 26.4% compared with 27.8% in the second quarter 2020. Our effective tax rate for the quarter was 18.5%, the same rate as in last year's second quarter. Return on equity for the second quarter was strong at 20.8% compared to 21.3% for the second quarter of 2020 when the stock and bond markets recovered from the pandemic. Operating ROE for the quarter was 18.3%. In capital management, our company paid its regular quarterly cash dividend of 29 cents per share in the second quarter. This quarter, the board declared a quarterly cash dividend of 29 cents per share payable on September 24th, 2021 to shareholders of record as of September 10th, 2021. Our company continues to generate significant amounts of capital beyond that needed for our ongoing operations. Our current operating leverage, measured by net written premiums to gap equity, that ratio is 0.62 times. Our target for this ratio is 1.1 times, and we will continue to manage capital to work towards that long-term target. And finally, just a few other items to note. Book value per share at June 30, 2021 was $24.19, up 6.6% from $22.70 at year-end. Our statutory surplus was $407 million at quarter-end, up from $366 million at December 31, 2020. And lastly, we plan to file our Form 10-Q with the SEC tomorrow after the market close. That concludes my remarks, and we would now like to open the call-up for the question-and-answer session. Operator?
spk05: Thank you. Ladies and gentlemen, if you'd like to ask a question, you may signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, please press star 1 to ask a question. We'll pause a moment to give everyone an opportunity to signal for questions. We'll take our first question from Mark Hughes with Truist. Please go ahead.
spk04: Yeah, thank you. Good morning, Janelle. Good morning, Neil.
spk00: Good morning, Mark.
spk04: Janelle, did you give the ELCM? I seem to have missed it again.
spk06: I did. 152, Mark.
spk04: And then in thinking back on last quarter, looking back at my note then, you seem to be fairly upbeat about the prospects for new business, potentially growth. The top line decline was a little bit less last quarter. Can you talk about what you might have seen between then and, you know, how the second quarter turned out? You know, kind of the down high single digits is where you've been for some time now, but there seem to be some green shoots perhaps. What do you see?
spk06: Yeah, you know, that's a great question, Mark. Certainly, one quarter does not a trend make. We were, and, you know, I remain optimistic in terms of, I think, as a whole, vaccination rollouts do provide a level of optimism, not only for public health, but for the economy. On the last quarter's call, we talked about the infrastructure bill. I know there's headlines about that today, that it seems to be making some progress. I haven't seen any real changes in the underlying metric so certainly there are things within that bill that we believe will be beneficial to Amerisafe you know 110 billion on roads and bridges 65 billion on broadband I think there's even maybe 17 billion or so on ports all things that we think could fall within Amerisafe's wheelhouse in terms of industries that we ensure could be beneficial to small to mid-sized employers so that level of optimism really hasn't I don't I don't feel like has shifted from first quarter to second quarters certainly we like everyone else in the country is concerned about the Delta variant and the surge there both from a public health standpoint and what it could mean to the industry you know I think the industry fared better than we hoped we would, you know, better than anticipated early on in the pandemic. So, uh, I think, uh, we don't see the Delta variant for at least from an industry wide or from the business side of things, hopefully not being that impactful, but again, certainly health concerns. Uh, we also, you know, there was, I believe some optimism about getting the economy upstart, you know, getting the economy started up and running agents being back out in the field. creating efficiencies in the pipeline. I don't know that that deteriorated all that much from first quarter to second quarter, but we certainly were not able to grow policy count, which we were able to do in the first quarter. We did not do that in the second quarter. I don't know that there's a trend that I would point to there in terms of something that we saw a shift in the market. That wasn't the case. The level of competition has remained the same. You know, we don't see – I mean, anecdotally, we may see something that we think is irrational, but not, you know, throughout the marketplace, irrational pricing. So, no, I don't view that as a trend. That's a very long answer, too. I think a simple question. I apologize.
spk04: Yeah, no, that's very helpful. How about the 2019 accident year? Was this the first quarter that you drew from 2019? Yes.
spk06: is it is enough I have those numbers here so 2019 was 4.5 million 2018 was 4 million 2017 was 4.4 million 2016 was 2.3 million and then prior to that was 2.7 million but this was the first quarter that we drew from 2019 and You know, and I look at the industry-wide numbers that were published, you know, in May, I guess, by NCCI, but, you know, even in that data, you saw deterioration from 19 to 20. So, you know, if you recall, there was, they reported numbers showed deterioration calendar year and accident year, deterioration from 18 to 19, and saw the same thing going from 19 to 20, both on a calendar year basis and an accident year basis. So, the workers' compensation industry as a whole is showing some deterioration in that experience year over year, both calendar year and accident year. So at AmeriSafe, we are going in the opposite direction of that.
spk04: You have, by chance, do you have the, when you first opened the 2018 accident year, I don't know if it was in 2Q of last year, but your first look at it. If it was $4.5 million for the 2019 and its first go, I don't know if I'm trying to read too much into it. I'm just sort of curious, when you first looked at 2018, how did it look?
spk06: That's a great question. I don't have that off the top of my head. I apologize.
spk04: Yeah, that's all right. It's probably not really a good data... Probably not relevant, probably just too much volatility. And just to be clear, the three large claims over a million, that was year to date. I think it was one in the first quarter.
spk06: That's correct. That's correct.
spk04: And then a final question. There was some discussion last quarter about the potential wage inflation maybe being helpful when you look at, well, maybe I'll combine this into two questions. When you look at renewal premium, how is that? Are you seeing any impact of potential wage inflation? And then secondly, you've talked about the next job being important for a lot of your, say, construction customers. How do you see that now?
spk06: Yeah, so I'll speak to wage inflation first. So we did see a payroll increase of about 2.9%. And it's sort of 80-20 in terms of 80% of that was wage inflation, 20% of that being new employees. So we feel really confident in those numbers. And it really pretty much was across our industry groups with the exception of oil and gas, which I don't think surprises anyone, and that's a very small portion of our book. So that happened in the second – we saw that in the second quarter. To your question about will the next job be there, we're keeping a close eye on the supply chain, right? Because I do think there are capital expenditures that are ready to be funded, but there may be some delays in terms of the supply chain and everything that has to happen along the way. So we're keeping our eye on that. On the flip side of that, we insure the lumber industry, and that was a good industry for us in the second quarter. So we saw... increased flow from the lumber industry in the second quarter.
spk02: Mark, on your question about renewal retention, our policy retention for the quarter was strong at 93.9% for those that we offered renewal, and that's compared to 93.7% last year in the same quarter. So it tends to be running fairly strong in that 93% to 94% pretty much for the last several years, people staying with us once they understand the value of AmeriSafe.
spk05: very good thank you thank you mark ladies and gentlemen as a reminder star one for questions or comments please star one we'll take our next question from matt carletti with jmp please go ahead hey good morning chanel good morning neil good morning matt uh mark mark stole most of my questions um
spk03: You had some good ones. Just want to follow up on kind of that last point. Payroll inflation was a topic I wanted to talk about. Can you help us a little bit with the mechanics of kind of timing in terms of if you were to see it right now, I'm thinking more actual wage inflation as opposed to the number of jobs increasing. So just the kind of what's been talked a lot in the market in terms of just wages going up, you Have you seen much evidence of that? I think you kind of answered that already. And secondly, would you really expect to yet if it's happening? Or is that more of a function that will really get caught on the audits as the policies wrap up in the months following?
spk06: Yeah, I think you're thinking about it the right way, Matt. I think the way we would see it coming through in the premium dollars, obviously for our renewal, but would be in the audits. Now, I guess On a new business side, if they're estimating that their payrolls are going to be higher, that would come in in terms of new business premium, whichever quarter we write it in. But certainly for the larger portion of our book, you're absolutely right. That would not really be reflected in premium dollars until that policy was audited 18 months after the effective date.
spk03: Got it. Okay. I just want to make sure I understand that correctly. Great. Well, that's all I got. I admit the ELCM as well for what it's worth. So thank you.
spk06: I said it too early. People were still dialing in.
spk03: Well, congrats on another nice quarter and we'll talk soon.
spk06: Thank you, Matt. Appreciate it.
spk03: Thanks, Matt.
spk05: Ladies and gentlemen, this does conclude today's question and answer session. I would like to turn the conference back to Janelle Frost for any additional or closing remarks.
spk06: What a difference a few months can make. It has just been three short months ago I spoke of the optimism for public health and the economy due to vaccination rollouts. And now we're facing another COVID surge and uncertainty is again at the forefront of economic news. I believe the industries and employers we insure fared well economically in 2020 and should continue to do so. In the meantime, please stay safe and well. Thank you for joining us today.
spk05: Ladies and gentlemen, this does conclude today's conference. We appreciate your participation. You may now disconnect.
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