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spk01: and welcome to the Amerisafe 2022 Second Quarter Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Vincent Bagliano, Chief Risk Officer. Please go ahead, sir.
spk05: Good morning. Welcome to the Amerisafe 2022 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 if the results of risks, uncertainties, and other factors, including factors discussed in today's earnings release, in the comments made during this call, and in the risk factors 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, Vincent, and good morning, everyone. Inflation continues to dominate financial news. Before discussing the quarter's results, I thought it would be helpful to discuss three ways inflation impacts workers' compensation industry and AmeriSafe. First, premium revenue is based on payroll. Wage growth brought about by a labor shortage and inflationary pressures is a potential tailwind for revenue as insured payrolls increase. AmeriSafe continues to see wage growth reported by our insureds in their monthly payroll reports, which ultimately leads to positive payroll audit premium. During the second quarter, payrolls grew 9.1% based on our analysis of those policies renewed during the quarter. Second, I believe workers' compensation medical cost inflation will rise above recent trends as the healthcare industry passes increased labor costs to end consumers. Industry-wide, this could lead to increased loss ratios and unfavorable development on open claims. AmeriSafe uses long-term averages in our reserve practices, and we work diligently to close claims, therefore limiting our exposure on open claims. Rising interest rates negatively impact fixed income portfolios of insurance carriers. The upside is that new investments can be made at much more attractive yields, growing investment income in future quarters. Neil will provide Amerisafe-specific metrics during his prepared remarks. To summarize, the impacts of inflation are far-reaching, but the three impacts I named directly influence key areas of Amerisafe and our financial outcomes. In the quarter, gross premiums written grew 1% over the prior year quarter, driven by robust audit and other premium adjustments. Higher than anticipated payrolls led to positive audit premiums for the policies written in the first quarter of 2021 and audited this quarter. Premiums for policies written this quarter was down 5.6%, principally driven by declines in loss costs. Our overall pricing for the quarter, as reflected by our ELCM, was a 151, down from 152 in the second quarter of 2021. Despite competition remaining strong and pricing pressures continuing, we retained 93.7% of the policies we offered renewal to. Continuing with losses, frequency trends for the current accident year remained favorable, with reported claim counts lower than prior accident years at six months. Coupled with severity within expectations, the loss ratio for the current accident year remained 71%. We had 10 claims with case incurred above a million dollars at the end of the quarter. This compares to three for the first six months of 2021, and 19 for the full year of 2021. Our history has shown there is no seasonality as to which quarters large losses occur. Further, favorable case development reduced the quarter's loss ratio by 13.6 percentage points. Accident years primarily attributing to the 9.6 million of favorable development were 2017, 2018, 2019, and 2020. This is the first quarter that we've adjusted the ultimate loss ratio for accident year 2020. I will now turn the call over to Neil to discuss expenses, investments, and capital management.
spk04: Thank you, Janelle, and good morning, everyone. For the second quarter of 2022, AmeriSafe reported net income of $6.1 million, or $0.32 per diluted share, compared with $23.8 million, or $1.23 per diluted share, in last year's second quarter. The decline in net income was primarily driven by declines in our equity securities compared with gains in our equity securities in last year's second quarter. Operating net income for the second quarter was 13.1 million or 68 cents per share, a decrease from 20.2 million or $1.4 per share in the second quarter of 2021. Revenues in the quarter were lower impacted by this year's $9.9 million decrease in unrealized gains on equity securities. Revenues came in at $68 million compared with $81.2 million last year. Net premiums earned increased 0.6% to $70.3 million compared with $69.9 million in last year's second quarter and a significant improvement from the trend in recent quarters. Turning to our investment portfolio, net investment income decreased 3.6% in the second quarter to $6.5 million, compared with $6.7 million in the second quarter of 2021. The decrease was driven by the continued impact of lower interest rates on fixed income securities as they work their way through the year-over-year comparisons. On a positive note, net investment income for the third and fourth quarter is expected to grow as the yield on our portfolio continues to increase. During the first six months of the year, our yield on new investments was approximately 100 basis points higher than the securities maturing or sold out of the portfolio. During the month of July, this difference was over 200 basis points. The tax equivalent yield on our investment portfolio was 2.86% at the end of the second quarter, up 26 basis points from one year ago. The pre-tax yield on the portfolio was 2.56% at the end of the quarter, also up from 2.30% one year ago. Realized gains for the portfolio on securities sold were $1.1 million in the quarter compared with $1.2 million during the second quarter of 2021. The investment portfolio remains high quality, carrying an average AA minus credit rating with a duration of 4.07% and with 62% in municipal bonds, which includes 15% in taxable munis, 20% in corporate bonds, 4% in U.S. treasuries and agencies, 6% in equity securities, and 8% in cash and other investments. Approximately 60% of our bond portfolio is comprised of held to maturity securities, and with the substantial rise in rates during the quarter, these bonds are now in a net unrealized loss position of $15.7 million at quarter end. As a reminder, these health and maturity securities are carried at amortized cost, and therefore unrealized gains or losses on these securities are not reflected in book value. Moving now to operating expenses, our total underwriting and other expenses were $19.9 million in the quarter, compared with $18.5 million in the second quarter of 2021. The increase was primarily due to higher loss-based insurance-related assessments during the quarter compared with last year. By category, the 2022 second quarter expenses included $6.8 million of salaries and benefits, $5.5 million in commissions, and $7.7 million of underwriting and other costs. As a result of the increase in expenses, our expense ratio for the quarter was 28.3%, compared with 26.4% in the second quarter of last year. Our tax rate for the quarter was 13.9% compared to 18.5% for last year's second quarter, largely due to a higher proportion of tax exempt income versus underwriting income in the quarter compared with last year. Return on equity for the second quarter of 2022 was 6.3%, operating ROE for the quarter was 13.3%. In capital management, the company repurchased shares during the quarter for a total of $3.6 million, leaving $19.3 million remaining on its share repurchase authorization as of June 30, 2022. Also in capital management, the company paid its regular quarterly cash dividend of $0.31 per share in the second quarter, and this quarter, The board declared a quarterly cash dividend of $0.31 per share payable on September 23, 2022 to shareholders of record as of September 9, 2022. And finally, just a couple of other items. Book value per share at June 30, 2022 was $19.95, down 3.2% from $20.62 at year end. Our statutory surplus was $300 million at quarter end up from $278 million at December 31st, 2021. And then finally, later today, we will be filing our Form 10-Q with the SEC after the market close. That concludes my remarks, and we would like to now open up the call for the question and answer session. Operator?
spk01: Thank you, sir. If you would like to ask a question, please 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. We will now take our first question from Matt Carletti from JMP. Please go ahead.
spk02: Hey, thanks. Good morning.
spk06: Good morning, Matt.
spk02: Good morning, Matt. Janelle, I appreciate your comments at the open about kind of the impacts of inflation on the industry and workers' comp, particularly workers' caught the comment about expectations for medical loss costs to rise and some of the important differences between AmeriSafe and the industry. Can you, particularly on the claims tail point, can you expand on that a little bit and just remind us how you view AmeriSafe's claims tail versus what maybe we more commonly think of for workers' comp as an industry?
spk06: Yeah, certainly. So, I'll talk about it in two ways. One is just number of claims reported to us. We've talked about on several calls now that we have not bounced back to pre-pandemic levels, and that still seems to be holding true. Our claim count, frequency count, number of claims reported is still lower at six months compared to prior accident years. So that's certainly benefiting us. To your point about what happens should there be a recession or how inflation impacts that, historically AmeriSafe has done pretty well. Our insured base, let me back up, our insured perform pretty well during recessions in terms of whether that increases activity or decreases claim activity. We haven't seen a large fluctuation in claim counts related to that in mild recessions. Certainly in the Great Recession, that was a different story. But when you think about it in terms of duration of claims, which is I think where you were headed with the question was, you know, AmeriSafe's average duration is somewhere less than three years. And I think that's probably a year and a half to, I haven't looked at the latest numbers of the industry for wide, but I would say that's probably a year and a half to two years less than industry-wide duration. So I think we are benefiting on the front end from just having fewer reported claims And then to your point on the duration side, we do a really good job of closing claims. Our open claim counts continue to drop. Our claim closure rates are very healthy. So we feel really good about that.
spk02: Great. That's very helpful. And then kind of keeping on the inflation point on wage inflation, are you seeing any notable trends, particularly by different industry focuses? You guys have some concentrations in particular industries, do any stick out as, you know, seeing, you know, notable trends versus, say, the rest of the book?
spk06: You know, Matt, the wage growth that we're seeing, and I'll kind of segregate that a little bit, but the wage growth we're seeing is across the board in our industry groups. And it sort of follows, it sort of tracks with what we see in terms of, you know, if you look at our mix of business, we're seeing it in construction and roofing particularly in trucking particularly, and lumber and logging. We've seen considerable wage growth. You know, we try to give a better, a clearer picture of where that's coming from versus new employees versus actual wage growth itself. And I think last quarter we were quite astonished and reported out that for policies that reported payrolls in that quarter, we saw actual wage growth of 7.3%. And we didn't know if that was, you know, a blip or a trend. And I'm happy to say it was 6.1% in the second quarter of 2022. So 7.3 last quarter, 6.1 this quarter in just wage growth. The other side of that is employee count. So last quarter, that was 1.9%. This quarter, 2.9%. So still not large amounts of growth coming from new employees, which as you know, is our preference. And that, again, to your question about industry-specific, it seems to be pretty consistent across our industry groups.
spk02: Great. That's very helpful. Last one, just housekeeping. You always seem to tell it, and I always seem to miss it. What was the ELCM in the order?
spk06: Awesome.
spk02: Great. Thank you for all the answers. Appreciate it.
spk06: Thank you, Matt. Thanks, Matt.
spk01: We will now take our next question from Mark Hughes from Trust. Please go ahead.
spk03: Yeah, thank you. Good morning.
spk01: Good morning, Mark.
spk03: The NCCI lost cost number, if you put that in the release, I didn't see it. Do you happen to have that kind of looking at your footprint, so generally speaking, how that's trending?
spk06: Right. So for the second quarter, that was 10% decline. And I believe, I don't have the historical for me, 8.2, Neil, is that correct, for last quarter?
spk04: Yeah, and the NCCI put out a projection in May at their annual insurance symposium that they expect, NCCI expects loss costs to be down 7.5% for 2022. So we're seeing similar trends in our book of business, although, you know, we are high hazard. It's a slightly different book than all of NCCI's books.
spk03: So does the 10% represent where you got information in the second quarter, or does that? That's a great question.
spk06: So the 10% represents of the loss cost declines that were effective in the quarter. For all the states that had loss cost declines effective that quarter, the decline was 10%.
spk03: So that's kind of a sample. Right. You have to do maybe rolling four quarters to get the... at least the country as a whole. So this is the latest information, but it may be skewed.
spk06: Right. So this is why Neil was saying NCCI projects overall 7.5%. Yeah. Yeah. Okay.
spk03: That's still a pretty big number, the 10%. It is. Yeah. Anything you can say about 2020, recognizing this is the first Court, are you taking a look at it? Do you look at the whole 2020 or just kind of the early 2020 policies at this point? And then in either case, what do you see?
spk06: No, we look at the accident year as a whole for 2020. So if you're, it's short history, but remembering 2020 claim counts dropped for the industry as a whole. Same for AmeriSafe. Severity was within expectations. As you know, we always try to measure, given the severity of the claims that we have, we like to let those age a little bit and get solid ground on where people are, how we're feeling about medical outcomes and long-term outlooks for particular claims, hence this being the first quarter for us to adjust kind of consistent with our pattern.
spk03: Yeah. And I think the 2020 is anomalous in terms of the claims count drop, should we assume that it's going to be pretty fruitful as you evaluate that accident year?
spk06: Time will tell. Time will tell. If you harken back to 2020, one of the concerns for the industry and AmeriSafe was the impact of COVID, and not necessarily just the number of claims reported for COVID, but how that was going to impact medical outcomes even for non-COVID related claims. I'm going to knock on wood here and say so far, it doesn't seem to be that impactful other than the stress that it put on the healthcare industry as a whole, which obviously everyone's feeling right now or is beginning to feel right now. I think as far as COVID specific claims, we had less than 40 reported to us. From that aspect, we felt really good about 2020.
spk03: Yeah. On medical inflation, how much of that are you actually seeing in your book, or you're just anticipating?
spk06: We're anticipating. We're anticipating. Certainly, we've talked about it on the last few calls, what we're seeing and everyone's experiencing in terms of just nursing costs and home health. But no, I don't have any clear metrics in our book. It's just something that we're anticipating, trying to be in front of. what we think will be a trend impacting, you know, a large liability on our balance sheet or the industry's balance sheet. I think AmeriSafe knows better about it simply because we close claims.
spk03: Yeah, I guess it doesn't help having the NCCI do the 10% decline in the rearview mirror. You're anticipating inflation.
spk06: I could not agree more, Mark.
spk03: Yeah, yeah. I guess If everybody wised up and competition eased up a bit, then that would be good, but it doesn't sound like that's the case either. Is that fair?
spk06: You know what? Absolutely. I don't know if you want to say wised up. I think, you know, NCCI is very data-driven. They're using what they're seeing in the data. I think people, carriers, are more anticipating what's to come. I mean, even if you look at the NCCI reports and you look at accident year 2021 you know the industry reported a combined ratio of 102. NCCI thinks ultimately that's not going to be a 102 but I think that's the difference between what carriers are experiencing and anticipating experiencing and reflecting in their pricing versus what's actually shown up in the data thus far yeah yeah um how about the audit premium um I think uh
spk03: you're taking into account the first quarter of 2021 and folks were still pretty conservative on their payrolls. Is that a dynamic that's going to continue for the next several quarters? Is there some reason why it shouldn't or what's going on?
spk06: I don't have, I don't have a crystal ball, but I would, I would think we would continue to see positive payroll goes for the next few quarters going. Yeah. If you think just to your point, If you think about where we were, the economy was, where our insurers were, first quarter of 2021 and playing that forward, the economy was still pretty robust. Our insurers were working. I don't think they anticipated the inflationary pressures that I believe for us in terms of a tailwind and audit premium.
spk03: Yeah, and that's still... the predicate for that is still going through today that the inflation is coming in pretty hot, you know, to your point about the six, 7% growth in wages, probably more than what folks had anticipated, you know, just a few months ago.
spk06: Right.
spk03: We'll make that an editorial comment, but I presume you wouldn't disagree with any of that.
spk06: I don't. I don't. I mean, I saw the headline today in the Wall Street Journal about a near record pace in terms of wage growth and benefit growth in the quarter.
spk03: Yeah. Yeah. Well, the funny headline, you know, the Fed doesn't like that. People are making too much money. We better stop that. OK. All right. I think I am good there. Appreciate all the answers.
spk06: Thank you, Mark.
spk01: Appreciate it.
spk03: Thanks, Mark.
spk01: It appears there are no further questions at this time. I would like to turn the conference back to Janelle Frost for any additional or closing remarks.
spk06: Thank you for joining us today. I want to take this opportunity to congratulate the AmeriSafe team on being named towards top 50 P&C carriers for the 14th consecutive year. Honors such as this only happen because of your dedication to serving our stakeholders. Thank you for joining us today.
spk01: This concludes today's call. Thanks for your participation. You may now disconnect.
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