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spk05: Please stand by. We are about to begin. Good day and welcome to the AmeriSafe 2023 Second Quarter Earnings Call. Today's conference is being recorded. At this time, I'd like to hand the call over to Catherine Shirley. Please go ahead.
spk02: Good morning. Welcome to the AmeriSafe 2023 Second Quarter Investor Call. If you have not received the earnings release, it is available on our website at 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 the earnings release, in the comments made during today's call, and in the risk factors 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 statements. I will now turn the call over to Janelle Frost, AmeriSafe's President and CEO.
spk06: Thank you, Katherine, and good morning, everyone. The state of the workers' compensation market overall remains profitable, despite continued rate softening. The line is reporting an industry-wide combined ratio below 100 percent. Reserves remain redundant, and approved loss-cost declines are expected to continue. Amerisafe is a disciplined underwriter in the high-hazard workers' compensation market that has demonstrated the ability to maintain strong margins throughout many market cycles. In the second quarter, we reported a combined ratio of 85.4% and a return on average equity of 18.6%. During the quarter, our top line decreased 3.7%, driven by continued rate declines and wage inflation slightly slowing when compared with a strong year-over-year growth in the second quarter of 2022. We continue to see strong retention in policies for which we offer renewal, with 93% retention for the second quarter, largely in line with the recent experience despite continued competition. As we look ahead, competitive pressures and rate declines are expected to remain a headwind, offset by strong payrolls. Moving to losses, the current accident year loss ratio remained a steady 71%. During the quarter, our claims handling practices drove better than expected outcomes, resulting in favorable prior period development of 10.9 million, or 16.7 loss ratio points. These reserves were primarily released from accident years 2018 through 2021. As it relates to loss trends, frequency and severity are both in line with our expectations, trending slightly lower than compared to the previous accident year at six months. As stated last quarter, we continue to expect medical inflation to increase as the year progresses and reflect these trends in our setting case reserves. Our balance sheet is conservatively positioned, roughly $960 million in investments and cash. a solid reserve position, and no outstanding debt. We expect our market dynamics to remain challenging. However, given our long tenure of experience through market cycles, we are well positioned to retain our policyholders and attract business while delivering robust returns to our shareholders. Finally, I'd also like to highlight AmeriSafe's inclusion in the Ward 50 top-performing property and casualty companies for the 15th consecutive year. This recognition is a testament to our employees' expertise in the high-hazard workers' compensation niche, resulting in financial strength and stability of our company. With that, I'll turn the call over to Andy to discuss the financials.
spk01: Thank you, Janelle, and good morning to everyone. For the second quarter of 2023, AmeriSafe reported net income of $15.6 million or $0.81 per diluted share and operating net income of $14 million or $0.73 per diluted share. This surpasses the second quarter of 2022 net income of 6.1 million or 32 cents per diluted share and operating net income of 13.1 million or 68 cents per diluted share. Net income was higher primarily driven by gains in our equity securities as compared to losses in the second quarter of 2022. Gross written premiums were $71.7 million in the quarter as compared to $74.5 million in the second quarter of 2022, a decrease of 3.7% on a year-over-year basis. During the quarter, voluntary premium decreased 2.3% primarily due to continued rate pressure. Payroll audit and related premium adjustments decreased by $800,000 for the second quarter of 2023 as compared to the second quarter of 2022. However, payroll audits standalone increased by $200,000 for the quarter as compared to the prior year. While audit premium remains strong, we are seeing some leveling off in the incremental growth due to the lower wage growth. Ceded premiums increased $1.2 million for the quarter and $2.9 million for the first six months of 2023 as compared to the second quarter of 2022, primarily due to costs related to additional reinsurance coverage. Turning to our investment portfolio. In the second quarter, net investment income increased 19.1% to $7.7 million from $6.5 million in the prior year. The increase was driven by higher yields on cash as well as higher reinvestment rates on fixed maturity securities. For the quarter, yield on new investments increased approximately 260 basis points, driving our tax-equivalent book yield to 3.62%, or 76 basis points higher than the second quarter of 2022. AmeriSafe's investment portfolio is high quality, carrying an average AA minus credit rating with a duration of 3.9 years. The composition of the portfolio is 57% in municipal bonds, 28% in corporate bonds, 3% in U.S. Treasuries and agencies, 7% in equity securities, and 5% in cash and other investments. Approximately 57% of our bond portfolio is comprised of health and maturity securities, and with the moderate increase in rates during the quarter, we resulted in a net unrealized position of 21 million. As a reminder, these health and maturity securities are carried at amortized costs and therefore unrealized gains or losses on these securities are not reflected in the book value. Our total underwriting and other expenses were 20 million in the quarter, largely in line with the prior year, resulting in an expense ratio of 30.4 as compared with 28.3 in the second quarter of 2022. Despite the dollar level of expenses remaining flat, the expense ratio increased due to a lower level of net earned premiums. Our tax rate was 20.1% compared to 13.9% for last year's second quarter, largely due to low proportion of tax-exempt income versus underwriting income in the quarter. Our capital position is strong with a high-quality balance sheet, solid loss reserve position, and conservative investment portfolio. Our company paid its regular quarterly cash dividend of $0.34 per share in the second quarter. Earlier this week, the Board declared for the third quarter a quarterly cash dividend of $0.34 per share payable on September 22, 2023 to shareholders of record as of September 8, 2023. And finally, just a couple of other topics. Book value per share at June 30, 2023 was $17.76 up 7.2% from 1657 at December 31st, 2022, and an ROE of 18.6%. Our statutory surplus was $284 million at quarter end, up from $270.1 million at March 31st, 2023, and $252.5 million at December 31st, 2022. And finally, later today we will be filing our Form 10-Q with the SEC after market close. With that, I would like to open the call for the question and answer portion of the call. Operator?
spk05: Thank you. 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. Again, press star 1 to ask a question. We'll pause just for a moment to allow everyone an opportunity to signal. And we will now take our first question from Matt Carletti with JMP. Please go ahead.
spk03: Thanks. Good morning.
spk05: Good morning, Matt.
spk03: Chanel, I was hoping you talked a little bit about wage inflation in your opening comments, and I was hoping maybe you could dive in a little deeper there. I'd be curious just kind of how those trends have evolved over kind of the past several quarters. Are there particular areas in your book where it's stronger versus weaker, or is it pretty uniform across, you know, different, you know, insureds, and just kind of your outlook, you know, for how that might impact, you know, your results going forward.
spk06: Right. I mean, I think, Matt, the last few quarters we've kind of been giving what it's looking like as payrolls are coming in the door, being reported coming in the door, which I guess in some way bodes for a future audit premium. So we continue to see wage growth, not at probably the record levels we have been seeing probably the last few quarters. I think things have moderated to some degree. So I think the last, you know, starting in third quarter of 2022, we had double-digit payroll growth, and most of that was wages, right, wage growth. I think the last few quarters, it was averaging around 8%. For wage growth itself, not counting new employees, in this quarter was closer to 5%. So still a very healthy growth number, about equivalent to what we're seeing on a national average. I think the latest data point I saw for the national was, I think, 5.5%. So very much in line with that in terms of wage growth. When I look at it by industry, obviously construction being the largest part of our business, Construction did show some slowing in the wage growth, but still very healthy numbers. If I look at BLS data or Bureau Economic Analysis data, construction spending is still up. The labor market for construction is still up. Layoffs were down in the last sequential data point. So I think things bode well for that particular industry group, which is over 40% of our book of business. new employee count it was very steady from the prior quarters we've been averaging somewhere around two percent for new employees and that's what it was for this quarter as well so we're not really seeing additional workforce perfect that's super helpful um and then maybe shifting gears a little bit um could you just you have
spk03: update us on kind of how you might be thinking about capital management as you come into the end of the year. Top line has been kind of flattish year to date. You continue to throw off really good returns. Just how should we think about that as, you know, going forward?
spk06: Yeah, absolutely. You know, our board actively talks about capital management each and every quarter. Certainly, as you mentioned, we're putting off really good returns this year. Our stance the last few years has been to return that capital to shareholders. The year is looking great this year, so I don't really see a change in that strategy where I sit today at six months. Obviously, we would like to see some organic growth. We think there's some opportunity for that to happen. We saw an increase in policy count this quarter, even though the premium dollars didn't quite even out the way we would like them to have. due to loss cost changes, I do feel like we've gained a little bit of momentum in terms of how we're approaching new business. But again, here we are at six months. I don't see that really impacting our ability to pay a special dividend between now and year end.
spk03: Okay, perfect. And then last quick one, and I apologize, I probably missed it in your opening comments, just the ELCM for the quarter.
spk06: Oh, 146.
spk03: Wonderful. All right. Thank you very much. Appreciate it.
spk05: Thank you, Matt. And as another reminder, it is star one. If you would like to ask a question, please press star one to ask a question. And we'll go ahead and take our next question from Mark Hughes with Truist. Please go ahead.
spk04: Yeah, thank you. Good morning.
spk05: Good morning, Mark.
spk04: Good morning, Janelle. The audit premium in the quarter, you said, kind of broke that out in a little more detail, but I'm not sure that I could put the pieces together properly. I think your audit premium in the second quarter of last year was 5.5 million. What's the number that I should use for the second quarter? Comparative, 4.8. 4.8, okay. Very good. premium, you mentioned it was up a little bit because of reinsurance. Is this the kind of level we should expect going forward? It is.
spk06: Yeah, great question, Mark. As you may recall, we have a structured product that we call our working layer products, our 8 million excess of 2, which renewed this year. In addition to that 8x of 2 and all the Finite details are in the 10K. We added a 10X of 10 layer, which also extended our topside 20X of 80. So we have more coverage there, and there's obviously dollars associated with that. But yeah, the run rate you see this quarter would be an accurate run rate.
spk04: Yeah, yeah. Then, Andy, the expense ratio was, as you said, dollars were relatively steady. ratio is a little higher were there any uh assessments or anything like that that influenced the number no actually there were no assessments this quarter that would have affected our they were flat okay so is the uh kind of expenses 20 20.5 million is that a good baseline perhaps on a go forward i would say yes
spk01: I mean, we are, you know, again, the difference between the two years was $50,000. So the $20 million, $20.5 million, I think is correct from a run rate perspective.
spk04: Yeah. Okay. And then, Janelle, you had mentioned the idea of potentially pursuing partnerships with other carriers. Any update on that or any other? kind of marketing or new business initiatives that you can speak to at this point?
spk06: Sure. No update as in, hey, this is what we've done. We are still exploring avenues. You know, I'm very excited. You're taking my closing remarks. I'm very excited that we've added a new chief sales officer. Ray Wise is going to be joining the company. So we're really excited to have Ray on board. He has a tremendous amount of experience, particularly in workers' compensation. We've been talking about our agent relationships and how to, I'm going to say, widen that pipeline. That doesn't necessarily mean more agents. It just means being more efficient and more effective with our agent force. I think Ray is going to do a great job for us in that regard.
spk04: On the medical inflation front, you pointed out that it's been as expected. You anticipate that it or at least you're reserving with the idea that it will accelerate as the time goes by. Any new signs of that? Any actual data points? Anything you're seeing in the claim trends?
spk06: No, I mean, you know, other than the pockets that we've talked about numerous times on these calls, just pockets here and there. I know I've had this conversation with you, Mark. You know, one of our concerns is, all the things that are happening in the healthcare industry, I think inflation is going to find its way into our costs in one of two ways. Either we're going to see updated fee schedules or updated expenses directly related to our reimbursement rates for medical care, or we're going to start seeing a constriction of the supply. In prior calls, I talked about home health. That's an example of where there's just less supply available. And I think if I am of the opinion, and this is the world according to Janelle, I am of the opinion if providers reach a point where their reimbursement rates for workers' compensation is not advantageous to them as a medical care provider, they will limit or constrict their availability for workers' comp carriers. That's a fear I think a lot of people in the industry have. Not that we've seen it widespread, but Ultimately, we know all the increased labor costs that the medical community has incurred is going to work its way through the system one way or another. I mean, in any given worker's company, whether you're high hazard or not, you know, 50% to 60% of your costs are medical, specifically related to medical costs.
spk04: Yeah.
spk06: So, you know, using America as an example. I'm sorry. Go ahead.
spk04: No, no, you please keep going.
spk06: I was going to say using the merits of example is one of the things we really focus on, you know, is closing claims. So we've been fortunate this year, although claim counts are starting to come back. I think we still have this quarter, we still have 56 fewer claims reported than we did at second quarter last year. But our closing rates have been really good. So my open inventory, I have 275 claims less than I had second quarter last year. and over 100 fewer than I had even at year end, even though I'm adding reported claims. So we're really focused on closing those claims and getting them settled, sort of hedging against future medical costs, for lack of a better term. So not only reflecting it in our case reserves, but finding ways to reserve to close claims and settle claims to sort of limit that liability.
spk04: Yeah, yeah, exactly. Andy, what's a good tax rate going forward?
spk01: I would say the 19 and a half is a good tax rate. Okay.
spk04: All right. Great. Thank you very much.
spk05: Thank you, Mark.
spk04: Thank you.
spk05: And with that, that does conclude our question and answer session. I would like to hand the call back over to Janelle Frost for any additional or closing remarks.
spk06: Thank you. I would, as I said to Mark, I would like to officially welcome Ray Rice to Amerisafe and the leadership team. Ray has been appointed our chief sales officer. He has more than 30 years of experience in the industry. His background is driving results through customer experience, fits well with Amerisafe's model, and will play an integral role in the company moving forward. Thank you for joining us today.
spk05: And with that, that does conclude today's call. Thank you for your participation. You may now disconnect.
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