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Amerisafe Inc (AMSF 0.04%)
Q3Â 2019 Earnings Call
Nov 1, 2019, 10:30 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good day everyone, and welcome to AMERISAFE's 2019 Third Quarter Earnings Conference. Today's call is being recorded.
At this time, I'd like to turn the call over to Kathryn Shirley, Executive Vice President and General Counsel. Please go ahead.
Kathryn H. Shirley -- Executive Vice President, General Counsel and Secretary
Good morning. Welcome to the AMERISAFE 2019 third 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 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-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.
G. Janelle Frost -- Chief Executive officer, President and Director
Thank you, Kathryn, and good morning, everyone. It has been interesting listening to and reading earnings comments thus far this quarter, as insurance CEOs have discussed giving rate followed by the pause or parenthetical except in workers' compensation. The news workers' compensation is that most states continue to approve loss cost declines. For AMERISAFE, this meant voluntary premium for policies written in the quarter were down 8.6%, while on account basis, we were down 1.3%. We continue to have strong policy retention of 93.4%, as we maintained underwriting discipline, reflected in our 1.62 effective loss cost multiplier or ELCM. I'll pause here to remind those of us who like to plot data points that ELCM is best compared quarter over prior year quarter, not sequentially.
Our second quarter ELCM was a 1.61. However, this quarter's 1.62 was down from 2018's third quarter of 1.65. That being said, the primary driver for the decline in premium was simply earning less premium per $100 of payroll. Offsetting the rate declines were stronger payrolls. Audit premium premium and other premium adjustments added $2 million to top line compared to a decrease of $2.1 million in last year's third quarter. In total, gross premiums written for the quarter were down 3.2% from the third quarter of 2018.
While declining rates lowered premium and competition remained strong, we produced an attractive return on equity of 18.6% this quarter. Our ROE, our long-term capital adequacy along with our commitment to creating shareholder value led to the declaration of an extraordinary dividend of $3.50. This quarter's ROE was supported by favorable loss ratios and expense management.
Neal will provide color around the expense management, but allow me to provide additional information about our losses. Our loss in LAE ratio for the quarter was 53.6%, down from 55.9% in the third quarter of 2018. The current accident year loss ratio remained unchanged from the beginning of the year at 72.5%. Both frequency and severity trends were in line with our expectations for the full year.
As for prior accident years, we experienced significant favorable case development this quarter. Slightly higher claim closure rates were one of many factors influencing the case development and led to $15.6 million of favorable development this quarter.
Neal will now provide more details around expenses and the remainder of the financials.
Neal A. Fuller -- Chief Financial Officer and Executive Vice President
Thank you, Janelle, and good morning, everyone. For the third quarter of 2019, AMERISAFE reported net income of $21.4 million, or $1.11 per diluted share compared with $19.7 million or $1.02 per diluted share in last year's third quarter. Operating net income for the third quarter was $21.1 million or $1.09 per share compared with $19.5 million or $1.01 per share in the third quarter of 2018. Revenues in the quarter decreased 2.2% to $91.5 million compared with the third quarter of 2018. Net premiums earned decreased 2.9% to $82.7 million when compared to last year's third quarter.
Now turning to earnings from our investment portfolio. Net investment income increased 4.8% in the third quarter to $8.3 million compared with $7.9 million in the third quarter of 2018. The increase was driven by slightly higher interest rates on fixed income securities. The tax equivalent yield on our investment portfolio was 3.10% at the end of the quarter. The pre-tax yield on the portfolio was 2.79% at the end of the quarter, up from 2.70% one year ago. There were no impairments on any of the securities held in the portfolio during the quarter, and there were no significant realized gains or losses during the quarter.
The investment portfolio continues to be high quality, carrying an average AA rating with duration of 3.68, with 56% in municipal bonds, 21% in corporate bonds, 11% in US treasuries and agencies, and the remainder in cash and other investments. Approximately 59% of our bond portfolio is comprised of held to maturity securities, which were in a net unrealized gain position of $22.4 million at quarter end. These unrealized gains, which totaled approximately $0.92 per share after-tax, are not reflected in our book value as the bonds are carried at amortized cost.
Moving now to operating expenses, our total underwriting and other expenses were $19.3 million in the quarter compared with $20.6 million in the third quarter of 2018. The decrease in expenses was primarily driven by lower loss-based assessments, lower premium-based assessments, and lower commissions compared to last year's third quarter. By category, the 2019 third quarter expenses included $6.4 million of salaries and benefits, $6.2 million in commissions, and $6.7 million of underwriting and other costs.
As a result of the lower expenses, our expense ratio for the quarter was 23.3% compared with 24.2% in the third quarter of 2018. Our tax rate for the quarter was 19.6% compared to 19.5% for last year's third quarter. Return on equity for the third quarter of 2019 was 18.6% compared to 17.4% for the third quarter of 2018. Operating ROE for the quarter was 18.9%.
Now turning to capital management, and as Janelle mentioned earlier, the Company's Board declared a special dividend of $3.50 per share payable on November 20th, 2019 to shareholders of record as of November 13th, 2019. This brings the total amount of special dividends paid out in the last seven years to $18.25 per share. In addition, the Company's Board of Directors declared a regular quarterly cash dividend of $0.25 per share payable on December 27th, 2019 to shareholders of record as of December 13th, 2019.
And finally, just a couple of other topics. Book value per share at September 30th was $24.29, up 14.3% from $21.26 at year-end 2018. Our statutory surplus at quarter-end was $325 million. This surplus level was lower this quarter due to dividends paid up to the parent company for the special dividend. And finally, we will be filing our Form 10-Q with the SEC later today 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?
Questions and Answers:
Operator
[Operator Instructions] And we'll first hear from Matthew Carletti of JMP Securities.
Matthew Carletti -- JMP Securities -- Analyst
Hey, good morning.
G. Janelle Frost -- Chief Executive officer, President and Director
Good morning, Matt.
Neal A. Fuller -- Chief Financial Officer and Executive Vice President
Good morning, Matt.
Matthew Carletti -- JMP Securities -- Analyst
Congrats on yet another very nice quarter.
G. Janelle Frost -- Chief Executive officer, President and Director
Thank you.
Matthew Carletti -- JMP Securities -- Analyst
Just a couple of questions. Janelle, I was hoping maybe you could just give a little more color on two things. The first being the competitive environment. I mean, we know it's a competitive market. We know what rates are doing, but kind of more of the nuances of, in general, what you're seeing among your competitive set? How the larger peers are acting at this point in the cycle? Whether you see kind of capital on the margin moving in or moving out? And then separately, kind of the underlying economic impact and what you're seeing from the economy and where in your book you might be seeing better trends or worse trends?
G. Janelle Frost -- Chief Executive officer, President and Director
Sure. So, I'll start with competitive environment. As far as the third quarter that it was really unchanged. We had a healthy policy retention of 93.4%. We think that is a response to our service level where we're pricing our book of business. I mentioned the ELCM at 1.62, down from last year's third quarter. So I think we're being responsive to the market, we still haven't seen what I would call new capital or new carriers in this space. So multi-line players finding workers' comp attractive.
I'll put a little forward-looking into that since Kathryn said I was going to do that at the beginning of the call. I was sort of energized listening to the earnings releases coming out this quarter. Some multi-line carriers out there talking about they were getting rate in their other lines of business. For me, that was a little glimmer of OK, well, maybe they will deploy that capital away from workers' comp and get back to their core lines of business. Time will tell, if that's the case, if we see that in terms of larger carriers to your point -- to your question -- if we see some of the larger carriers starting to pull back a little bit out of workers' compensation in the anticipation that it won't remain a profitable line for a longer period of time. Again, that's all speculation. We'll see what the market tells us going into the fourth quarter, and I guess really the first quarter of 2020.
As far as the economy, I think for our insurance, it's a pretty robust economy. Our payroll audits remain positive. We saw growth in -- again, this is payroll growth and construction obviously being our largest class, but it was pretty robust this quarter. Less so in trucking, but we saw pretty big increases in terms of marine, post that what we call wholesale retailers. So that's like lumber yards and building materials, gas dealers, those type of things where we saw a little bit of slippage and again the payrolls were positive, but not as positive as third quarter of 2018 was actually in our farm book and a little bit in our lumber book.
Matthew Carletti -- JMP Securities -- Analyst
Okay, great. And then one other question, just as we were getting closer to 2020 and I just want to make sure I'm thinking about this right, kind of, as we have seen the accident year loss ratio, small tick-ups kind of in the past couple of years. It seemed that set of circumstances are still in place being pricing down, severity, while manageable still up and kind of probably not making the assumption that frequency will go down forever. Is it right to think about some small uptick in that accident year, as we enter 2020?
G. Janelle Frost -- Chief Executive officer, President and Director
Yeah..There's things that I factor into that Matt, a, first, 2019 is not over, we'll see what the rest of the year holds out in terms of -- you're right about frequency in your question. However, in terms of severity, I think we'll see where accident year 2019 falls in as well as the loss cost filings that are still coming in. I think we're a little over halfway there in terms of states that have approved their 2020 rates that will be impacting those numbers for 2020. But as the loss cost filings come in, we'll keep an eye on those as well and see. On the flip side of that, we had significant case development this quarter. So in some more recent accident years, I mentioned that we had -- in last quarter's earnings release, we had favorable development in accident year 2017, we had it again this quarter. So that also impacts where we think and what we think in terms of loss ratio.
Matthew Carletti -- JMP Securities -- Analyst
Of course. That makes sense. Well, thank you for the color and congrats again.
G. Janelle Frost -- Chief Executive officer, President and Director
Thank you, Matt.
Neal A. Fuller -- Chief Financial Officer and Executive Vice President
Thanks, Matt.
Operator
Next, we'll hear from Mark Hughes of SunTrust.
Mark Hughes -- SunTrust -- Analyst
Yeah. Thank you. Good morning.
G. Janelle Frost -- Chief Executive officer, President and Director
Good morning, Mark.
Mark Hughes -- SunTrust -- Analyst
Janelle, you mentioned the 2020 loss costs coming in from NCCI. What are you seeing in those state-by-state numbers?
G. Janelle Frost -- Chief Executive officer, President and Director
Yeah, we're still seeing decreases. Some of them had been single-digits which I like to see. Finally, seeing some single-digit decreases. On behalf of our major states, we're still seeing approved decreases. So, there has been a couple of I think small -- maybe some long only [Phonetic] increases. I've heard a couple of jokes among just other people in the industry. Well, Hawaii had an increase. And I think everyone just sort of chuckles about that. But yeah, it's still no major increases at this point coming in.
Mark Hughes -- SunTrust -- Analyst
Yeah. Can you -- in aggregate, is it kind of a mid-to-digit decline or low single-digit or...
G. Janelle Frost -- Chief Executive officer, President and Director
I think NCCI anticipated 9%, I'm looking at Neal, I think NCCI anticipated 9% for '19 and '20 [Phonetic] going into '20.
Neal A. Fuller -- Chief Financial Officer and Executive Vice President
Right. That is their projection.
G. Janelle Frost -- Chief Executive officer, President and Director
So, I think that was their projection. We'll see what pans out.
Mark Hughes -- SunTrust -- Analyst
Yeah. And then, the large losses in the quarter. How many of those did you have?
G. Janelle Frost -- Chief Executive officer, President and Director
We had 12 at the end of the third quarter compared to 18 at the end of third quarter in 2018.
Mark Hughes -- SunTrust -- Analyst
Okay. Very good. I appreciate it. Thank you.
G. Janelle Frost -- Chief Executive officer, President and Director
Thank you, Mark.
Neal A. Fuller -- Chief Financial Officer and Executive Vice President
Thanks, Mark.
Operator
[Operator Instructions] We'll now hear from Christopher Campbell of KBW.
Christopher Campbell -- KBW -- Analyst
Hi. Good morning.
G. Janelle Frost -- Chief Executive officer, President and Director
Good morning, Chris.
Christopher Campbell -- KBW -- Analyst
Hey. Quick question on the expense ratio changes. I guess, can you unpack that a little bit and why were the assessments lower and where do they originally come from last year?
Neal A. Fuller -- Chief Financial Officer and Executive Vice President
Yeah, certainly, the expense ratio, we did see some familiar, I mean, some favorable loss-based assessment activity in the quarter. And it really depends upon where we see favorable reserve development by state because that will affect those loss-based assessments, which are based upon our reserves in various states. So loss-based assessments in the quarter were down $637,000 from last year's third quarter. Premium-based assessments were down about $361,000 from last year. Again, that is more based upon some rate changes in some states where we actually are paying slightly lower premium taxes.
Christopher Campbell -- KBW -- Analyst
Okay, got it. All right. And then I think one of Mark's questions previously about like the rate changes. Is there -- when we see things like headline rate numbers like NCCI is like 5% or something, I forget what the number is this year. Is there like a spread that you guys typically do better than? So if the rate declines are 5% for the industry, AMERISAFE typically does I don't know 200 bps better than that. Is there like a heuristic thing about -- in terms of how well you guys can recoup some of those rate declines?
G. Janelle Frost -- Chief Executive officer, President and Director
Right. That's actually a very good question. So, as you know, you're right, when they see that line, let's use Texas as an example, had an approved loss cost filing for 7/1 [Phonetic] that was 12.4% that was the headline. So what was that in terms of AMERISAFE Class Codes, well in the sense of example, it was actually 12.4%. So, yeah, it does vary sometimes by class codes because I think Arkansas had -- I think their headline was 3.4% and AMERISAFE's was 5.4%. So it does vary by class codes, but I think it goes both ways. I still believe if you're looking at, in the aggregate, the decreases, I think that's a very good measure of where it is headed directionally, whether it's high hazard or low hazard.
Christopher Campbell -- KBW -- Analyst
Okay, great. And then just one last one on your policyholder dividends. Obviously, if you guys keep having like great reserve development, though it's probably go up, what's a good way to think about modeling those? There's like a 150 bps on the combined ratio -- is that like a good way to think about it or...
Neal A. Fuller -- Chief Financial Officer and Executive Vice President
That's a really good question. It does fluctuate from quarter to quarter and it's really driven by our performance in various states where we compete through policyholder dividends, so, Florida, Virginia, Wisconsin. And so, I think it was actually a little bit high this quarter at 1.5% than we've seen it running in prior quarters. And it really does depend again on what policies came up in that period and what dividends they earned. So, I don't have a good way to model it for you other than to expect that maybe it's going to be between 1% and 2%.
Christopher Campbell -- KBW -- Analyst
Thanks for all the answers. Best of luck in the fourth quarter.
Neal A. Fuller -- Chief Financial Officer and Executive Vice President
Thank you.
G. Janelle Frost -- Chief Executive officer, President and Director
Thank you.
Operator
And it appears there are no further questions at this time. Janelle, I will turn the call back over to you for any additional or closing comments.
G. Janelle Frost -- Chief Executive officer, President and Director
Thank you. AMERISAFE has shown a strong commitment to creating shareholder value through our operational consistency and long-term capital adequacy. This quarter's combined ratio of 78.4% and the return on average equity of 18.6% are just two measures to illustrate that commitment. We are pleased to share those rewards and of that commitment through our extraordinary dividend, while at the same time, building a better AMERISAFE for our shareholders, our policyholders, and our employees.
Thank you for joining us today.
Operator
[Operator Closing Remarks]
Duration: 21 minutes
Call participants:
Kathryn H. Shirley -- Executive Vice President, General Counsel and Secretary
G. Janelle Frost -- Chief Executive officer, President and Director
Neal A. Fuller -- Chief Financial Officer and Executive Vice President
Matthew Carletti -- JMP Securities -- Analyst
Mark Hughes -- SunTrust -- Analyst
Christopher Campbell -- KBW -- Analyst
