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Amerisafe Inc (AMSF -0.57%)
Q4Â 2019 Earnings Call
Feb 20, 2020, 10:30 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good day, everyone, and welcome to the AMERISAFE's 2019 Fourth Quarter and Year-End Earnings Conference Call. [Operator Instructions]
At this time I'd like to turn the conference to Kathryn Shirley, Chief Administrative Officer. Please go ahead ma'am.
Kathryn H. Shirley -- Executive Vice President, Chief Administrative Officer and Secretary
Good morning. Welcome to the AMERISAFE 2019 fourth quarter investor call. If you've 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-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.
G. Janelle Frost -- President and Chief Executive Officer
Thank you, Kathryn, and good morning everyone. The current soft market is unique and its challenges given the state of the property and casualty industry. Over the past year, there has been a lot of focus on the continuing rate declines and workers' compensation. And yes, the impact is significant to the industry. Carriers are collecting less premium for a growing exposure base.
However, there has also been favorable trends. Payrolls expanded with a strong economy, frequency trends were stable and medical inflation tempered. These favorable trends coupled with our distinctive approach to workers' compensation produced another year of excellent financial results for AMERISAFE.
We reported a combined ratio of 76.6% and a return on average equity of 22.1% in 2019, the fourth year of workers' compensation rate declines. For AMERISAFE, less than anticipated average loss severity for prior years offset the impact of lower premiums. Our gross premiums written in the quarter were down 6.1% from the fourth quarter of 2018. Strong payrolls and audit premiums lessened the impact of rate declines and a slight drop in overall policy count.
Our retention for policies for which we chose to offer renewal remained strong at 94.1%. However, new business finds were not enough to cover loss renewals in terms of policy count. Our pricing for the quarter, as shown in our ELCM was at 159, compared to 162 in the fourth quarter of 2018.
Back to those trends I opened the call discussing, and the impact to losses. First is frequency. I choose to talk about frequency in terms of earned premium. For AMERISAFE, we anticipated flattening to slight increases in frequency for the last few accident years, more a function of decreased premium than actual claim counts. For example, our reported claims for accident year 2019, were down 4.4% from the accident year 2018 at 12-months. While earned premium for the calendar year was down 5%. I still believe that in a full employment economy, we have more unskilled workers in high risk industries, which will lead to an increase in workplace injuries. For these reasons, I anticipate there to be continued pressure on frequency.
The second loss trend is severity. Average severity was distinctly impactful to this quarter's results, as it relates to prior accident years. I believe, we've been transparent of how we think about the more recent accident years, often referring to them as green. Our consistent book of business provides us rich data based on historical patterns. We rely heavily on our case reserves, which were established timely and with expertise gained through our experience in specialization.
Given the types of injuries we deal with, 30 months to 36 months of maturity gives a better indication of how an accident year will ultimately develop. This quarter, favorable case reserve patterns led to an -- recognition of lower average severities than previously anticipated for accident years 2014 to 2017. In the quarter, the financial impact was a reduction of loss and loss adjustment expense of $26.1 million or 31.7 loss ratio points. As for the current accident year, the loss ratio was 72.5% and it remained unchanged throughout 2019. We did not adjust our assumptions for those accident years '18 or '19, due to their greenness. We also do not anticipate a change in the loss ratio for accident year 2020, barring some material change between now and the end of the first quarter.
I will now turn the call over to Neal to discuss the financials.
Neal A. Fuller -- Executive Vice President Chief Financial Officer
Thank you, Janelle, and good morning, everyone. For the fourth quarter of 2019, AMERISAFE reported net income of $34 million or $1.76 per diluted share, compared with $18.8 million or $0.98 per diluted share in last year's fourth quarter. Operating net income was $32.8 million for the quarter or $1.70 per share, an increase from $1.07 in the fourth quarter of last year.
For the full year 2019, AMERISAFE produced net income of $92.7 million or $4.80 per share. Operating net income for the full-year of 2019 was $89 million or $4.60 per share. This level of operating income is our highest year ever and was influenced by benign severity trends, which drove significant prior year favorable reserve development as Janelle mentioned earlier.
Revenues in the quarter were down 2.9% to $91.9 million, compared with the fourth quarter of 2018. Net premiums earned decreased 7.4% to $82.3 million, when compared to last year's fourth quarter. For the full-year, net premiums earned were off 5%, totaling some $332.9 million. These trends were driven by the continued decline in workers' compensation loss costs in 2018 and 2019.
Turning to net investment income. We saw a slight decrease of 0.3% in the fourth quarter to $8 million, compared with $8.1 million in the fourth quarter of 2018. Net investment income for the full-year was up 6.7% to $32.5 million, compared with $30.5 million in 2018, due to slightly higher average investment yields. The tax equivalent yield on our investment portfolio was 3.12% at year-end and almost unchanged from 3.15% at year-end 2018. The pre-tax yield on the portfolio at year-end was 2.7%. There were no impairments on any of the securities held in the portfolio during the quarter or for the full-year of 2019.
And additionally, there were no significant realized gains or losses during the quarter or the full-year. The investment portfolio is high quality, carrying an average AA rating with current duration of 3.95, and the portfolio is comprised of 61% in municipal bonds, which includes taxable municipal bonds; 21% in corporate bonds; 12% in US treasuries and agencies; 2% in equities and the remainder in cash and other investments. Approximately 58% of our bond portfolio is comprised of held-to-maturity securities, which were in an overall unrealized gain position of $21.9 million at year-end. These gains are not reflected in our year-end book value as these bonds are carried at amortized cost.
Moving now to operating expenses. Our total underwriting and other expenses were $14.7 million in the quarter, compared with $19 million in the fourth quarter of 2018. The decrease in operating expenses was primarily due to a $3.5 million benefit as the result of an end of a multiple injury fund assessment. By category, the 2019 fourth quarter expenses included $7.9 million of salaries and benefits; $6.2 million of commissions; and 500,000 of underwriting and other costs.
Our expense ratio for the quarter was 17.8%, compared with 21.4% for the fourth quarter of 2018. For the full-year 2019, operating expenses decreased $6.8 million or 8.4%, heavily influenced by a reduction in insurance assessments, including the fourth quarter benefit mentioned earlier. As a result, our expense ratio for the full-year was unusually low at 22.3%, compared with 23.2% in 2018.
Our tax rate for the fourth quarter was 20.8% and 19.8% for the full-year, both higher than in 2018 as a result of stronger underwriting profitability. Return on average equity for the fourth quarter of 2019 was 30.3%, compared to 17.3% for the fourth quarter of 2018. For the full-year, ROE was 22.1%, compared with 17.2% last year. Operating ROE for the quarter was 30%, operating ROE for the full-year was 21.5%, compared with 17.9% in 2018.
And now to capital management. During the fourth quarter, the company paid its regular quarterly cash dividend of $0.25 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 $0.27 per share, payable on March 27th, 2020 to shareholders of record as of March 13th, 2020. This represents an 8% increase in the regular quarterly dividend.
And finally, just a couple of other noteworthy items. Book value per share at December 31st 2019 was $22.29, up slightly compared with last year's $21.26 per share and we paid out $4.50 per share in dividends to shareholders throughout the year. Our statutory surplus was $360 million at December 31st, 2019, compared with $384 million at the end of 2018. And finally we will be filing our Form 10-K with the SEC next week.
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
Thank you. [Operator Instructions] We'll go first to Randy Binner with B Riley, FBR.
Randy Binner -- B. Riley FBR -- Analyst
Hey, and good morning. Thanks. So I think we'd like to kind of dig into the expenses to better understand how that would run rate into the future. So just starting with the second injury fund, I think that was quantified at $3.5 million. Is that -- was that something that was coming out in the fourth quarter or was that kind of ratable throughout the year?
Neal A. Fuller -- Executive Vice President Chief Financial Officer
No, that was in the fourth quarter, it was a reversal of an accrual that we had up for the multiple-injury trust fund, but the trust fund has been shutdown or has shutdown, did its actuarial analysis in 2019 and indicated that there would be no further assessments. So we had $3.5 million up for those future assessments and we took that down during the quarter.
Randy Binner -- B. Riley FBR -- Analyst
So that's a one-timer and then that -- I'm sorry, which fund was it? What state was it for?
Neal A. Fuller -- Executive Vice President Chief Financial Officer
It was for South Carolina.
Randy Binner -- B. Riley FBR -- Analyst
And that fund is no longer, it's some -- it's shutdown effectively is that right?
Neal A. Fuller -- Executive Vice President Chief Financial Officer
That is correct. They [Technical Issues] future assessments, that's why we took the full accrual down.
Randy Binner -- B. Riley FBR -- Analyst
Okay. So that had been -- but that hadn't been -- that had been accrued for I guess over time through expenses so...
Neal A. Fuller -- Executive Vice President Chief Financial Officer
Correct.
Randy Binner -- B. Riley FBR -- Analyst
Okay. Then the other question is just -- so if we add that back then, that would be more of the normal run rate. But it still seems a little -- like you were a little lower quarter-over-quarter, maybe on just general compensation expense. Was there anything there that was lower or is there something else that's affecting the year-over-year comparison ex the second injury fund reversal?
Neal A. Fuller -- Executive Vice President Chief Financial Officer
No, typically you'll see our fourth quarter expenses are a little bit lower as we accrue assessments throughout the year for loss based assessments and other types of guaranteed fund assessments. And then in the fourth quarter, if those assessments have not been charged by the states we will reverse those. That's why our fourth quarter expense ratio is typically a little bit lower. I would say generally in the past two years, we've seen some favorable trends in those assessments being lower-than-expected, and I think that's because the trends -- the favorable trends in the workers' comp market in general have impacted those assessments, because of the favorable severity trends and other trends that we see.
Randy Binner -- B. Riley FBR -- Analyst
Okay. And then, I just had one on medical loss inflation. Obviously the reserve result was benign for the '14 to '17 accident years. And I think it usually takes about, like 36 months -- 24 months to 36 months to season the workers' comp book. So, given your view though on how medical loss inflation and other severity trends are trending now like in 2019 and 2020? Just as you observe the business?
G. Janelle Frost -- President and Chief Executive Officer
Yes, you know, I think when we established the 72.5% for 2019, in that assumption we had mid single-digit medical inflation expected for '19. So I guess...
Randy Binner -- B. Riley FBR -- Analyst
And that would be similar to 4Q '19 [Speech Overlap] net income or?
G. Janelle Frost -- President and Chief Executive Officer
Yes, so that would be similar to what we had accrued in '18 and '17.
Randy Binner -- B. Riley FBR -- Analyst
All right, thank you.
Neal A. Fuller -- Executive Vice President Chief Financial Officer
You're welcome.
Operator
Our next question will come from Matt Carletti with JMP.
Matt Carletti -- JMP Securities -- Analyst
Hey, good morning.
Neal A. Fuller -- Executive Vice President Chief Financial Officer
Good morning, Matt.
G. Janelle Frost -- President and Chief Executive Officer
Good morning, Matt.
Matt Carletti -- JMP Securities -- Analyst
Few questions. One, hope we could start with the prior period development. I know you mentioned '14 to '17 were the years that it came from. Can you be just a little more specific across these four years? Was there any year or grouping of years that drove the bulk of it? Or was it fairly even across the four years?
G. Janelle Frost -- President and Chief Executive Officer
Yes, I'll give you the numbers by accident year for the quarter. So accident year '17 was $6.3 million; '16 was $7.5 million; '15 was $6.2 million; '14 was $2.3 million and then the remainder of the balance was prior to '14.
Matt Carletti -- JMP Securities -- Analyst
Got you, OK. Really helpful. Great, and then just shifting to your comment about expecting a flat accident year for 2020, absent some macro surprise. Am I thinking about that right, that your prior methodology of -- on the frequency view of expected frequency to kind of increase on your earned premium view still holds? And that the offset to that is, a different view of severity, it has maybe informed by that the prior period development that's been taking place?
G. Janelle Frost -- President and Chief Executive Officer
Yes, I think that's a good way to look at it. I mean, as I said in my prepared remarks, we -- I still believe that we're going to see an uptick in claims just as unskilled workers are working in the hazardous industries. So that should drive frequency -- at least flatten to slight increases in frequency, that hasn't changed. But we have seen, as I mentioned in the severity front, we have seen severities be less than we anticipated. Again the accident years '14 through '17, we're not willing to call it as I like to say on '17 and '18 just yet, but I see -- or, yes, '18 and '19. But I think looking into 2020, we expect that to be relatively flat with '19.
You followed us for a long time Matt, I think we're pretty -- we're quicker about recognizing things when we see negative trends or negative things in the data harking back to accident year 2017 during the accident year. We raised our loss pick as we saw an uptick in frequency at that point. I think we're a little slower to -- or a little bit more cautious about recognizing more positive trends in our data. This is a long tail line of business, it's lumpy. So we don't try not to be too ready -- quick on the draw when it comes to the positive side of that.
Matt Carletti -- JMP Securities -- Analyst
Yes, definitely served you well over the years.
G. Janelle Frost -- President and Chief Executive Officer
Thank you.
Matt Carletti -- JMP Securities -- Analyst
Last one, if I can just on capital management, more just on methodology and then strategy. Am I right in thinking that you know, assuming we're still in a flat to down revenue environment, because it seems like there's still pressure is there and absent a turn in the market, that's probably the case is for foreseeable future, that it would be expecting, kind of, earnings costs to be returned in some form of dividend? Is still kind of the norm that -- to keep the capital ratios, kind of, stable or improving absent growth?
Neal A. Fuller -- Executive Vice President Chief Financial Officer
Yes, Matt, this is Neal. We don't typically comment on future dividends. I would point out, we did pay out $4.50 in dividends this year, and we ended up having operating earnings of $4.60. So we sort of out-earned the dividend pace. But management and the Board addresses the company's capital position and looks out at each quarter and periodically makes adjustments, which in recent years have included special dividends.
Matt Carletti -- JMP Securities -- Analyst
Great. Well, thank you for the color. Congrats on a nice year and best of luck.
G. Janelle Frost -- President and Chief Executive Officer
Thank you, Matt.
Neal A. Fuller -- Executive Vice President Chief Financial Officer
Thanks, Matt.
Operator
[Operator Instructions] We'll go next to Mark Hughes with SunTrust.
Mark Hughes -- SunTrust Robinson Humphrey -- Analyst
Yes. Thank you. Good morning.
G. Janelle Frost -- President and Chief Executive Officer
Good morning, Mark.
Neal A. Fuller -- Executive Vice President Chief Financial Officer
Good morning, Mark.
Mark Hughes -- SunTrust Robinson Humphrey -- Analyst
The number of large losses for 2019, do you have that number and the comparison with '18?
G. Janelle Frost -- President and Chief Executive Officer
Sure. We ended the year with 16, what we would call, severe claims, claims over $1 million of case incurred and that compares to 18 at the end of the calendar year for accident year '18 and '17 -- for accident years '17.
Mark Hughes -- SunTrust Robinson Humphrey -- Analyst
And then how do we think about the IBNR? I think you've emphasized that your savings here, the better performance has been on case reserves. How much is sitting there in IBNR and when do you would evaluate that?
G. Janelle Frost -- President and Chief Executive Officer
Yes, so our historical pattern has been obviously when we begin an accident year, we have an anticipated loss ratio. We try not to -- unless there's something compelling in the data that doesn't really change during the current accident year, although as I mentioned earlier, harking back to;17, we did change it. But at that point we try and list just something completely compelling in the data are really a handful of really large losses that change -- move the needle. We typically don't adjust our IBNR balances until we get to that 30 month to 36 month window.
Hence the changes that you -- we saw this quarter, with the favorable case development that we've been experiencing throughout the year in accident years '14, '15, '16, you saw some adjustment in the -- as I mentioned in my remarks, the anticipated severities were lower than or the actual severities were coming in lower than we anticipated. Hence, we made the adjustment.
Mark Hughes -- SunTrust Robinson Humphrey -- Analyst
Right. To case reserve?
G. Janelle Frost -- President and Chief Executive Officer
And IBNR.
Mark Hughes -- SunTrust Robinson Humphrey -- Analyst
And IBNR. Okay. The loss cost multiplier for 2020, when you look at your footprint, kind of, roughly what is the expectation on loss cost trends? And this would be an official loss cost?
G. Janelle Frost -- President and Chief Executive Officer
Yes, I understood. So our rate in turn -- the rates that we charged our clients, if -- we talk about ELCM a lot, but the premium per 100, which is something we disclosed in our 10-K, with the decrease in '19 was around 9.1%, which oddly enough, is about what I think NCCI projected for the loss cost changes around that number for 2019. So we were in "in line with that." Their expectation for 2020 I believe, I don't think they've published that as of yet, but I would expect it to be higher single-digit.
Mark Hughes -- SunTrust Robinson Humphrey -- Analyst
Right.
G. Janelle Frost -- President and Chief Executive Officer
Based on just the rate filings we've seen thus far.
Mark Hughes -- SunTrust Robinson Humphrey -- Analyst
And when I think about your loss pick outlook to hold steady, I guess on the one hand, you've got competition in the market. You've got declining loss costs, your ELCM numbers have continued to come down slowly, but still come down all that would suggest pressure on current accident year, but it sounds like since the severity, and I would assume frequency has been more benign than expected in the last couple of years, you're able to kind of restrain that upward pressure and therefore, a hold it steady. Is that the right way to think about it?
G. Janelle Frost -- President and Chief Executive Officer
I think that's very accurate, we are summarizing it. Yes.
Mark Hughes -- SunTrust Robinson Humphrey -- Analyst
Right, which is to say at least so far, so good on '18 and '19?
G. Janelle Frost -- President and Chief Executive Officer
Yes, I -- maybe that's how I should have said it. Yes, they're still very green for us, so we're not willing to -- so, yes, this is all good. But you're right, so far so good.
Mark Hughes -- SunTrust Robinson Humphrey -- Analyst
Yes, yes. And then the audit premium was up a bit, any general comment on payroll? I don't know whether you've made any comments about that in your earlier remarks, but the trends in wages audit?
G. Janelle Frost -- President and Chief Executive Officer
Right. We like the industry are certainly benefiting from a strong economy, particularly in our industries, we continue to see positive audit premiums from our insured. So, the signs that the economy remains strong, I think that bodes well for us. It certainly helps offset the rate declines.
Mark Hughes -- SunTrust Robinson Humphrey -- Analyst
And then the -- Neal, the tax rate outlook for 2020?
Neal A. Fuller -- Executive Vice President Chief Financial Officer
Yes, there shouldn't be any change in tax rate. It's really driven by the fact that how much of underwriting gain we have, because that's taxed at 21% and then how much of our investment income is tax-exempt through our municipal portfolio. So it was higher this year, but that was mainly because we had stronger underwriting profitability, obviously expenses affect that as well.
Mark Hughes -- SunTrust Robinson Humphrey -- Analyst
Yes. The state of the competition when we think about the ELCM, Janelle, just looking at the trend here. Year-over-year, the ELCM that's been coming down kind of 2% to 3% each over the last four quarters and prior to that, that was 1% to 2% for the year and a half. So just continuing to drift down low single-digits. If you had to guess, how do you feel like that will shape up given the current nature of the competition?
G. Janelle Frost -- President and Chief Executive Officer
Yes, you know, it's still very competitive out in the marketplace. I'd always try to think, when I -- we prepare for these calls. Do I think -- do I feel differently about the competition now than I did the last time we all spoke? The answer is no. It's still just competitive out there. There is still a lot of people that are willing -- actually wanting to write workers' comp and willing to write high hazard workers' comp. We see -- I guess we are somewhat -- see some protection in the fact that in our hazard groups, again A to G where we see positive results, our E, F and G in terms of not only retention, but also binding new business. So that's a positive sign for us. But let me be very clear and I said this in my opening comment. We did not grow policy count or key policy count flat in 2019, which is something that we wanted to do throughout this soft market. We -- I think I've been saying that at least since '17 maybe even since '16, and that's a disappointment to us.
Mark Hughes -- SunTrust Robinson Humphrey -- Analyst
Yes. To that point, again, that you're seeing positive results in the E, F and G? Is that -- say that again?
G. Janelle Frost -- President and Chief Executive Officer
Yes -- no, what I meant by positive result is our retention in those classes. And I think I talked about this on the last call. Our retention in those classes is high. The new business that we are able to buying is coming in those same classes. So that's a good sign for us at least, maybe there are a lot more carriers out there wanting to write workers' comp and looking for those premium dollars, but we're -- our high hazard focus gives us some protection from that. Is that clear? Okay.
Mark Hughes -- SunTrust Robinson Humphrey -- Analyst
It does. And would you say that's different or is that about the same, does it feel the same?
G. Janelle Frost -- President and Chief Executive Officer
No, I think that's been throughout this soft market. But that's -- I guess the way I gauge whether is the competition got more intensive. All of a sudden I started losing retention in E that I -- policies I really wanted to retain then that would -- that's how I would say, there has been a shift in the competition.
Mark Hughes -- SunTrust Robinson Humphrey -- Analyst
I apologize for going on, but the -- what has been the -- I don't know if you have it there in front of you, Neal, the cumulative development on '16 and '17?
Neal A. Fuller -- Executive Vice President Chief Financial Officer
I don't have the cumulative development on those accident years in terms of over time.
Mark Hughes -- SunTrust Robinson Humphrey -- Analyst
Yes. Yes, I was just being curious.
Neal A. Fuller -- Executive Vice President Chief Financial Officer
I have the full -- I have the actual -- I have the full amount for this year, this calendar year that we've recognized, in '16 for instance it was out of the total $65 million of favorable development this year. Accident year '17 was $9.5 million, '16 was $23.4 million, '15 was $14.5 million, '14 was $8.6 million and then '13 and prior was $9 million.
Mark Hughes -- SunTrust Robinson Humphrey -- Analyst
And refresh me, was it the first year you took gains lot of '17?
Neal A. Fuller -- Executive Vice President Chief Financial Officer
Correct.
Mark Hughes -- SunTrust Robinson Humphrey -- Analyst
Okay. Okay, thank you very much.
G. Janelle Frost -- President and Chief Executive Officer
Thank you, Mark.
Neal A. Fuller -- Executive Vice President Chief Financial Officer
Thank you, Mark.
Operator
We have no other questions at this time. I'd like to turn it back to Janelle Frost for closing remarks.
G. Janelle Frost -- President and Chief Executive Officer
Thank you for joining us today. February is insurance careers month. Surely all this talk about trends and challenges aptly highlights the exciting opportunities a career in insurance offers. At AMERISAFE, our careers are based on turning risk and opportunity and in 2019, our employees delivered. Thank you.
Operator
[Operator Closing Remarks]
Duration: 30 minutes
Call participants:
Kathryn H. Shirley -- Executive Vice President, Chief Administrative Officer and Secretary
G. Janelle Frost -- President and Chief Executive Officer
Neal A. Fuller -- Executive Vice President Chief Financial Officer
Randy Binner -- B. Riley FBR -- Analyst
Matt Carletti -- JMP Securities -- Analyst
Mark Hughes -- SunTrust Robinson Humphrey -- Analyst
