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Amerisafe Inc (NASDAQ:AMSF)
Q3 2020 Earnings Call
Oct 29, 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 2020 Third Quarter Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Kathryn Shirley, Chief Administrator, Officer. Please go ahead.

Kathryn Housh Shirley -- Executive Vice President, Chief Administrative Officer And Secretary

Good morning. Welcome to the AMERISAFE 2020 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 result of risks, uncertainties and other factors, including the impact of the COVID-19 pandemic on the business and operations of the company and our policyholders and the market value of the securities in our investment portfolio. Other factors that may affect our results are 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.

Gerry Janelle Frost -- Chief Executive Officer And Presiden

Thank you, Kathryn, and good morning, everyone. We are now nine months into a global pandemic. The long-term impact to workers' compensation rates is yet to be determined. While there are plenty of opinions regarding what will influence ultimate costs, I believe there is not enough pandemic-specific or identified trends to influence near-term loss costs. Therefore, declining loss cost can continue to pressure the industry's revenue and support robust competition.

An important distinction is that competition varies by state given that workers' compensation is a state-regulated financial product. two factors influencing the variation between states are approved loss costs and the mix of industries underwriting in any given state. To illustrate the differences in state markets, consider the latest approved loss costs, which ranged from a 20% decrease in Virginia to a 9% increase in Hawaii. Industry mix is also impactful.

Unemployment increases were more heavily weighted toward service and hospitality industries, which were not where AMERISAFE rights business. State mandates related to stay-at-home orders and essential business operations temporarily impacted payrolls, and for some businesses altered their long-term business outlook. For the states we actively market, competition remained robust in the third quarter. Our ELCM is one measure of AMERISAFE's response to competition. Our ELCM for the third quarter was 1.59, down from 1.62 in the third quarter of 2019. The resulting premiums for policies written in the quarter were down 10.7%. Loss cost changes were the primary driver. Based on our states and industries, our loss costs were down 7.8% on average.

Voluntary policy count in the quarter was down only 2%, supported by healthy policy retention of 94.6%. New business was suppressed in part due to disruption to the distribution network. The pandemic hampered individual independent agents' ability to prospect new business, which impacted our premiums during the quarter. Less robust payrolls from policies written in prior quarters also impacted our quarterly revenue slightly. Payroll audit premiums were positive in the quarter. However, audit premium and other adjustments were $0.9 million lower than the third quarter of 2019. In total, our gross premiums written were down 12.1% from the quarter. Turning to losses incurred.

Our loss in LAE ratio for the quarter was 53.2%, down slightly from the third quarter of 2019. Our current accident year loss ratio remained at 72.5% -- the same as the first two quarters of 2020 and the full year of 2019. Frequency trends were favorable with reported claim counts in the quarter down 18% from the third quarter of 2019 and below our expectations for the accident year. However, I will take this opportunity to circle back to industry mix. AMERISAFE's operating model focuses on high-severity, low-frequency industries. Severity for the current accident year has been within our expectation, and we still have one quarter to go. The timing of severe accidents is not particular to any given quarter. We continue to reach favorable outcomes for prior year claims attributable to our extensive claims management and aided by lower claim counts.

Case reserve changes led to overall favorable development of $14.4 million or 19.3 basis point decrease in the loss ratio. Accident years to note were accident year 2018 with $2.6 million of favorable development, accident year 2017 with $4.8 million of favorable development and accident year 2014 with $2.9 million of favorable development. Before I turn the call over to Neal to discuss expenses and other financial metrics, I would like to conclude my prepared remarks by reiterating our strong value to shareholders. Earnings and our ability to pay dividends are founded in our long-term commitment to underwriting discipline throughout the insurance cycle. We remain dedicated to our mission of providing quality insurance product while profitably serving our stakeholders.

I'll now turn the call over to Neal.

Neal Andrew Fuller -- Executive Vice President And Chief Financial Officer

Thank you, Janelle, and good morning, everyone. For the third quarter of 2020 AMERISAFE reported net income of $23.4 million or $1.21 per diluted share compared with $21.4 million or $1.11 per diluted share in last year's third quarter. Operating net income for the third quarter was $22.4 million or $1.16 per share, an increase of $0.07 or 6.4% from the third quarter of 2019. Revenues in the quarter decreased to $83 million compared with $91.5 million in the third quarter of 2019. Net premiums earned decreased 9.6% to $74.8 million when compared to last year's third quarter. Turning to our investment portfolio.

Net investment income decreased 14.5% in the third quarter to $7.1 million compared with $8.3 million in the third quarter of 2019. Last year's third quarter was a high point for investment income, and the decrease was driven by lower interest rate on fixed income securities, particularly on cash and short-term investment securities. The tax-equivalent yield on our investment portfolio was 2.8% at the end of the third quarter. The pre-tax yield on the portfolio was 2.49% at the end of the quarter, down 30 basis points from 2.79% one year ago. There were no significant realized gains or losses for the portfolio during the quarter.

The investment portfolio remains high-quality, carrying an average AA credit rating with a duration of 3.81 and with 63% in municipal bonds, 15% in corporate bonds, 12% in U.S. treasuries and agencies, 3% in equity securities and 7% in cash and other investments. The 63% in municipal bonds includes taxable municipal bonds, which now make up 12% of the overall portfolio. Approximately 57% of our bond portfolio is comprised of held-to-maturities securities, which were in a net unrealized gain position of $34.8 million at quarter end. These unrealized gains are not reflected in our book value as the bonds are carried at amortized cost, less an allowance for credit losses. Moving now to operating expenses. Our total underwriting and other expenses were $13.9 million in the quarter compared with $19.3 million in the third quarter of 2019.

The decrease in expenses was due to a $5.7 million reduction in loss assessments due to the early termination of an assessment related to a state multiple injury trust fund. By category, the 2020 third quarter expenses included $7 million of salary and benefits, $5.6 million in commissions and $1.3 million of underwriting and other costs. As a result of the change in assessments and the associated expense benefit, our expense ratio was 18.6% for the quarter compared with 23.3% in the third quarter of 2019. Without the change in assessments, the expense ratio for the quarter would have been 26.2%. Our tax rate for the quarter was 18.5% compared to 19.6% for last year's third quarter. This is largely due to more tax-exempt income on our investment portfolio than last year. Return on equity for the third quarter of 2020 was 19.8% compared to 18.6% for the third quarter of 2019. Operating ROE for the quarter was also 19.8%. Now turning to capital management.

And as announced in conjunction with our earnings release, the company's Board of Directors declared a special dividend of $3.50 per share for shareholders payable on November 18, 2020, to shareholders of record as of November 11, 2020. This brings the total amount of special dividends paid out in the last eight years to $21.75 per share. In addition, the company's Board of Directors also declared a regular quarterly cash dividend of $0.27 per share, payable on December 18, 2020, to shareholders of record as of December 4, 2020. And finally, just a couple of other items. Book value per share at September 30, 2020, was $24.93, up 11.8% from $22.29 at year-end. Our statutory surplus was $338 million at quarter end. The amount of surplus was lower this quarter due to dividends paid up to the parent company for the special dividend. And lastly, we will be filing our Form 10-Q with the SEC tomorrow after the market closes.

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 take our first question from Mark Hughes from Truist. Please go ahead.

Mark Hughes -- Truist -- Analyst

Okay, thank you. Good morning Janelle, good morning Neal.

Gerry Janelle Frost -- Chief Executive Officer And Presiden

Good morning Mark.

Mark Hughes -- Truist -- Analyst

On the claims, the -- obviously a sharp drop in the claims for this year. When you think about the claims that are still being worked from last year, the year before, is there any impact from COVID on those? Are people deferring treatments? Are you seeing any benefit on older claims?

Gerry Janelle Frost -- Chief Executive Officer And Presiden

Yes. Mark, that's a great question. Early on in the pandemic, we certainly saw, just like everyone else in the country saw, delays in appointments, deferred surgeries. I think that has more returned to normal in terms of procedures. But that's a great question regarding what happens to the older claims. So we focus a lot on the current accident year. But those claims that we still have open, I do have concerns, and we've talked about this on prior calls, about what happens to the ultimate severity of those claims.

Certainly, there's been a decline in frequency for the current accident year. But as claims have been out there, procedures have been delayed, medical care has been delayed, does that somehow alter the maximum medical improvement and the time of which that happens. So it's something that we're keeping our eyes on. I will say we've had lower claim inventories thus far in 2020 less than we expected. And so certainly we've seen some acceleration in our claim closure rates for most of the older accident years.

Mark Hughes -- Truist -- Analyst

Is there any administrative or judicial impediments to that? If the courts are closed, one of your competitors talked about getting a sign off from the administrative judges or what have you, that might make it a little harder to close out some of those old claims? Do you see anything like that?

Gerry Janelle Frost -- Chief Executive Officer And Presiden

Yes. Certainly -- again, certainly early on in the pandemic that was indeed the case. But it took states and those regulatory bodies a while to adjust, but they found ways to get it done. So I mean, there was a delay. But again, I think most of that is back on track.

Mark Hughes -- Truist -- Analyst

Okay. Your -- yes, the 1.59 is pretty similar to what you had. 2019 it was 1.59. Is the competitive environment stabilizing? Could we assume that?

Gerry Janelle Frost -- Chief Executive Officer And Presiden

It is still competitive out there. There's -- we've heard lots of talk among workers' comp carriers of what's going to drive increases in rates. I think there's been a few articles put out there about increases in rates. I think that's very state-specific and industry-specific. So I can tell you from the space that we actively market in and the industries that we write, competition is alive and well. It's not irrational competition that we spoke of in prior soft sackers where people were just buying books of business, but it's certainly there, and it's very, very competitive.

Mark Hughes -- Truist -- Analyst

And you had mentioned distribution, there was some disruption in the prospecting for new accounts, things like that. Is that back to normal? Or is that still in the -- up in the air?

Gerry Janelle Frost -- Chief Executive Officer And Presiden

It's improving. It's certainly improving. When you think about the pandemic and stay-at-home orders and remote work and the agency distribution, it certainly was an obstacle for agents. I feel for them. So certainly with stay-at-home orders it was very difficult for them to prospect new business. So they were working on their renewals. But that prospecting new business and you think about agents typically work 90 days out.

So early on in the pandemic, we were still getting a pretty good flow of new business submissions, but that dwindled as stay-at-home orders lingered. So when you think about third quarter specifically, those would have been accounts that agents typically would have been out in May and June prospecting. And so -- and we all know what the state of the country was at that point. So I do think it's improved. Anecdotally, it seemed like Labor Day was a cut off point for a lot of different people for a lot of different reasons. So yes, we started seeing improvement later in the quarter.

Mark Hughes -- Truist -- Analyst

And then one final question. You have talked about the construction, how everybody has continued to be busy, but it's kind of the next job that is the question for some. Any updated perspective on that next job for construction companies?

Gerry Janelle Frost -- Chief Executive Officer And Presiden

Yes. So I hear the word uncertainty a lot. I think there's a lot of uncertainty out there. A, related to the pandemic and vaccines and what's going to happen. I think the election has a lot to do with the uncertainty. The recession has a lot to do with the uncertainty. So I keep -- hear uncertainty and postponement.

I haven't heard -- just -- and again, this is more anecdotal than trends that I can read. But yes, when you read different articles in different papers and talk to different people in the industry, I keep hearing the word postponed. I don't think people are willing to call it a day and say, yes, we're absolutely not going to make that capital expenditure. I think there's just enough uncertainty out there to keep it in the mix of just postponement. But kudos to our clientele, they are still working.

Mark Hughes -- Truist -- Analyst

Very good. Thank you.

Gerry Janelle Frost -- Chief Executive Officer And Presiden

Thank you, Mark.

Neal Andrew Fuller -- Executive Vice President And Chief Financial Officer

Thanks Mark.

Operator

We'll now take our next question from Randy Binner from B. Riley. Please go ahead.

Randy Binner -- B. Riley -- Analyst

Hey, good morning. In Mark's questions there, I know you talked about frequency. But I guess I -- could you repeat the actual percentage it was lower by in the quarter? I think I've kind of missed that in the conversation.

Gerry Janelle Frost -- Chief Executive Officer And Presiden

The percentage that frequency was down. Is that what you were referring to?

Randy Binner -- B. Riley -- Analyst

Yes.

Gerry Janelle Frost -- Chief Executive Officer And Presiden

Yes. So for the accident year, we -- our claims reported in the quarter were down 18%, for accident year 2020.

Randy Binner -- B. Riley -- Analyst

Yes, for accident year. Got you. And then, just on the expense ratio, the termination of the trust, I guess, as a second injury or multi injury fund. I think that's a discrete matter, meaning it's complete, right? But the follow-on question would be, to the extent that the function of kind of generally better claim results, are there other such funds out there that might have early terminations?

Neal Andrew Fuller -- Executive Vice President And Chief Financial Officer

Yes. It's a really good question, Randy. This was one of the bigger funds. This was the Georgia Subsequent Injury Trust Fund, and they had been assessing the industry about $100 million a year for pretty much the last 20 years. And I think they finally got to the point where actuarially they ended that assessment a little bit earlier than scheduled.

So we had a full accrual up for that, and that's why we had the one time item. Another fund that we had a similar event like this, it was actually in the last year in the fourth quarter, and that was South Carolina. But there's not too many other funds out there that have been shut down that are still assessing the industry like this. We typically take a conservative view toward those loss-based assessments and put them up. And then this was a one time benefit.

Randy Binner -- B. Riley -- Analyst

Okay. Understood. And then just on the tax rate. You all have shown good profitability. But I guess the tax rate has been a little bit slower or a little bit lower than expected. And I think in years past where you've had good earnings there's been kind of a true-up at the end of the year. And so I'm wondering if that might be the same dynamic this year. In the fourth quarter?

Neal Andrew Fuller -- Executive Vice President And Chief Financial Officer

Yes. No. Yes, we try to forecast net income for the full year when doing our quarterly provision. So that is a forecasted rate. And typically, I don't know that we see as big a true-up in the fourth quarter. The true-up in the quarter that we do see is really around assessments. And that's why typically we see our expense ratio tends to be lower in the fourth quarter than it is in other quarters during the year.

Mark Hughes -- Truist -- Analyst

Okay. That works. Thank you.

Neal Andrew Fuller -- Executive Vice President And Chief Financial Officer

Thanks Randolph.

Operator

[Operator Instructions] And we'll now take our next question from Matt Carletti from JMP Securities. Please go ahead.

Matt Carletti -- JMP Securities -- Analyst

Ok thanks. Good morning. Neal, maybe I'll actually start off right where Randy left off with just a follow-up question on kind of the expenses and the activity in the quarter. On your comment about for a while now Q4 is often a time when you provision for these potential assessments, and then if they don't happen, bring that down. Should we view kind of what happened in Georgia this quarter as a little bit of a pull forward of that? Or is it kind of an independent thing from that normal process that takes place in Q4?

Neal Andrew Fuller -- Executive Vice President And Chief Financial Officer

Yes. It's a good question. It's an independent thing. And that was a loss-based assessment, it wasn't subject to that seasonality.

Matt Carletti -- JMP Securities -- Analyst

Got it. Perfect. That's very helpful. And then, can we talk about investments a little bit? And just -- I appreciate the commentary you gave. Just curious like what -- where is the new money yield currently? Just trying to get a better feel for kind of where you're reinvesting dollars as they roll off versus the book yield today?

Neal Andrew Fuller -- Executive Vice President And Chief Financial Officer

That's been tough. The new money yield is quite a bit lower than what's been rolling off of the portfolio. We also, though, have seen a pretty significant decline in the short-term because we have cash that we use for dividends and other purposes that is in that 0 to 1-year timeframe. And that particularly is where we've seen a big hit with the reduction in the federal interest rates, particularly on a year-over-year basis. I expect that, that will continue for a couple more quarters in terms of it being an unfavorable comparison. And then it would -- should stabilize and then with lower interest rates gradually roll down.

Matt Carletti -- JMP Securities -- Analyst

Okay. That's helpful. And maybe a question for Janelle. I appreciate your commentary around kind of pricing and how -- what states you're in and industries really do matter. And obviously, your mix probably, we know, looks a bit different than the industry. Can you give us some color how it looks by size, account size? Is it -- are you seeing signs, good, bad or otherwise, in certain parts of your book that might not be apparent in the aggregate number?

Gerry Janelle Frost -- Chief Executive Officer And Presiden

Yes. That's a really good question. For this quarter, we mentioned -- we had really strong policy retention of 94.6%. And it really was, I would say, for most of our -- when I think about our policy size, most of our policy size probably with the exception of the larger account. And when I say larger, that would be 250, 150-plus, not that we have a large number of those claims or those policies, but that's play where -- and again, that sort of makes sense, right? That's where it's most competitive for us. Our sweet spot is the smaller policy size than that.

Matt Carletti -- JMP Securities -- Analyst

Got you. Got it. Perfect. And then, last question. You've given us kind of, I think, kind of claim count in the past of the large claims. I think you defined them as north of $1 million. How is that running this year versus last year or this year versus expectations, whatever the right metric is?

Gerry Janelle Frost -- Chief Executive Officer And Presiden

Yes. At the end of the quarter we had 11 claims that were over that $1 million. And if you compare that, I think, at year-end last year, we had something like 16 or 18 of those claims. So nothing unusual about that and still a quarter to go. And as I said in my opening remarks, we never know which quarter it's going to happen in, but certainly not with -- it's certainly within expectations.

Matt Carletti -- JMP Securities -- Analyst

Yes. I think we all remember years where last week of the year you get surprised. So hopefully, that's not the case. Thank you for that color. Best and good luck forward. Thank you. You guys, to America for getting back on your feet after that recent storm.

Gerry Janelle Frost -- Chief Executive Officer And Presiden

Thank you Matt. We appreciate that.

Neal Andrew Fuller -- Executive Vice President And Chief Financial Officer

Thanks Matt.

Operator

And we'll now take our next question from Mark Hughes from Truist. Please go ahead.

Mark Hughes -- Truist. -- Analyst

Just a quick follow-up on the frequency question. Do you see it more in some areas as opposed to others? When you think about your construction accounts that have been working pretty consistently with steady payroll through this period? Do you even see them with frequency down? I know there's some phenomenon of in volatile times people are less likely to report maybe smaller claims. Just any more granularity on where you're seeing it, why you're seeing any mix issues would be great.

Gerry Janelle Frost -- Chief Executive Officer And Presiden

Yes. The why part of that question, Mark, is an excellent one that I wish I had clear insight into why something doesn't happen, in particular in this quarter why are the claim counts as -- why is the 18% lower when we -- our insureds are working, they're reporting payrolls to us. To your point about industry mix, it was down across the board. So it was not like it was particular to a certain group or type of industry. I can only tell you what my speculation is and what my thoughts are about it. I think insureds are -- we know our insureds are working.

I believe we may be working, and I think we're more conscious of safety, we're more conscious of our surroundings, maybe working at a different pace. I speculate, and this is again Janelle speculating, not that I have hard-and-fast data, I speculate that we have probably fewer new workers in our industries right now. And we often talk about the newer workers that tend to drive up frequency. I think right now it's steady as you go, they're not adding staff. So maybe that's contributing to the lower claim counts. It's certainly happening, but it's hard for me to measure why something doesn't happen.

Mark Hughes -- Truist. -- Analyst

And it wouldn't -- I guess it wouldn't be the low severity claims that are not being reported. Otherwise you would see that in your severity numbers, correct?

Gerry Janelle Frost -- Chief Executive Officer And Presiden

Right. Right. That's right. It's a very good point.

Mark Hughes -- Truist. -- Analyst

Okay. All right. Thank you.

Gerry Janelle Frost -- Chief Executive Officer And Presiden

Thank you Mark.

Neal Andrew Fuller -- Executive Vice President And Chief Financial Officer

Thanks Mark.

Operator

And we have no further questions. That does conclude our question-and-answer session. I would now like to turn the call back over to Janelle for any additional or closing remarks.

Gerry Janelle Frost -- Chief Executive Officer And Presiden

Thank you. It is great to speak to you today from our beloved Southwest Louisiana. There's nothing like two hurricanes and a global pandemic to serve as a reminder of the dedication of the AMERISAFE family. Thank you to all of our employees across the country for your commitment to our mission. Stay safe and stay well.

Operator

[Operator Closing Remarks]

Duration: 29 minutes

Call participants:

Kathryn Housh Shirley -- Executive Vice President, Chief Administrative Officer And Secretary

Gerry Janelle Frost -- Chief Executive Officer And Presiden

Neal Andrew Fuller -- Executive Vice President And Chief Financial Officer

Mark Hughes -- Truist -- Analyst

Randy Binner -- B. Riley -- Analyst

Matt Carletti -- JMP Securities -- Analyst

Mark Hughes -- Truist. -- Analyst

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