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Amerisafe, inc (NASDAQ:AMSF)
Q2 2021 Earnings Call
Jul 29, 2021, 10:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the AMERISAFE 2021 Second Quarter Earnings Conference Call. Today's conference is being recorded.

At this time, I'll turn the conference over to Kathryn Shirley, Chief Administrative Officer. Please go ahead.

Unidentified Speaker

Good morning. Welcome to the AMERISAFE 2021 Second Quarter Investor Call. If you have not received the earnings release, it is available on our website at www.amerisafe.com. This call is being recorded. A replay of today's call will be available. Details on how to access the replay are in the earnings release. During this call, we will be making forward-looking statements. These statements are based on current expectations and assumptions that are subject to various risks and uncertainties. Actual results may differ materially from the results expressed or implied in these statements if the underlying assumptions prove to be incorrect or as a result 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 statements.

I'll now turn the call over to Janelle Frost, AMERISAFE's President and CEO.

Janelle Frost -- President & Chief Executive Officer

Thank you, Kathryn, and good morning, everyone. I generally begin these calls with an update on the workers compensation market. This quarter, there are no substantial changes in the market for which to provide an update, approved loss costs decreases are averaging in mid-single digits and competition is strong. As for AMERISAFE, our combined ratio of 74.4% for the quarter, resulted from favorable case development from accident years 2019 and prior and a competitive expense ratio. Our long-view approach to underwriting discipline in claims management continued to produce underwriting margins above industry levels.

We're focused on remaining competitive and disciplined in our underwriting. In the quarter, this resulted in flat policy count with pricing down from the prior-year quarter. Our ELCM was at 1.52. New business binds in the quarter were less than the prior-year quarter, but we had strong renewal retention of 93.9%. Combined, premium for policies written in the quarter was down 8.9% with average loss costs down 6.5%. Audit premium in the quarter remained positive, despite that the audited policy period covered the full impact of the COVID-19 pandemic. We view this as a strong economic sign for our insureds and their respective industries. In total, gross premiums written were down 8.2% from the prior-year quarter.

Turning to losses, we experienced favorable case development in the quarter from accident years: 2015 through 2019. This favorable case development comes from our focus on injured workers' medical care, and their potential to return to work starting from the first reported injury until the claim is settled. Experience in reserving and handling claims for our claim staff is one of the many differentiators for AMERISAFE. As a reminder, our field case managers on average handle less than 50 indemnity claims. This is well below industry averages and allows for extensive claims management. This quarter that focus decreased prior accident year losses incurred by $17.9 million, or 25.6 basis points.

That same experience and consistency also contributed to our loss estimate for the current accident year of 72%. Frequency for the current accident year, we -- returned to pre-pandemic levels as expected. We do not know if the delta variant surge will impact claim counts later in the year. Severity for the current accident year was also within our expectations. The pandemic did not materially impact severity in our book of business. We also refer to the number of large claims as a measure of severity. At the end of the second quarter, we had three claims with case incurred over $1 million.

The timing of when these claims occur can be random, so our offer as comparison, 18 claims reported at the end of 2020 and 16 claims reported at the end of 2019.

I'll now turn the call over to Neal to discuss investments, expenses, and capital. Neal?

Neal Fuller -- Chief Financial Officer

Thank you, Janelle, and good morning, everyone. For the second quarter of 2021, AMERISAFE reported net income of $23.8 million or $1.23 per diluted share, compared with $23.9 million or $1.24 per diluted share in last year's second quarter. Operating net income for the second quarter was $20.2 million or $1.4 per share, an increase of $0.04 from the second quarter of 2020. Revenues in the quarter decreased to $81.2 million compared with $89.1 million in the second quarter of 2020. Net premiums earned decreased 8% to $69.9 million when compared to last year's second quarter. Turning to our investment portfolio. Net investment income decreased 8.1% in the second quarter to $6.7 million, compared with $7.3 million in the second quarter of 2020. The decrease was driven by lower interest rates on fixed-income securities. The tax-equivalent yield on our investment portfolio was 2.60% at the end of the second quarter. The pre-tax yield on the portfolio was 2.30% at the end of the quarter, down from 2.55% one year ago. Realized gains for the portfolio on securities sold during the quarter were $1.2 million, compared with $163,000 during the second quarter of 2020.

The investment portfolio is high-quality, carrying an average AA-minus credit rating, with the duration of 3.67, and with 63% in municipal bonds, which includes 14% in taxable monies, 20% in corporate bonds, 7% in US treasuries and agencies, 5% in equity securities, and 5% in cash and other investments. Approximately 60% of our bond portfolio is comprised of held-to-maturity securities, which were in a net unrealized gain position of $31.2 million at quarter-end. These unrealized gains are not reflected in our book value as these bonds are carried at amortized cost.

Moving now to operating expenses. Our total underwriting and other expenses were $18.5 million in the quarter, compared with $21.1 million in the second quarter of 2020. The decrease was largely due to lower loss-based and premium-based insurance-related assessments. By category, the 2021 second-quarter expenses included $6.8 million of salaries and benefits, $5.3 million in commissions, and $6.3 million of underwriting and other costs. As a result of the favorable decline in expense, our expense ratio for the quarter was 26.4%, compared with 27.8% in the second quarter 2020.

Our effective tax rate for the quarter was 18.5%, the same rate as in last year's second quarter. Return on equity for the second quarter was strong at 20.8% compared to 21.3% for the second quarter of 2020, when the stock and bond markets recovered from the pandemic. Operating ROE for the quarter was 18.3%. In capital management, our Company paid its regular quarterly cash dividend of $0.29 per share in the second quarter. This quarter, the Board declared a quarterly cash dividend of $0.29 per share, payable on September 24, 2021 to shareholders of record as of September 10, 2021. Our Company continues to generate significant amounts of capital beyond that needed for our ongoing operations. Our current operating leverage, measured by net written premiums to GAAP equity -- that ratio is 0.62 times. Our target for this ratio is 1.1 times. And we will continue to manage capital to work toward that long-term target. And finally, just a few other items to note. Book value per share at June 30, 2021, was $24.19, up 6.6% from $22.70 at year-end. Our statutory surplus was $407 million at quarter-end, up from $366 million at December 31, 2020.

And lastly, we plan to file our Form 10-Q with the SEC, tomorrow 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

Thank you. [Operator Instructions] We'll pause a moment to give everyone opportunity to signal for questions. We'll take our first question from Mark Hughes with Truist. Please go ahead.

Mark Hughes -- Truist Securities -- Analyst

Yes. Thank you. Good morning, Janelle. Good morning, Neal.

Janelle Frost -- President & Chief Executive Officer

Good morning, Mark.

Neal Fuller -- Chief Financial Officer

Good morning, Mark.

Mark Hughes -- Truist Securities -- Analyst

Janelle, did you give the ELCM, I think, you've missed it again?

Janelle Frost -- President & Chief Executive Officer

I did, 1.52, Mark.

Mark Hughes -- Truist Securities -- Analyst

And then, thinking back on the last quarter and looking back at my -- note then, you seem to be fairly upbeat about the prospects for new business, potentially growth and the top-line decline was a little bit less last quarter. Can you talk about what you might have seen between then and how the second quarter turned out, kind of the down high-single-digits is where you've been for some time now, but there seem to be some green shoots perhaps. What do you see?

Janelle Frost -- President & Chief Executive Officer

Yes, that's a great question, Mark. Certainly, one quarter does not a trend make. We were -- and I remain optimistic in terms of -- I think as -- I think, as a whole, vaccination rollouts do provide a level of optimism, not only for public health but for the economy. On the last quarter's call, we talked about the infrastructure bill. I know there's headlines about that today that it seems to be making some progress. I haven't seen any real changes in the underlying metrics. So, certainly, there are things within that bill that we believe will be beneficial to AMERISAFE, $110 billion on roads and bridges, $65 billion on broadband. I think there's even maybe $17 billion or so on ports. All things that we think could fall within AMERISAFE will house in terms of industries that we insure and could be beneficial to small-to-mid-size employers. So that level of optimism really hasn't -- I don't feel like has shifted from first quarter to second quarters. Certainly, we like everyone else in the country is looking there [Phonetic], concerned about the delta variant and the surge there, both from a public health standpoint.

And what it could mean to the industry -- I think the industry fared better than we hoped -- we would -- yes, better than anticipated it early on in the pandemic. So, I think we don't see the delta variant for -- at least from an industrywide or from the business side of things, hopefully not being that impactful. But again, certainly, health concerns. We also -- there was, I believe, some optimism about getting the economy upstart -- getting the economy started up and running, agents being back out in the field, creating efficiencies in the pipeline. I don't know that that deteriorated all that much from first quarter to second quarter, but we certainly were not able to grow policy count, which we were able to do in the first quarter. We did not do that in the second quarter. I don't know that there is a trend that I would point to there in terms of something that we saw a shift in the market. That wasn't the case, the level of competition has remained the same. We don't see, I mean anecdotally, we may see something that we think is irrational but not throughout the marketplace, irrational pricing. So, no, I don't view that as a trend.

That's a very long answer to I think a simple question. I apologize.

Mark Hughes -- Truist Securities -- Analyst

Yes. No, that's very helpful. And about the 2019 accident year, was this the first quarter that you drew from 2019?

Janelle Frost -- President & Chief Executive Officer

It is. And if I like -- I have those numbers here. So, 2019 was $4.5 million, 2018 was $4 million, 2017 was $4.4 million, 2016 was $2.3 million, and then prior to that was $2.7 million. But this was the first quarter that we drew from 2019. When I look at the industrywide numbers that were published in May, I guess by NCCI; but even in that data, you saw deterioration from '19 to '20. So, if you recall, there was -- they -- reported numbers show deterioration, calendar year an accident year, deterioration from '18 to '19, and saw the same thing going from '19 to '20, both on a calendar year basis and an accident year basis. So the workers' compensation industry as a whole is showing some deterioration in that experience, year-over-year, both calendar year and accident year. So, and AMERISAFE --

Mark Hughes -- Truist Securities -- Analyst

Yes.

Janelle Frost -- President & Chief Executive Officer

We are going in the opposite direction of that so.

Mark Hughes -- Truist Securities -- Analyst

Do you have -- by chance do you have the -- when you first opened the 2018 accident year, I don't know if it was in 2Q of last year, but your first look at it, I think it was $4.5 million for the 2019 and at first go, I don't know if I'm trying to read too much or into it, I'm just sort of curious when you first read that 2018, how did it look?

Janelle Frost -- President & Chief Executive Officer

It's a great question. I don't have that off the top of my head, I apologize.

Mark Hughes -- Truist Securities -- Analyst

Yes, that's all right. It's probably not really a good data -- not -- probably not relevant, probably just too much volatility. And just to be clear, the three large claims over $1 million that was year-to-date, I think it was one on the first quarter?

Janelle Frost -- President & Chief Executive Officer

That's correct. That's correct.

Mark Hughes -- Truist Securities -- Analyst

And then a final question. There was some discussion last quarter about the potential wage inflation maybe being helpful when you look at well, maybe, I'll ask -- I'll combine this into two questions. When you look at renewal premium, how was that? Are you seeing any impact of potential wage inflation? And then secondly, you talked about the next job being important for a lot of your, say, construction customers. How do you see that now?

Janelle Frost -- President & Chief Executive Officer

Yes. So I'll speak to wage inflation, first. So, we did see payroll increase of about 2.9% and it's sort of 80/20 in terms of 80% of that was wage inflation, 20% of that being new employees. And so, we feel really confident in those numbers. And it really much -- pretty much was across our industry groups, with the exception of oil and gas, which I don't think surprises anyone, and that's a very small portion of our book. So -- that happened in the second -- we saw that in the second quarter. To your question about -- will the next job be there? We are keeping a close eye on the supply chain, right? Because I do think there are capital expenditures that are ready to be funded, but there may be some delays in terms of the supply chain and everything that has to happen along the way. So, we were keeping our eye on that. On the flip side of that, we insure the lumber industry and that was a good industry for us in the second quarter. So we saw increased flow from the lumber industry in the second quarter.

Neal Fuller -- Chief Financial Officer

And Mark, on your question about renewal -- retention in our -- policy retention for the quarter was strong at 93.9% for those that we offered renewal. And that compares to 93.7%, last year, in the same quarter. So it tends to be running fairly strong in that 93% to 94%, pretty much for the last several years. People staying with us once they understand the value of AMERISAFE.

Mark Hughes -- Truist Securities -- Analyst

Very good. Thank you.

Janelle Frost -- President & Chief Executive Officer

Thank you, Mark.

Operator

[Operator Instructions] We'll take our next question from Matt Carletti with JMP. Please go ahead.

Matt Carletti -- JMP Securities -- Analyst

Hey. Good morning, Janelle. Good morning, Neal.

Janelle Frost -- President & Chief Executive Officer

Good morning, Matt.

Neal Fuller -- Chief Financial Officer

Good morning, Matt.

Mark Hughes -- Truist Securities -- Analyst

Mark -- Mark stole most of my questions. So I -- he had some good ones. Just want to follow up on the kind of that last point: payroll inflation was a topic I wanted to talk about. Can you help us a little bit with the mechanics of kind of timing in terms of, if you were to see it, right? And I'm thinking more actual wage inflation as opposed to number of jobs increasing. So just kind of what's been talked a lot in the market in terms of just wages going up? Have you seen much evidence of that? I think you -- kind of answered that already. And secondly, like, would you really expect to yet, if it's happening, or is that more of a function that it will really get caught on the audits as the policies wrap up in the months following?

Janelle Frost -- President & Chief Executive Officer

Yes. I think you're thinking about it the right way, Matt. I think the way we would see it coming through in the premium dollars for the -- obviously for our renewal book would be in the audits. Now, I guess, on a new business side, if they are estimating that their payrolls are going to be higher, that would come in in terms of new business premium, which ever quarter we write it in. But it certainly, [indecipherable] the larger portion of our book. You're absolutely right, that would not really be reflected in premium dollars until that policy was audited at 18 months after the effective date.

Matt Carletti -- JMP Securities -- Analyst

Got it. Okay. Just want to make sure that I understand that correctly. Great. Well, that's all I got. I missed the ELCM as well for what it's worth. So, thank you for reiterating it.

Janelle Frost -- President & Chief Executive Officer

I said, it's too early, people were still dialing in -- afterwards we noted that.

Matt Carletti -- JMP Securities -- Analyst

Okay. Congrats on another nice quarter and we'll talk soon.

Janelle Frost -- President & Chief Executive Officer

Thank you, Matt. Appreciate it.

Neal Fuller -- Chief Financial Officer

Thanks, Matt.

Operator

Ladies and gentlemen, this does conclude today's question-and-answer session. I would like to turn the conference back to Janelle Frost for any additional or closing remarks.

Janelle Frost -- President & Chief Executive Officer

What a difference a few months can make. It has just been three short months ago I spoke of the optimism for public health and the economy due to vaccination rollouts. And now we are facing another COVID surge and uncertainty is again at the forefront of economic news. I believe the industries and employers that we insure, fared well economically in 2020 and should continue to do so. In the meantime, please stay safe and well. Thank you for joining us today. [Operator Closing Remarks]

Duration: 21 minutes

Call participants:

Unidentified Speaker

Janelle Frost -- President & Chief Executive Officer

Neal Fuller -- Chief Financial Officer

Mark Hughes -- Truist Securities -- Analyst

Matt Carletti -- JMP Securities -- Analyst

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