Amerisafe Inc Q2 FY2025 Earnings Call

Good day, and welcome to the AMERISAFE Second Quarter 2025 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Kathryn Shirley. Please go ahead.

Thank you, operator, and good morning, everyone. Welcome to the AMERISAFE 2025 Second Quarter Investor Call. If you have not received the earnings release, it is available on our website at amerisafe.com. This call is being recorded. A replay of today's call will be available. Details on how to access the replay are in the earnings release. During this call, we will be making forward-looking statements intended to fall within the safe harbor provided under the securities laws. 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 factors discussed in the earnings release and the comments made during today's 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 will now turn the call over to Janelle Frost, AMERISAFE's President and CEO.

Thank you, Kathryn, and good morning, everyone. I am pleased to begin today's call highlighting our continued success in growing premiums by increasing policy count, exhibiting pricing discipline, and strong renewal retention. Our risk selection, coupled with working more effectively with our agents, generated 12.8% growth in voluntary premiums for policies written in the quarter. Our in-force policy count grew 3.4% in the quarter, supported by new business growth and 93.8% renewal retention. These accomplishments took place in a competitive market where workers' compensation remains the most profitable in the property and casualty space. According to NCCI, the industry's combined ratio remained below 100% for 2024. However, it did not improve over 2023, unlike the other P&C lines, which are getting rate increases. Workers' compensation approved loss costs, on average, are down mid-single digits, with California being a significant outlier with an 8.7% increase. While AMERISAFE only has ancillary exposure in California, we cannot ignore the potential for this dramatic increase to signal a shift in the cycle. Another potential sign for a shift is NCCI's reported 6% increase in medical severity for 2024. Regardless of whether the market remains soft or begins to harden, AMERISAFE is well positioned, both operationally and with a strong balance sheet, to respond and generate consistent underwriting profitability. As for AMERISAFE loss experience, frequency was down compared to the second quarter of 2024, and severity trends are within our expectations. Our current accident year loss ratio was 71% as of the end of the second quarter. In addition, we had $8.6 million of favorable development in the quarter as our claims team continues to demonstrate expertise in finding opportunities to close claims effectively and efficiently. This quarter, accident years 2020 and prior drove most of the favorable case development. Further, on July 23, 2025, our Board of Directors approved the reauthorization of a $25 million share repurchase program, replacing the prior program. Since the inception of our initial program in February of 2010, we have repurchased approximately 1.75 million shares at an average cost of $25.69 per share, totaling $44.8 million. In addition, the company's Board of Directors declared a regular quarterly cash dividend of $0.39 per share payable on September 26, 2025, to shareholders of record as of September 12, 2025. These ongoing capital management strategies reflect our confidence in the long-term value of our business and our commitment to delivering shareholder returns. I'll now turn the call over to Andy to discuss financial results surrounding our underwriting profitability and investment.

Thank you, Janelle, and good morning, everyone. For the second quarter of 2025, AMERISAFE reported net income of $14 million or $0.73 per diluted share, and operating net income of $10 million or $0.53 per diluted share. During the second quarter of 2024, net income was $11 million or $0.57 per diluted share and operating net income was $11.1 million or $0.58 per diluted share. The higher reported net income was primarily driven by stronger valuations across our equity holdings, which resulted in a net unrealized gain on equity securities of $1.8 million during the quarter, in addition to $3.1 million of realized gains, also primarily from equity securities. Gross written premiums were $79.7 million in the quarter compared with $76.4 million in Q2 of 2024, increasing 4.3%. Audit premiums continued to moderate, which increased the top line by $1.5 million compared with $7.3 million in the year-ago period. Despite the audit premium headwinds, voluntary premium growth on policies written in the quarter was 12.8%, fueled by new business production and strong retention. Our total underwriting and other expenses were $21.7 million in the quarter compared with $20.4 million recognized in the prior year quarter. This increase resulted in an expense ratio of 31.3% compared with 29.8% in the year-ago quarter. The expense ratio reflects ongoing investment in AMERISAFE's growth. Further, audit premium, which is earned immediately, has declined in comparison to the prior year, but is still a material contributor to net premiums earned. While voluntary premiums are earned over time, creating an expense premium mismatch that elevates the ratio. Lastly, 100 basis points of the current quarter's expense ratio is due to an increase in insurance-based assessments. We anticipate the full year expense ratio to be in line with previous years. Our effective tax rate was 20.1% compared to 20% in the prior year quarter. Turning to our investment portfolio. In the second quarter, net investment income decreased 10.2% to $6.7 million, driven by a decrease in investable assets following the payment of the special dividend. At quarter end, we had approximately $807 million in investments, cash, and cash equivalents compared to $884 million at June 30, 2024. On a consecutive quarter basis, net investment income increased by 60 basis points. The reinvestment rate environment remained strong this quarter with yields on new investments exceeding portfolio roll-off by 230 basis points, contributing to a tax-equivalent book yield of 3.85% compared to 3.79% in the second quarter of 2024. Our investment portfolio remains high quality, carrying an average AA- credit rating with a duration of 4.5 years. The composition of the portfolio is 62% in municipal bonds, 21% in corporate bonds, 4% in U.S. treasuries and agencies, 7% in equity securities, and 6% in cash and other investments. Approximately 50% of the portfolio is classified as held to maturity. As a reminder, these securities are carried at amortized cost and therefore, unrealized gains and losses are not reflected in our reported book value. Our capital position is strong with a high-quality balance sheet, solid loss reserve position, and conservative investment portfolio. During the second quarter, the company repurchased 63,000 shares at an average cost of $44.55, totaling $2.8 million. And finally, a couple of other topics. Book value per share increased to $13.96, up 3.3% year-to-date. Statutory surplus was $257 million compared to $235 million at year-end 2024. And lastly, we will be filing our 10-Q with the SEC later today after the close of the market. With that, I would like to open the call for the question-and-answer portion of the call.

We will now take our first question from Mark Hughes with Truist.

13% pretty impressive. You described it in the usual way, good retention and strong new business, but could you give something is good or stronger than last quarter. So just sort of curious what you saw in the quarter that drove that business?

Yes, Mark, I'll start by saying this, shout out to the AMERISAFE team. The employees have truly been focused on ease of doing business, agent effectiveness, and creating scalability. I've been talking about it for probably... look back and see how many earnings calls now, and they really are seeing the fruits of their labor. Coming into this year and at the end of last year, we said we were looking for small incremental growth. We are achieving that. We've grown policy count 5.8% since year-end, 3.4% in the quarter. But yet, sticking to our knitting, sticking to our risk selection process, starting from the beginning of the sales process with our sales folks on the ground, working with agents making sure that we are working with the right agents that fit AMERISAFE's profile on to safety being part of that process. Still, 93% of our accounts are still getting that pre-cost safety inspection, our safety visit with our safety folks out on the ground, visiting with prospects, understanding those risks, providing that information back to my underwriters and then our underwriting do what they do best in terms of risk selection, understanding risk, pricing it appropriately. I know we don't give pricing information anymore on this call, but I'll say this about our risk selection process. If I look at that in-force policy count, 83% to 85% of that is still within those hazard groups, ES and G, which is where we consider our specialty, where we consider our sweet spot. So that's a very long answer to the say that I just feel like all of those things collectively are coming together with the intention of finding ways to address this very competitive market that we're in. For the longest time, AMERISAFE probably took more of a defensive position in terms of the market price. And now we look at the soft market has been gone for... I think we're in our 10th... maybe 10th or 11th year of approved loss costs continuing to go down with some improvement. We're not in double-digit declines anymore. We're at mid-single digits, but finding a way to respond to that market and still keep our risk selection profile and what we know we want to underwrite to in terms of profitability top of mind and finding ways to get that done.

Very good. How about the average policy size? I think policy count is up 6%, written is up 13%. I know that's kind of apples and oranges, but any change in the average policy size?

There has been a slight improvement in loss costs, which have decreased by mid-single digits, around 5% to 6%. Wage inflation for the past quarter saw wages rise by approximately 5%. Additionally, NCCI mentioned that wage growth for 2024 did not surpass the changes in loss costs. Previously, our premium dollars were primarily influenced by wage inflation, but that has now balanced out with wage growth around 5% and loss costs in the 5% to 6% range. Consequently, the average premium size may have decreased slightly, but we still find ourselves in the $1,000 range, which is our sweet spot.

Got it. Can you share your thoughts on medical inflation and how the updates to the Medicare fee schedules might affect your perspective on inflation? I understand there are many details that people are still analyzing, but have there been any changes in the reimbursement arrangements for specialists? I'm interested to hear if you have any insights on that.

Yes. As I mentioned earlier, NCCI reported a 6% increase in medical severity for 2024. Their workers' comp medical index showed a 2.8% rise. The remainder of the increase is mainly attributed to utilization, which has been a topic of discussion in the industry for some time and impacts our reserves. I believe my claims team excels in how they initially set those reserves and evaluate claims over the long term. We haven't altered our perspective, as we rely on long-term averages to assess medical severity. Consequently, our reserving practices remain unchanged despite the fluctuations in the data that others may be starting to notice. About two years ago, we discussed home health as an example of certain areas experiencing medical cost inflation due to a shortage of providers in specific regions. When we located providers, we saw significant rate increases. In the industry, there are areas experiencing increased costs, particularly with surgical procedures and possibly more hospitalizations. However, our current data does not suggest a need to modify our reserving practices. I must commend my claims team for maintaining a long-term viewpoint. We have a consistent range of injury types and the severity of those injuries, and there aren’t many scenarios we haven’t encountered, which I hope remains the case. I feel very assured in our case reserving process.

Very good. Any stats on new business? Like new business production year-over-year in the quarter. I know that's something you haven't historically disclosed...

We're very excited about the growth of our new business, though I won't disclose specific numbers since competitors are listening. We are seeing success, and to illustrate our new business growth, our retention rate is 93.8% based on policy count, and we experienced a 3.4% increase in policy count during the quarter. Additionally, while our agent count decreased from about 2,200 at the end of 2023 to roughly 1,700 at the end of 2024, and it dropped to almost 1,600 by the second quarter, our policy count has still gone up. This demonstrates how we've managed to secure new business and operate effectively with fewer agents.

The addition by subtraction traction method. I'll ask you 1 final question. Construction. What's the vibe in construction?

We're still seeing wage growth according to the payrolls reported to us. Interestingly, this past quarter, we didn't see an increase in new employee count; in fact, there may have been a slight decrease. We're monitoring this closely. New employees typically raise claim counts and frequency, so we would prefer to extend work hours. Anecdotally, we are hearing about extended hours with the same employees working longer. In construction and agriculture, factors like integration and undocumented workers are likely influencing these numbers, making this quarter particularly noteworthy. If we consider immigration as a factor, not adding new staff but extending work hours could benefit frequency. However, if undocumented workers are replaced by higher wage earners, it could boost premiums, but if those new workers are inexperienced in the industry, it might increase frequency as well. There are various scenarios to consider, but I believe this could significantly impact our construction and agriculture sectors.

We will go next to Bob Farnam with Janney.

Just I think 1 more question in line with kind of what Mark was asking about. I just wanted to know in terms of case load per claim personnel. I don't know if there's been any changes to the case loads over the last few years.

No, sir. Great question, Bob. We're still below 50 claims on average per adjuster, so there have been no changes there.

Okay. You've maintained the 71% accident year loss ratio assumption for several years. Considering the changes in loss cost, can I assume that there's been some upward pressure that may lead to an increase in the future?

I believe that's a reasonable assumption. There is certainly pressure in that area. Regarding your point, as the loss cost keeps decreasing, one of the advantages of AMERISAFE, particularly thanks to the claims department, is how we manage reserving. We are able to set those reserves to ultimate fairly quickly, which assists us in pricing our products and improving our profitability in risk selection. However, it's clear that in terms of the total number of claims and the costs associated with them, we are experiencing pressure on that 71% moving forward, unless there is a change in the market. I wanted to mention that just in case anything shifts, but if the current trends regarding loss costs persist, we will definitely face pressure in that area.

Okay. And in terms of capital management, how are you balancing kind of share repurchases versus the special dividend? Is there any thought process behind how much you're allocating to each?

Bob, it's Andy. Right now we looked at the buyback. So of course, we want to buy back our stock at the right time. So we did go to the Board, as Janelle said, and it was reauthorized up to $25 million. And then again, the inquiry is how we balance out, does that mean to have any kind of patients towards the special dividend. We assume there will be a special dividend. The recommendation is there, and there is capital sufficiency. I mean, that's probably the best way I can answer it for you.

Okay. I understand. My last question is about the expense ratio for this year, which seems to be around 30 percent, possibly a bit lower. Do you have a long-term target for the expense ratio that you aim to maintain, whether it's at 30 percent or higher or lower?

So for the sake of not being too forward-looking, what we assume is that we will be within the range that we have been historically.

And the historical range, you don't expect any changes at least for now without getting any...

No. And if I can add just 1 other. If you look at the quarter, we're at 31.3%, look at the year, we're at 30.6%. So again, the assumption is that we'll be within the historical range.

We'll return next to Mark Hughes with Truist.

Yes. Just 1 follow-up. The policyholder dividends were up a bit in the quarter. What drove that?

Mark, I mean the policyholder dividend is some of our policyholders did qualify for it. And it isn't linear. It's lumpy. So if you recollect or even from last year, it goes up and down each quarter. So that's all I can say is there's really not any spike. It's just that we had more policies qualified for the policyholder dividends.

Could it be seen as a competitive issue that you're inclined to pay higher dividends on some policies to stay competitive, or is it more about improved loss experience driving this? What’s the best way to understand it?

It's likely a combination of both, Mark. I want to highlight that policyholder dividends for AMERISAFE primarily come from three states: Florida, which is our largest market, along with Wisconsin and Virginia. In Florida, we operate in an administrative pricing environment. Therefore, while policyholder dividends are a way to remain competitive, they are also influenced by loss experience.

Yes. Would one say maybe Florida rates being flat this year instead of down, that there is a little more competition by way of policyholder dividends. Is that a...

One could say that.

It appears there are no further questions at this time. I'll turn the call back to Janelle Frost, CEO, for any additional or closing remarks.

We are pleased with this quarter's continued top line growth and industry-leading operating ROE of 14.9%, supported by our investment in our people and technology and delivering on our commitment to our stakeholders. Thank you for joining us today.

Thank you. Ladies and gentlemen, that will conclude today's call. We thank you for your participation. You may disconnect at this time.