Amerisafe Inc Q3 FY2025 Earnings Call

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

Thank you, operator, and good morning, everyone. Welcome to the AMERISAFE 2025 Third 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 results 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 statement. I will now turn the call over to Janelle Frost, AMERISAFE's President and CEO.

Thank you, Kathryn, and good morning. We are pleased that our growth strategy in this competitive market is yielding a healthy 20.5% return on average equity and a 90.6% combined ratio for the quarter. Our continued success in the market reflects the strength of the AMERISAFE value proposition. At our core, we are a profitable underwriter, focused on knowing our risk, pricing them appropriately and servicing our policyholders and their workers. In doing so, we are a better carrier for our agents and create long-term value for our shareholders. This is our sixth consecutive quarter of top line growth. Voluntary premiums on policies written in the quarter grew 10.6%. Combined with audit premiums, our gross premiums written grew 7.2% and net earned grew 6.2% over the third quarter of 2024. We are seeing the compound benefits of disciplined underwriting, robust new business production and strong renewal performance. Turning to losses. Our accident year loss ratio was in line with the prior year end quarter at 71%. Frequency remains at historically low levels, while severity continues to not higher on a year-over-year basis. We are confident that our claims handling practices, coupled with upfront risk selection remain consistent and disciplined in the current environment. Thus, the company experienced $8.9 million of favorable reserve development on prior accident years, primarily accident years 2020 and prior. In addition to announcing the quarterly results, we also announced the Board of Directors declared both a regular quarterly dividend of $0.39 per share and a $1 special dividend payable on December 12, 2025, to shareholders as of record as of December 5, 2025. The Board takes a comprehensive approach when evaluating capital deployment, considering both the regular quarterly dividend, share repurchases and any special dividend within the broader framework of AMERISAFE's capital position operating performance and future growth opportunities. This balanced strategy ensures that we continue to reward shareholders while maintaining the flexibility to invest in the business and support long-term value creation. Our capital management philosophy remains consistent. Profitability drives capital and capital is deployed with discipline. We are proud of our track record. Over the past 13 years, AMERISAFE has declared nearly $50 per share in total dividends, including $12.68 in regular dividends and $37.25 in special dividends per share. Along with managing capital, the continued investment we are making in our people and technology is reflected in our solid top line growth at industry-leading returns, delivering long-term value to our shareholders. With that, I'll turn the call over to Andy to discuss the financials.

Thank you, Janelle, and good morning to everyone. For the third quarter of 2025, AMERISAFE reported net income of $13.8 million or $0.72 per diluted share and operating net income of $10.6 million or $0.55 per diluted share. During the third quarter of 2024, net income was $14.3 million or $0.75 per diluted share and operating net income was $11.1 million or $0.58 per diluted share. Gross written premiums were $80.3 million in the quarter compared with $74.9 million in Q3 of 2024, increasing 7.2%. Audit premiums increased the top line by $2.5 million compared with $4 million in the prior year quarter. Despite the audit premium headwinds, voluntary premium growth of 10.6%, fueled by new business production and strong retention is driving top line growth. Our total underwriting and other expenses were $22.1 million in the quarter compared with $21.3 million in the prior year quarter, which resulted in an expense ratio of 31.1% compared with 31.7% in the prior year quarter. The expense ratio reflects ongoing investment in AMERISAFE's growth as we see elevated opportunity in our target markets. Our effective tax rate was 21% compared to 19.5% in the prior year quarter. Turning to our investment portfolio. In the third quarter, net investment income decreased 12.3% to $6.6 million, driven by a decrease in average investable assets following the payment of the special dividend in the fourth quarter of 2024. At quarter end, we held approximately $817 million in investments cash and cash equivalents compared to $899 million at September 30, 2024. The reinvestment rate environment remains fairly strong with some moderation compared to the second quarter of 2025. Yields on new investments exceeded portfolio roll-off by 77 basis points, driving the portfolio tax-equivalent book yield to 3.9%, relatively flat versus the third quarter of 2024. The yield on cash held in money market funds ended the quarter at 4% compared to 4.8% at the end of the prior year quarter. The unrealized gain for the equity securities was $4.1 million compared to $3.9 million in the prior year quarter. Both periods were driven by strength in the U.S. equity market. Our investment portfolio remains high quality, carrying an average AA minus credit rating with a duration of 4.3 years. The composition of the portfolio is 61% in municipal bonds, 21% in corporate bonds, 3% in U.S. treasuries and agencies, 7% in equity securities and 8% in cash and other investments. Approximately 45% of the portfolio is classified as held to maturity, which maintains a net unrealized loss position of $7.6 million. As a reminder, these securities are carried at amortized costs; 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 third quarter, the company repurchased roughly 31,000 shares at an average cost of $43.72 per share totaling $1.3 million. And finally, a couple of other topics. Book value per share increased to $14.47, up 7.1% year-to-date. Statutory surplus was $259 million compared to $235.1 million at year-end 2024. Lastly, we will be filing our Form 10-Q with the SEC later today, October 30, 2025, after the close of the market. With that, I'd like to turn the call over to the operator for the question-and-answer portion.

And our first question is going to come from Matt Carletti.

Janelle, I was hoping maybe to start off, obviously, voluntary premium growth has been kind of solid double digits for a couple of quarters now, which is a great kind of emerging trend. Could you talk a little bit about where you're seeing success where that growth is coming from, if it's kind of any particular areas? Or maybe it's just more broad-based and it's pretty evenly across kind of all aspects of your business?

Thank you for recognizing that. I'm happy to report that our growth is broad-based. We increased our policy count in the quarter compared to the second quarter, with a growth of approximately 2.7%. Year-over-year, this growth reaches about 11%. Increasing policy count is crucial for us. Our insured payrolls are also growing, which is encouraging, especially given the headlines about unemployment and wage growth expectations. Skilled labor jobs in high-hazard industries are performing well, supporting our premium growth through payroll increases. We continue to see strong retention for renewals; our renewal retention rate for the policies we renewed was 93.6%, a healthy figure that matches our performance from the previous year. In this highly competitive market, we have managed to retain the accounts we value due to the collaborative efforts of the AMERISAFE team. Our experienced sales staff and the way we integrate safety services into the risk selection process provide significant value not only for our underwriters in assessing and pricing risk but also for our policyholders and their agents. The relationships built through AMERISAFE are essential and set us apart. Additionally, I must highlight our claims handling experience, which positively influences renewal retention. When a claim is addressed by an AMERISAFE employee, we ensure it is handled properly and treat injured workers well, which is important to our policyholders. All these factors contribute to our growth strategy. We've prioritized ease of doing business and speed to market, and we are now seeing the results in our growth metrics. It's important to note that we haven’t added class codes or expanded geographically; our growth is primarily due to deeper market penetration and improved collaboration with our agents.

Great. And then if I kind of try to tie it one step further. So as I look at your business, I mean financially kind of earnings returns have been strong for many years now and really unchanged if you want to look at ROE or something like that. So really strong kind of where the business is. You talked a little bit about the special dividend at the outside of the call and it is a little bit smaller than some of the previous years. So would I be correct to kind of interpret that maybe an output of that is expression of your guys' confidence in the kind of the durability of that growth or that growth going forward and that that's where you'd prefer to allocate capital versus giving it back to those growth opportunities are there?

Well said, Mr. Carletti, that is exactly what you should infer into the dividend. I mean I'm excited about the dollar dividend by no question. But I think it definitely infers that we believe what we have going here in terms of our growth strategy is not short-lived that I believe it has longevity. And we've said since the very beginning when we started paying out the special dividend, part of the reason that we were returning that capital to shareholders is because we made the internal decision; it wasn't the right time to really pour that into organic growth because we wanted that growth to be profitable growth. So now we've had these quarters of top line growth, and it's starting to flow through on the earnings. And so that dividend, we're using that capital and deploying that capital towards that organic growth.

And our next question is from Mark Hughes from Truist.

Janelle or I'll say, Andy, in the spirit of the question about the special dividend and the growth opportunities. How do you view your leverage now? And how much flexibility do you have on the balance sheet? And this would be underwriting leverage.

It is going up, but it's at $1. I mean from our standpoint, I don't think it's really changed. I think it's increased a little bit, but it's right at $1.

Yes. And then what would you see as kind of the upper bound kind of comfortably where would you be able to take that?

I would say about $1.5 mark.

Okay. What's the latest on medical inflation?

There have been several articles recently. AM Best released a segment report on workers' compensation, discussing medical inflation, which is certainly a concern for everyone. We are not exempt from medical inflation. However, I believe that the fee schedules and the fee structure in workers' compensation are likely mitigating this effect more than what is being observed in non-workers' compensation areas, like health care renewals. Therefore, I think we have some relief from the fee schedules concerning medical inflation. Utilization is also an area we have touched on in previous calls. NCCI indicated a 6% increase due to medical inflation, and we are paying close attention to this, particularly in home health services. I've been emphasizing home health for several years and will continue to do so. Furthermore, we have noticed an uptick in visits from physician assistants, which can lead to additional doctor visits due to the need for a doctor's approval for patient releases. We are monitoring this situation. Although we have not yet seen any significant data trends, utilization is an aspect we need to keep track of, especially since the fee schedules appear to be effective and there are known shortages within the health care industry regarding service availability. Those are the things we are keeping an eye on.

Yes. What's been the latest trend in terms of the approved state loss costs, the most recent ones, any trend there?

Great question. We have seen increases in four states: Missouri, D.C., Nevada, and California, which we discussed in our last call. On average, most of the loss costs for 2026 are already in and approved, and we are observing steady mid-single-digit declines. I reviewed the CIAB study, which surveys agents regarding their clients' renewals. Although they have not released their third-quarter data, the second-quarter data showed that more than 50% reported no change. If this reflects what agents are observing in the market, it suggests that carriers are maintaining discipline regarding loss costs. While absolute loss costs may be down, the average pricing they are using appears to be flat according to this agent survey. This indicates a level of discipline in the marketplace.

Yes. You'd mentioned your insured payrolls are expanding. Any specific comments on wage growth how wage growth is compared to in 3Q last few quarters?

Right. So wage growth in the quarter, we saw about 6.7%. As the total was about 8.9%. 6.7% was actual wage changes and a new employee count was 2%. So I was happy to see that 2% in new employee count. If you recall, last quarter, it was actually slightly negative and I wondered, okay, is this a blip? Or is this a data point in terms of is there something happening with integration with our particular employee base, but it sort of bounced back to norms this quarter, so I feel pretty confident about that, that was just a blip last quarter.

Yes. What was the wage last quarter, wage growth?

5.7%. Yes, if I look at the last four quarters, it was 5.5%, 6.3%, 5.7%, 6.7%.

Okay. Very good. How about the large losses in the quarter?

We ended the quarter with 17 large losses over $1 million.

That's year-to-date?

Year-to-date, yes.

Yes. That's up a little bit, isn't it?

I believe this time last year, we were at 13 for 2024, but we saw an increase in the fourth quarter. Unfortunately, these things can be unpredictable, and I don’t know in which quarter they will occur. When we file the Q later today, you will notice that reported claim counts on a year-to-date basis have increased just slightly. This is a noteworthy figure considering how much we've expanded our policy count, yet the claim counts have remained relatively stable. This aligns with my earlier comments regarding the low frequency of claims, which is undeniable.

Yes. And then anything on the competitive front, Brand X talking more about getting into high hazard?

Great question. The competition remains very intense, and there hasn't been significant change regarding competitors' interest levels. We occasionally see variations in specific classes in certain states, typically due to a negative experience in that area. This consistent approach has been a strong selling point for AMERISAFE with our agents, as we've maintained our strategy since 1986. Our underwriting footprint and the classes of business we focus on demonstrate significant stability, which I believe is a key value proposition for our agents at AMERISAFE.

Yes. Any thoughts when we think about audit premium? Obviously, that's led to some just a little bit of a headwind in terms of the written premium but corrected for that, obviously, you've been up double digits. If you're seeing a little more wage growth, is that a positive for audit premium? Or should that continue to moderate? What are the puts and takes there?

That's a really interesting way to look at it. This is just my take on it. I do feel that the wage growth numbers that we're seeing now speak well to future audit premium. At the same time, I have to be very cognizant of all the things that are happening in the economy right now with inflation and everybody is talking about jobs, jobs, jobs, and we're seeing these headlines of major layoffs. I feel our industry groups being the skilled labor is somewhat protected from the types of layoffs that we seem to be seeing nationwide. A lot of those are at least being anecdotally pointed to things like AI is helping us gain efficiencies, et cetera, and that's why we're lowering headcount. But I do think companies are looking for efficiencies as well. That being said, with skilled labor jobs, a little bit of a different story there. So if we can maintain the wage growth, it should bear well for future audit premium moderating, I would think, over time.

Yes. Yes. Okay. And then last cantered question. How about the construction end market, the next job being important, any observations there?

Yes. Based on the payrolls that are being reported to us and the fact that I'll point to that new employee count number kind of bouncing back to normal, the economies for our insured base are holding up really well as of right now.

And our next question is going to come from Bob Farnam from Janney.

Mark Hughes asked about the claims count in relation to the increased revenue shown in the graph and the number of policies. I am curious if you have increased your claims staff to manage a potential increase in claims. Although I understand that the frequency of claims has not yet risen, I would like to know how your claims staff is currently positioned in case claims do begin to rise.

No, we have not really increased the number of claims staff, but I'll backtrack on that a little bit to say we run a very lean organization. But at the same time, when our claim counts were dipping down, we also did not decrease our claims staff because of the expertise they bring to the table and we want to keep those inventories really low; that's not something that we felt like we should dial down and then try to dial back up. So the number of claims staff has not changed.

I understand that they have a lower volume of claims that they have already handled. I wasn't surprised they could manage it in-house, but I'm curious if you are actively looking to expand into other states. If so, what is holding you back at this point? Are you even considering this?

We are constantly looking. We have a committee here that is always looking at geographies of where we're not and maybe where we should be or where we are and maybe we're not having a great experience, whatever the case may be. And so I would always say that we are continually considering that; nothing on the near horizon.

Right. Okay. And the last question I had was on the fee schedules. Obviously, it sounds like that's helping to contain medical costs. I just didn't know, on average, how long do fee schedules stay in place before they're renewed? And do you see that fee schedules are renewed, will they have an impact?

Yes, that is very appropriate. Fee schedules are updated relatively regularly, and many are influenced by Medicare and Medicaid. The frequency of updates can depend on various factors, including political considerations. If workers' compensation issues arise in a state, legislators may intervene to enact changes. Currently, it seems that workers' compensation isn't a priority for legislators, as they focus more on pressing issues in property and casualty insurance, especially concerning homeowners and auto insurance. Consequently, workers' compensation has remained stable, and employers and carriers appear satisfied with the current situation. At this moment, it doesn't seem likely that any legislative agendas will significantly alter fee schedules.

And there appears to be no further questions in the queue at this time. I'd now like to turn the conference back over to Janelle Frost, CEO, for any additional or closing remarks.

Thank you. We are pleased with this quarter's results and the successes we're having in adding small incremental growth while maintaining the standards that make AMERISAFE a profitable underwriter of high hazard workers' compensation. Thank you for joining us today.

And this concludes today's call. Thank you for your participation. You may now disconnect.