Earnings Call Transcript - AMSF Q4 2022

Operator, Operator

Good day, and welcome to the AMERISAFE 2022 Fourth Quarter Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Kathryn Shirley. Please go ahead.

Kathryn Shirley, Investor Relations

Good morning. Welcome to the AMERISAFE 2022 fourth 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 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 will now turn the call over to Janelle Frost, AMERISAFE's President and CEO.

Janelle Frost, President and CEO

Thank you, Kathryn, and good morning, everyone. We are pleased to report continued strong results for the fourth quarter and the full year of 2022. For the year, we reported a combined ratio of 83.6%, gross premiums written declined by less than 1 point despite rate pressure as loss costs continue to trend down, and an operating ROE of 16.5%. Our balance sheet remains strong with roughly $1 billion in investments in cash, a strong reserve position, and no outstanding debt. We continue to see strong retention in policies for which we offer renewal with 94.6% retention in the fourth quarter. Our overall pricing, as measured by ELCM, was a 151 for the fourth quarter. As we look ahead, competitive pressures and loss cost declines are expected to remain a headwind, though we expect wage growth to be a largely mitigating factor in the near term. Digging into wage growth a little further, when looking at this metric on a year-over-year basis, the results will be muted given the strong wage growth we saw in 2022. Additionally, I'd like to note that payroll growth is primarily coming from existing employees. Moving to losses, the accident year loss ratio remained steady at 71% throughout the year. During the quarter, we experienced $10 million in favorable prior year development, primarily from accident years 2017 to 2020. For the full year, we released roughly $40 million in favorable development as active claims handling resulted in lower claim severities. As outlined on our call a year ago, we focused on using the drop in reported claims to find avenues to resolve and close open claims. For 2022, we ended the year with 13 severe claims compared to 19 at year-end 2021 and 18 at year-end 2020. In this instance, I define a severe claim as those with case reserves incurred in excess of $1 million. As it relates to loss trends, frequency and severity are both within our expectations. We expect medical inflation to begin to tick up in the back half of the year as our experience in certain pockets of the health market are exhibiting very early indicators. Bringing all the pieces of the loss ratio together, and given the information we have now, we expect to hold our accident year loss ratio steady at 71% in the first quarter of 2023. Finally, as it relates to capital management, AMERISAFE's Board of Directors has approved a 9.7% increase in the regular quarterly dividend to $0.34. With our long tenure of experience in the high-hazard niche, we are well positioned to retain our policyholders and compete for new business while delivering robust returns to our shareholders. With that, I'd like to turn the call over to Andy to discuss the financials.

Andy Omiridis, CFO

Thank you, Janelle, and good morning to everyone. For the fourth quarter of 2022, AMERISAFE reported net income of $20.8 million, or $1.08 per diluted share, and operating income of $16.1 million, or $0.84 per diluted share. This shows a significant improvement compared to the fourth quarter of 2021, which had net income of $3.5 million, or $0.18 per diluted share, and a net operating loss of $9,000, mainly due to large claims in the previous year. For the full year, net income was $55.6 million, and net operating income was $59.3 million, compared to $65.8 million and $54.7 million in 2021, respectively. The decrease in net income was primarily due to about $20.4 million related to our unrealized equity securities position. Gross written premiums totaled $55.6 million for the quarter and $276.1 million for the full year, showing little change year-over-year. In the quarter, voluntary premiums fell by 4.5%, but were largely offset by payroll audit and related premium adjustments of $2.3 million. For the entire year, voluntary premiums dropped by 5.9%, partially mitigated by audit and related premium adjustments of $14 million. Rates are under pressure as the industry faces decreasing loss costs. The accident year loss ratio was 71% for both the fourth quarter and the full year. The net loss ratio for the quarter was 55.3%, while it was 56.1% for the full year, reflecting $10.4 million in favorable loss development in the quarter and $40.6 million for the full year. Our total underwriting and other expenses were $17.4 million in the quarter, leading to an expense ratio of 26.4%, compared to 24.7% in the fourth quarter of 2021. For the full year, underwriting and other expenses totaled $72 million, or 26.5%, compared to 26.1% the previous year. The rise in the expense ratio was primarily caused by lower earned premiums, as underwriting and other expenses for the full year remained mostly stable. Regarding our investment portfolio, it is of high quality with an average AA- credit rating and a duration of 4.2 years. The portfolio's composition includes 60% in municipal bonds, which features 15% in taxable munis, 22% in corporate bonds, 3% in U.S. treasuries and agencies, 7% in equity securities, and 7% in cash and other investments. About 60% of our portfolio is made up of held-to-maturity securities. In the fourth quarter, net investment income rose by 25.8% to $7.6 million from $6.1 million in the same quarter last year. This increase was due to higher yields on money market funds and bank accounts, along with improved reinvestment rates on fixed maturity securities. For the full year, net investment income climbed 7% to $27.2 million from $25.4 million in 2021. The yield on new investments increased by approximately 291 basis points, bringing our tax-equivalent book yield to 3.38%, which is 71 basis points higher than the prior year. Our capital position remains strong with a high-quality balance sheet, a solid loss reserve position, and a conservative investment portfolio. Overall, our operating return on average equity was 16.5%. With that, I would like to open the call for the question-and-answer portion.

Operator, Operator

Thank you. We'll go to our first question from Mark Hughes with Truist.

Mark Hughes, Analyst

Yes. Thank you. Good morning.

Janelle Frost, President and CEO

Good morning, Mark.

Mark Hughes, Analyst

Your comment about inflation, Janelle, mentioned that you are observing it in certain areas. Could you elaborate on that a bit? It seems that medical inflation had slowed down according to the last measure, but it appears you are experiencing something different. Could you provide more details on that?

Janelle Frost, President and CEO

Certainly. When considering the medical costs tied to our claims, particularly for severe injuries, durable medical equipment constitutes a significant portion of our expenditures. Due to supply chain challenges and the aftermath of the pandemic, we've observed an increase in these costs. While we hope that improvements in the supply chain will help to some extent, inflation for durable medical equipment remains noticeable. In recent discussions, I've highlighted the rising costs associated with home health services, nursing, licensed practical nurses, and certified nursing assistants that we incorporate to support our injured workers with long-term health needs. The healthcare industry is facing wage pressures, which also impacts us. It’s not that medical inflation overall is significantly rising—our observations align with industry trends—but there are specific areas of cost that we are monitoring closely.

Mark Hughes, Analyst

Understood. And then on loss costs, I think I've asked the question the last couple of quarters. Just the recent state-by-state trends, anything new you're seeing there? Is it still as negative as it had been?

Janelle Frost, President and CEO

Right. I think the last number coming out of NCCI was expected to be down loss costs as a whole for the NCCI states being down 7.3% for 2023. But if I look at the latest chart showing the most recent rate filings by state, just to give you an order of magnitude, there are only two states showing increases: Hawaii and Minnesota. Then the decreases range from 9.1% to 16.8%. So that's a very wide swing, and again, the 16.8% was in D.C. Using Georgia as an example, which is one of our larger states, Georgia was down 13.7% in their last rate filing or loss cost filings. Those are significant drivers.

Mark Hughes, Analyst

Yes. So fair to say it's not getting any better if you look at those numbers…

Janelle Frost, President and CEO

Yes. As better means, are we seeing the increases? No. Are we seeing a slowing rate of decrease? Perhaps.

Mark Hughes, Analyst

Yes, yes. Okay. You used the word muted in your script. And I did not pick up what that was referring to. Wonder if you could...

Janelle Frost, President and CEO

I was referring to wage growth. In relation to the previous discussion about loss costs, we expect that, all else being equal, we will encounter rate decreases in 2023. However, we believe that ongoing wage growth will help alleviate that situation to some extent. While it won’t completely offset the effects, we’ll see what transpires in 2023. The presence of relatively strong wage growth does alleviate that concern to a degree. This has been our observation over the last two quarters, despite a slight decline in our voluntary payroll and premium audits, which have remained mostly flat.

Mark Hughes, Analyst

Yes, yes. Anything you're seeing in your end market construction activity, any kind of change in tone?

Janelle Frost, President and CEO

It's very interesting. If I base it just off of the payrolls that are reported to us on a monthly basis, I would say work activity is robust. We're seeing wage growth. We're saying about 2% of that is probably coming from new employees. But the last few quarters have been very strong. If I look at just the data that I'm receiving, I would say all is well. I read the same headlines everybody else reads about whether there is going to be a recession, is there a potential for a recession? I think there was a headline in the Wall Street Journal today about commercial rental properties. We just haven't really seen it, and I'm going to knock on wood here; we really just haven't seen it come across in our book of business as slowing down.

Mark Hughes, Analyst

Yes. I appreciate the sound effects there.

Janelle Frost, President and CEO

Thanks.

Mark Hughes, Analyst

And then maybe one more. Any development on that large fourth quarter claim? Did that help in the fourth quarter?

Janelle Frost, President and CEO

No, you're right. If you're looking at the comparative fourth quarter of 2021, that's when we reported the catastrophic claims. As I sit here today, I'm very comfortable with the reserves that we established at the end of 2021, and there's been no development regarding those reserves.

Mark Hughes, Analyst

Okay. Thank you very much.

Operator, Operator

Thank you. We will turn the call back over to management.

Janelle Frost, President and CEO

Thank you for joining us today. We are pleased with the outcome of 2022, and we look forward to continued success in 2023. Happy New Year.

Operator, Operator

This does conclude today's conference call. You may now disconnect.