AMERISAFE, Inc. (NASDAQ:AMSF) Q1 2024 Earnings Call Transcript April 25, 2024

AMERISAFE, Inc. isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day. And welcome to the AMERISAFE 2024 First Quarter Earnings Conference Call. Today’s conference is being recorded. At this time, I’d like to turn the conference over to Ms. Kathryn Shirley, Chief Administrative Officer. Please go ahead, ma’am.

Kathryn Shirley: Good morning. Welcome to the AMERISAFE 2024 first 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. 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 risk, uncertainties and other factors, including factors discussed in the earnings release, in the comments made during today’s call and in the risk factors section of our Form 10-K, Form 10-Q, 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: Thank you, Kathryn, and good morning, everyone. Workers’ compensation rates across the industry continue to decline in the first quarter, spurred by favorable frequency trends and modest increases in severity. Continued wage growth is helping the industry taper the impact of multiyear rate decreases. However, it is not as robust as 2023. With these conditions as a backdrop, AMERISAFE had solid results in the first quarter, reporting a combined ratio of 87.3% and an ROE of 22.8%. We remained competitive by maintaining our strategy of evaluating risk through safety services and underwriting, giving our insurers peace of mind, and continuing our track record of creating value for our shareholders. Premiums for policies we wrote in the quarter were relatively flat compared to the first quarter of 2023.

We continued to see strong retention in policies for which we offered renewal, with 94.9% of retention in the first quarter, as well as modest policy growth. Both new business submissions and bonds increased on a year-over-year basis as we’re seeing higher agent engagement. Gross premiums written decreased 2.9% compared with the first quarter of 2023, primarily due to lighter audit premiums, as wage pressure is moderating. Each quarter of last year, we reported that wage growth was slowing from the post-pandemic highs. For the types of jobs that we insure, we continue to see upper single-digit wage growth, which speaks to the economic strength of our insured classes in the near-term. For example, the construction industry continues to add jobs when looking at the latest national data.

I believe we will continue to report positive audit premium in 2024, but at lower levels than 2023. As for losses, our accident year loss ratio was in line with the prior year at 71%. Our expectation is that frequency trends will remain favorable and severity increases will be modest, similar to the industry as a whole. In addition, we experienced $8.6 million of favorable development on prior accident years due to proactive claims handling. The favorable development was primarily attributable to accident years 2017 through 2020. We continue to monitor the potential impact of rising healthcare costs on the long-term medical cost inflation, but nothing noteworthy at this time. With that, I’d like to turn the call over to Andy to discuss the financials.

Andy Omiridis: Thank you, Janelle, and good morning to everyone. For the first quarter of 2024, AMERISAFE reported net income of $16.9 million or $0.88 per diluted share and operating net income of $13.3 million or $0.69 per diluted share. During the first quarter of 2023, net income was $17.3 million or $0.90 per diluted share and operating net income was $16.1 million or $0.83 per diluted share. The lower net income this year was primarily driven by a combination of lower earned premium and net investment income, as well as favorable items impacting the year ago quarter. Gross written premiums were $80.1 million in the quarter, compared to -- with $82.5 million in the first quarter of 2023. The year-over-year decrease was primarily due to moderating wage inflation, which reached record levels in the prior year.

Our total underwriting and other expenses were $18.7 million in the quarter, compared with $17 million recognized in the prior year quarter. This increase resulted in an expense ratio of 27.3%, compared with 24.5% in the year ago quarter. The increase was primarily the result of lower earned premium and a $3.3 million favorable impact from profit sharing commission in the first quarter of 2023. For the quarter, our tax rate was 18.4%, compared to 19.5% in the prior year, largely due to a higher proportion of tax-exempt income versus underwriting income in the quarter compared with last year. Turning to our investment portfolio. In the first quarter, net investment income decreased 0.9% to $7.4 million despite increased reinvestment rates as compared to the prior year.

For the quarter, the yield on new investments increased approximately 215 basis points in relation to the portfolio roll-off, driving our tax equivalent book yield to 3.75% or 26 basis points higher than the first quarter of 2023. Realized loss for the portfolio and securities sold were $200,000 in the quarter, compared with a realized gain of $300,000 during the first quarter of 2023. The investment portfolio is high-quality, carrying an average AA- credit rating with a duration of 4.1 years. The composition of the portfolio is 58% in municipal bonds, 27% in corporate bonds, 4% in U.S. Treasuries and agencies, and 7% in equity securities, and 4% in cash and other investments. Approximately 58% of our bond portfolio is comprised of held-to-maturity securities.

As a reminder, these held-to-maturity securities are carried at amortized costs and therefore unrealized gains or losses on these securities are not reflected in our book value. Our capital position is strong with a high-quality balance sheet, solid loss reserve position and conservative investment portfolio. At quarter end, AMERISAFE carried roughly $900 million in investments, cash and cash equivalents. And finally, a couple of other topics. Book value per share was $15.74, an increase of 3% compared to the prior quarter and operating return on average equity was 17.5%. Our statutory surplus was $270.5 million at quarter end, up 6.1% from $254.9 million at December 31, 2023. And finally, tomorrow, Friday, April 26, 2024, we will be filing our Form 10-Q with the SEC after market close.

With that, I would like to open the call for the question-and-answer portion. Operator?

Operator: Yes, sir. Thank you. [Operator Instructions] And we’ll take our first question from Mark Hughes with Truist.

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