AMERISAFE, Inc. (AMSF) Earnings Call Transcript & Summary

Good day, and welcome to the AMERISAFE Fourth Quarter 2024 Earnings Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Ms. Kathryn Shirley. Please go ahead, ma'am.

Good morning. Welcome to AMERISAFE 2024 fourth 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 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 statement. I will now turn the call over to Janelle Frost, AMERISAFE's President and CEO.

Thank you, Kathryn, and good morning, everyone. We are pleased to share AMERISAFE's results for both the fourth quarter and the full year 2024. A key priority throughout the year has been top line growth with consistent underwriting margin, which is reflected in our gross premiums written increase of 3.9% for the fourth quarter and 3.1% for the full year. Voluntary premiums on policies written rose by 8.5% in the fourth quarter and 4.6% for the year compared to 2023, while our in-force policy count grew 9.6%. Strong premium retention and robust new business production were the primary drivers for this growth, underscoring our commitment to profitable growth and the competitive landscape. Despite industry-wide headwinds, including rate reductions and declining wage inflation, our ability to identify and capitalize on profitable opportunity is a testament to the expertise and collaboration of our team. We are improving our agent relationships, protecting our policyholders and caring for injured workers. Our focus led to a combined ratio of 88.7% and an ROE of 20.2%. This success is a direct result of collaboration across our organization and the empowerment of our employees to foster a sales-driven culture. From frontline teams with underwriting, sales and safety to the back-end support of claims and premium audit and operational functions such as regulatory, IT and finance, every department played a role in driving growth. Our employees have embraced the challenge of competing in the dynamic P&C market, where worker's compensation is a line -- as a line remains attractive to carriers. For the full year, our accident year loss ratio remained steady at 71%, consistent with the prior year, and we anticipate maintaining that level in 2025. Additionally, we recognized favorable development from prior accident years of $9.7 million in the quarter and $34.9 million for the full year 2024. On capital management front, AMERISAFE's Board of Directors has approved a 5.4% increase in our regular dividend to $0.39 per share. Looking ahead, we remain focused on top line growth. We're confident that our ability to identify and ensure profitable high-risk, high-hazard risk will continue to offset broader market challenges. With strong policy retention and a disciplined approach to growth, AMERISAFE remains committed to delivering exceptional 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 fourth quarter of 2024, AMERISAFE reported net income of $13.2 million or $0.69 per diluted share, and operating net income of $12.8 million or $0.67 per diluted share. During the fourth quarter of 2023, net income was $19.2 million or $1 per diluted share and operating net income of $14.3 million or $0.74 per diluted share. The lower net income was primarily driven by lower net unrealized gains on equity securities. For the full year, net income was $55.4 million and net operating income was $48.4 million compared with $62.1 million and $55.9 million, respectively, in 2023. Gross written premiums were $62.7 million in the quarter and $294.1 million for the year, growing 3.9% and 3.1%, respectively. Net premiums earned were $66.5 million in the quarter and $270.6 million for the year, growing 1.2% and 1.3%, respectively. Overall, strong premium retention and new business production were the primary drivers of top line growth for both the quarter and year, reflecting an organizational focus on growing profitable sales despite competitive market conditions. Our total underwriting and other expenses were $19.8 million in the quarter, a 4% increase compared with $19 million recognized in the fourth quarter of 2023. This increase resulted in an expense ratio of 29.7%, compared with 28.9% in the fourth quarter of 2023. The increase was primarily the result of slightly lower earned premium growth in relation to other operating expenses. For the full year, the expense ratio was 29.6%, compared with $29.3 million in 2023. For the year, our tax rate was 19.7%, unchanged from the prior year. Turning to our investment portfolio. For the fourth quarter and full year net investment income decreased 14.4% to $6.9 million and 6.8% to $29.2 million, respectively. This was due to the decrease in investable assets following the payment of the special dividend in December. For the quarter, the yield on new investments increased approximately 42 basis points, driving our tax equivalent book yield to 3.8% or 11 basis points higher than the fourth quarter of 2023. Realized losses for the portfolio on securities sold were $400,000 in the quarter compared with a gain of $1 million during the fourth quarter of 2023. The investment portfolio is high quality, carrying an average AA minus credit rating with a duration of 4.4 years. The composition of the portfolio is 62% in municipal bonds, 22% in corporate bonds, 3% in U.S. treasuries and agencies, 7% in equity securities and 6% in cash and other investments. Approximately 56% of our bond portfolio is comprised of held-to-maturity securities and due to the notable increase in rates during the quarter, the net unrealized loss was $13.3 million at quarter end. 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 $830 million in investments, cash and cash equivalents. And finally, just a couple of other topics. Book value per share was $13.51 after paying the special dividend in December 2024, a decrease in book value of 11.6% from year-end 2023. Operating return on average equity was 17.5% for the quarter and 17.1% for the full year. We will be filing our Form 10-K with the SEC tomorrow, February 28, after the market closed. With that, I would like to open the call for the question-and-answer portion of the call. Operator?

[Operator Instructions] We'll now take a question from Mark Hughes with Truist.

Janelle, the policy count growth, I think you said 9.6%. Could you put that in the context of what you've experienced in recent quarters? And could you also talk about the -- what the average size per policy has been, how that has trended over the last few quarters?

Great. Well, I believe, Mark, the 9.6% that I quoted was for the year. That's on import base, not just the quarter. So that was for the entire year. And how does that compare, so -- I'm sorry, go ahead.

I was going to -- I'm sorry to interrupt, but how was that in the fourth quarter?

Great question. I don't have that in front of me actually. I only brought the year to date. Let me speak about...

I guess the year-over-year is the 9.6%, but...

2.6%.

Yes. Policy from growth in the fourth quarter was 2.6%.

Okay. And that's a sequential number?

Yes.

Okay, very good. And then sorry for interrupting. You were saying, I think I'd asked about size as well.

Yes. So the size of policy. Our average policy size for 2024 was slightly lower than 2023, but still holding strong. We certainly were boosted by stronger payrolls coming into the year. We knew that going into 2024 that we were seeing payroll growth. In the fourth quarter, we saw some slowing in terms of average weighted, if you recall, the last -- probably the first 3 quarters of 2024, we were seeing somewhere around 7% each quarter. It dropped to 4% in the fourth quarter of 2024, not a complete surprise, obviously. But we were trending higher than national averages, and now we're starting to see some moderation there.

Okay. How about the renewal rate, the pricing measures that shall not be named, we don't have that which is perfectly fine. But generally speaking, this quarter, I think you had undertaken a strategy of being a little more active on renewal rate. Was that a contributor this quarter? Is that kind of run its course, or how much was that an impact on the top line?

Right. Yes, it certainly was impactful to the quarter and to the full year actually. But for the quarter, our policy retention was 94.1% on a policy basis, on a premium basis 88%, so strong renewals.

And then your reserve gains, I think you had some gains in 2022 earlier in the year, and you described this quarter also reserve gains from older acts in the years, including 2022. Any observations about the post-COVID years, '21, '22, just kind of how they're shaping up?

Yes, those are going to be good accident years. The 9.7% favorable development -- not percent, $9.7 million of favorable development we had this quarter. $1 million of it was from '22, $1.5 million was from '21, $1.6 million from '20 and then 2019 and prior was $5.6 million. So we are obviously seeing -- even from the more green years, we're seeing favorable taste development come out of those accident years.

Yes. And then maybe 1 more, the ceded premium was a little elevated in this quarter. I think it was a little higher in the fourth quarter of last year, but even compared to that, it's up year-over-year. If we think about, I guess, number one, why was that? And then number two, for 2025, should it be kind of back in the -- yes, I see it as around 6% normally of gross premiums written.

Mark, it's Andy. So you're right, recession was a little bit higher. I think that's because of the growth that we saw in the quarter. And of course, in Q4, we always go back and make sure that if there's any true-up needed that's done. But overall, it's really based on the growth that we're seeing in the policy count coming through voluntary deck and just -- as far as 2025, I think it's fair to say that every quarter isn't linear. So I think the 6% you're saying is probably correct, but it's right around that number.

[Operator Instructions] We'll now take a question from Matt Carletti with Citizens JMP.

First question is you've obviously talked a bit about what we're seeing the voluntary growth really pick up kind of back half of the year, and I think we've talked a bit about how there's been pretty intentional kind of interacting with your agencies and trying to be easier to do business with. And one of the aspects you pointed, I think it was last call, was kind of the idea like, getting them just to not think of you as like the roofing company and that you write other high-hazard kind of class codes and things like that. Have you seen that in the growth that's come through that there is an expanded kind of maybe appetite by the agency and that in certain cases, you might have been pigeonholed to a particular type of risk and that's broadening and that's driving the growth, or is it up and up?

Well, it's a great question. We certainly have, to your point, really have been making sure our agency base understands; a, the value proposition of AMERISAFE, particularly our safety and claim services. And then two, what our appetite is. So making sure that, that is easily accessible to our agents, both through our [ TSMs ] and both through digital platforms as well. But basically, getting our [ TSMs ] in front of agents, reiterating what do you have in your book, Mr. Agent, that sits in the AMERISAFE's risk appetite and give us an opportunity. So the question too, is that attributable to a growth, I would say, yes, can I put percentages around that? Probably, no. But I will say this, we are trying to be sure that we are being more effective with the agents that we have appointed. So increasing the percentage of our agents that are submitting business to us and more importantly, an increasing the number of agents that have a bind with us. Those are 2 numbers internally that we're really focused on. So driving home the appetite is part of that equation, certainly.

Okay. Perfect. And then second question, latter part of last year, a couple of hurricanes came through areas in the country that you have a lot of business. Have you seen any of -- I guess, any other growth we saw in Q4, kind of been a result of kind of that reconstruction, if you will? Or would you expect to see any of that maybe as we go forward? I know it can take time for that to come through.

Yes. You're right, Matt. It does take time. It certainly has insurance and audit premium yet because, obviously, we haven't audited those policies that would have been affected during those time periods. We do look at the monthly reporting that our policyholders are sitting into us. And we've seen some -- a little bit of increase if I look at Florida, Georgia and the Carolinas, but nothing that I can point to and say, yes, that's definitely a hurricane-related business. I think it's more normal course of business. So I don't know that I can quantify if any of that particular to storms.

[Operator Instructions] We'll now take a question from Bob Farnam with Janney.

I'd just like to maybe expand a little bit on Matt's question about the kind of the expansion of your new business. And I just wanted to know, are you looking at adding additional class codes as you're expanding, or are you really just focusing on the stuff that you already write?

We are focusing on things that we already write. If I talk about it in terms of hazard groups, ADG, we specialize in ES&G. And still over 80% of our in-force policies are ES&G. So even with our new business growth, that is our focus area. We haven't added necessarily classes of business, it's really about penetrating the markets that we're in and being more effective about that.

Right, okay. That's what I thought. And then just kind of a qualitative view on reserves. How much of your kind of overclaimed inventory is related to claims that are 10 years or older, I'm trying to get an idea of kind of how long claims can stay open and kind of what your -- the average duration of your liabilities is kind of what I'm getting at.

Yes. If I look at accident years, and I use the same -- certainly the same accident years that we put in the 10-K, where we have 2023, 2022, it goes into this prior to 2019. Prior to 2019, I would say 99% of the claims that were reported to us are closed. So very small percentages are open. And some are open for -- there are some cases that we can't technically close the claims is for medical reasons. And so they're open for medical only, we're done with the indemnity portion of the claim. Yes, 99% of those claims, I would say, are closed for those -- for that prior to 2019.

Okay. So it sounds like relative to the overall workers' comp industry, your claims closures seem to be more quick than maybe the average for the industry. Is that inaccurate?

I believe so. And I totally give the credit to my claims organization. It is definitely in the way that AMERISAFE handles claims. We still use -- we call it good old-fashioned claim adjusting. We meet with people, we take written statements, we manage those claims intensely, and we keep those low inventories partial case manager, I can't stress that enough. I know that, that is unique to AMERISAFE. On average -- across many field case managers, on average, they have less than 50 claims per adjusted. When you think about that, they are really -- they really have the opportunity to make a difference in these claims, know these claims, and that's how we're able to close them and find resolutions, getting maximum medical improvement, return those injured workers to work as quickly as we can because they have the opportunity and the means to close those claims.

[Operator Instructions] We'll now take a follow-up from Mark Hughes with Truist.

You talked about the payroll, one of the concepts that's come up from time to time is kind of the next job in construction. Do you have any view on the construction industry and the prospects there?

Look, I feel -- I mean this is the world according to you. But my opinion is that at least for our insured base, the economy seems to be supporting their work pretty well. I mean we're still seeing strong payroll growth there. We are finding opportunities. We think about all the things, all the headlines that I read every day, and we always contemplate how does that affect our book of business. We think about tariffs and what that can mean to construction as a whole, I know people talk about steel and those types of things. Not that we are completely isolated from that, but you also think about small to midsized employers. I do think we have some buffer around those type of impacts to the industry as a whole. So not immune, but somewhat insulated, I would think. Immigration is, again, a question that we've been asked about, particularly regarding our construction in the agriculture book. For AMERISAFE, I don't have a way of quantifying from the premium side of things. How many of our workers are non-documented workers. But certainly, we know from a claims perspective, we do have injured workers that are non-documented workers. But from a claims' perspective, they are entitled to the same benefits every other worker is entitled to. So if I play that through in my mind, what happens for non-documented workers, particularly in our construction book or our agriculture book. Could it be influential to the labor force perhaps, but again, these are small and midsized employers. So even if it is influential in terms of maybe less resilient labor force, perhaps that also could lead to higher wages if those jobs are replaced with documented workers. So headline-wise, those are the things I think about in terms of our industries and the economy as it stands. But I mean, as of right now -- obviously, these things change every day, but as of right now, I feel pretty strongly that our construction book and even our entire book is -- has a bright future for 2025.

Yes. How about the large claims for the year?

Yes. So you're going to laugh when I say this, Mark, but, it's been a while since I've had to use this word, but it's lumpy. So we ended the year with 18 claims over $1 million. And when you look comparatively to 2023, which was a record year in terms of low number, 9, I harken back to my lumpy word, 18 is not that unusual. If I look at the 5-year average of where we were at 12 months because obviously, claims develop after at the end of an accident year. But if I look at the 5-year average at 12 months, we averaged around 15, so 18 is not too far off of the average. But compared to 2023, that number certainly, you look at -- well, that's a change. But when you look at the book as a whole, it's really not that much of a frequency of severity. It's just there were 18 claims. If I look at how they occurred or what industries they incurred in, it very much mirrors our book of business. And even the types of injury are very consistent with what we've seen in terms of the types of injuries. Obviously, falls and slips being the #1 cause of loss for those larger claims, and that's true for '24.

Yes, okay. And then anything on the medical inflation front, either from costs or ability to access certain services in case of lack of capacity because reimbursement rates are too low. Any changes there you've noted?

No real development than what we've shared over the last couple of quarters. Home health is still probably the one I focus on the most simply because it's such a big component of our larger claims. Home health is a big component of those costs. But we certainly are paying attention to that. But nothing new other than than those things in terms of reimbursement rate, no. We certainly are monitoring the loss costs or the rates that are being approved by the states and how that could or could not be impactful to us, but there's -- it's been a wide range. If you look at the loss costs that have been approved for 1/1 or the one that we know about for 2025 at this point. I think the high is a 19% decrease in Maine and -- or the, I'd say, the high, the low, the decrease. And then the largest increase, I think, we've seen is 6.5% in Nevada. But there's a wide range there in the loss costs that are being approved. So how medical costs will influence, or how the reimbursement rates will influence that on a go-forward basis, I guess time would tell. But I don't -- I can't see anything in those rate filings that were specific to medical fee schedules being adjusted to the degree that it was a highlight in the rate filing, I don't recall that. It's been more just experience.

Yes. Did you -- have you averaged up the rate filings, if you look at the recent trend, is...

Yes, the average -- yes, I shouldn't -- I don't think I say this, but it's a decrease of -- in somewhere around the mid-single-digit range.

Yes. How was that midyear or this time last year?

So for -- it's a good point. In 2023, we were a little -- we were sort of upper single digits, so more in the 8% to 9%, depending. I think we said somewhere in the range of 7% to 9% for 2023. So it's -- so ever so slight improvement if you're trying to get me to give you great news about rates, there you go.

It's inflection, the trend you define.

Yes, yes, yes.

And then anything on the audit front is that we're just kind of progressing through that earlier period of wage inflation. And so as you do the audits on the look back, it's kind of naturally tapering. Is that a way to think about it? Maybe the audits just naturally from a macro perspective, you'll see a deceleration there?

Yes. I believe we'll see a deceleration or a moderation. I don't see -- again, looking forward to 2025 based on what I know today. I don't see audit premium turning negative. I think it still remains positive. I think the new employee count still been averaging between that 1% and 2% of the things that we've been seeing each quarter, and then there's been wage inflation. I don't think there's -- I don't foresee that flipping to being negative, but certainly, the year-over-year comparisons get tough -- are going to get tougher and tougher. And there'll be a deceleration from that standpoint. But stand-alone audit premium, I believe, will still remain positive in 2025.

Yes. And then any instances of any competitors getting more aggressive for workers' comp premium? It seems like you're holding your own and then some in terms of policy count and premium growth. So you would know it by looking at it in that sense, but I'm just sort of curious whether you've seen any changes?

It is very competitive, Mark. That's a change, probably not. But as the other P&C lines have not yet rectified their issues in terms of overall results, workers' compensation remains attractive. And so as long as the combined ratios for the industry remain attractive, we will have competitors, and we will have competitors dipping into the high-hazard space, but that's a reality that we are prepared to face.

Yes. Zipping into the high hazard is probably a bad approach. One...

Oh, yes. If you're asking me for advice, yes, we say that certainly.

That's super dangerous. You need to stay away.

Exactly.

Any early thoughts on loss pick for 2025?

Yes. As of right now, I believe we're going to hold at 71%.

And it appears there are no further telephone questions. I'd like to turn the conference back to Mr. Frost for any additional or closing comments.

Profitable incremental growth is the focus goal for the AMERISAFE team, one that we delivered on in 2024 and are well positioned for 2025. Thank you for joining us today.

And once again, that does conclude today's conference. We thank you all for your participation. You may now disconnect.