Mike Grasher - CFO Allen Bradley - Chairman Janelle Frost - CEO.

Matt Carletti - JMP Securities Mark Hughes - SunTrust Jason Oetting - FBR Capital Markets.

Welcome to the Amerisafe Incorporated First Quarter Earnings Call. [Operator Instructions]. I would like to now introduce your host for today's program, Mr. Mike Grasher, Chief Financial Officer. Sir, please begin..

Thank you, Roland. Good morning everyone. Welcome to the Amerisafe first quarter 2015 investor call. If you've 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 could materially differ because of factors discussed in today’s earnings release, in the comments made during this call and in the risk factor 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 Allen Bradley, Amerisafe’s Chairman..

Thanks, Mike. Good morning ladies and gentlemen. Thank you for joining us for our first quarter 2015 earnings call. I will make a few remarks about the marketplace and then turn the call over to our CEO, Janelle Frost and our CFO, Mike Grasher for details on the company's performance during the quarter.

Industry pricing surveys by both the council of independent agents and brokers and market scout. During the quarter indicated slight decreases in the pricing of workers' compensation insurance. As is usually the case the pricing reductions favored large accounts, those over a $100,000 while reductions in smaller accounts were very slight.

We continue to believe that there will be a drift downwards in pricing over the next few quarters. Considering that prices on an effective LCM basis have been at historical highs, we consider this decline in pricing to be normal and it does not negatively impact our view of the market which we view is attractive.

The improvement in employment levels should increase the total written workers' compensation premium. However the most recent GDP data does create some concern relative to the strength of the economy. On the favorable side currently claims frequency and severity are trending in the right direction.

However as lower pricing earns out over policy periods claim frequency may flatten and could increase owned and earned premium basis. The potential for an increase in frequency, doubts about the strength of the nation's economy and the continued lower investment returns should cause prudent underwriters to limit pricing concessions to employers.

All things considered the market should relatively stable for the near term. With those comments I'm going to turn the call over to our new CEO, Janelle Frost..

Thank you, Allen, Good morning everyone. We were extremely pleased to start 2015 with an 85% combined ratio. Our continued focus on our core disciplines of underwriting, safety, claims handling and expense management resulted in a successful quarter. As we discussed on our last call it is our intention to grow in terms of premium.

Our reported decline in our new business in the fourth quarter and that decline continued in 2015. As a result top line decreased 4.6% in the quarter partially offsetting the new business decline was our renewal premium. Renewal premium grew 7.9% in the quarter.

Policy retention was 91.7% for the first quarter of 2015 compared to 90.9% in the same quarter last year. Pricing on policies written in the quarter was 1.83 on an effective LCM basis. This compares to 1.86 in the first quarter of 2014.

And finally audit premium and related adjustments remained positive this quarter at 4.4 million, an increase of 1.1 million from last year's first quarter. This increase reflects growth and payrolls for our insurance. I continue to feel we’re making appropriate price adjustments while maintaining our underwriting integrity.

In addition in mid-April, David Morton joined our company as Head of Sales and Marketing following the 2014 retirement of long-time employee Craig Leach. I make these points to reiterate that our intention to profitably grow has not wavered. Relative to losses we continue to experience a decrease in claims frequency on an earned premium basis.

Our claims reported in calendar year 2015 were down 5.2% to 1251 claims from 1320. The encouraging frequency trend coupled with the same pricing led to our loss and loss adjustment expense ratio for the current accident year of 69.8% down 1.7 percentage points from accident year 2014.

While frequency is currently downward our loss selection does assume frequency will flatten in the near future. Another positive impact in the quarter was favorable development from prior accident years. Case development once again led to 6.1 million of favorable loss development in the quarter compared to 2.5 million in the first quarter of 2014.

This year's favorable development was primarily attributable to accident year's 2009, 2011 and 2012. Our loss experience coupled with strong pricing and expenses delivered an end result of 43.4% growth in net income for the quarter. Our commitment is to remain focused on producing and servicing profitable business.

That concludes my prepared remarks, I will now turn the call over to Mike..

Thank you, Janelle. For the first quarter of 2015 fully diluted earnings rose 43.4%, as Amerisafe reported net income of $15.1 million or $0.79 per diluted share compared to $10.5 million or $0.56 per diluted share in the first quarter of 2014.

Operating earnings, a non-GAAP measure were also 15.1 million and $0.79 per share in the first quarter each rising over 40%. Revenues for the first quarter of 2015 grew to a 101.8 million up 5.8% from $96.2 million one year ago.

Net premiums earned increased 6.2% from the year ago quarter to 94.8 million reflecting net premium written growth over the past year. Our net investment income totaled $6.8 million in the first quarter of 2015, a 1.9% increase from last year's first quarter.

The tax equivalent yield on our investment portfolio was 3.5% in the first quarter of 2015 down 30 basis points from the first quarter of 2014 including cash and cash equivalents the company's portfolio is now valued at roughly $1.2 billion with 59.5% in securities classified as held to maturity, carrying an unrealized gain of $24.6 million.

As of March 31, 2015 municipal bonds comprised 51.3% of the investment portfolio. Overall the investment portfolio continues to carry a -AA rating with an duration of approximately 2.9 years. Turning to expenses, our current accident year loss ratio for the quarter was 69.8% a 170 basis points lower than 2014's loss pick of 71.5%.

The incurred loss and loss adjustment expenses totaled $60 million for the quarter which included 6.1 million of favorable prior year development. This compares to loss and loss adjustment expenses of $61.3 million in last year's first quarter which included $2.5 million of favorable prior year development.

In total our net calendar year loss ratio for the first quarter of 2015 was 63.3% compared to 68.7% one year ago. With regard to operating expenses, total underwriting and other expenses declined 4.6% to $20.4 million from $21.4 million in the first quarter of 2014. The decline in expenses reflects a few specific items for the quarter.

In particular, lower premium based assessments out of the State of Pennsylvania which resulted in a $632,000 reduction, a $453,000 adjustment for premium taxes due to lower than anticipated premium tax rates. And finally the over accrual of 2014 bonus compensation in the amount of $398,000.

Recall that the first quarter of 2014 included a $400,000 under accrual for bonus compensation, so net-net compensation expense was favorably impacted by roughly $800,000 in the year-over-year comparison.

These benefits were offset in part by no contingent profit commission being recorded in the quarter compared to 900,000 in the first quarter of 2014. This was due to the company experiencing a large claim in the quarter.

By category the 2015 first quarter expense components include 5.9 million of salaries and benefits, 7 million of commissions and 7.5 million on underwriting and other cost. Overall the expense ratio declined 240 basis points to 21.5%, from 23.9% in the same quarter a year ago.

If you exclude the impact of the one-time items previously discussed the expense ratio would have been 23.2% in the quarter. In total our combined ratio was 85% for the first quarter versus 92.7% for the same period in 2014.

You may have noted our tax rate climbed to 28.6% in the quarter from 21.3% a year ago, the increase largely reflects the increase in taxable income relative to tax exempt interest income as that ratio rose in the quarter due to the $6.1 million of favorable development.

Cash flows from operations remained strong during the first quarter of 2015 at 32.3 million, return on average equity for the first quarter of 2015 was 13.3% compared to 10.1% for the first quarter of 2014.

On the capital management front, the company paid a regular quarterly cash dividend of $0.15 per share on March 28, 2015, a 25% increase from the regular cash dividend of $0.12 per share paid in prior quarters.

On April 28, 2015 the Board of Directors declared a quarterly cash dividend of $0.15 per share payable on June 26, 2015 to shareholders on record as of June 12, 2015. Book value per share at March 31, 2015 was $24.32, an increase of 7.9% from March 31, 2014 as reported book value of $22.54.

And finally our statutory surplus was $391.7 million at quarter end. That concludes my prepared remarks on the financials, and I will now turn the discussion back to Janelle for closing comments.

Janelle?.

Thank you, Mike. This was a remarkable quarter, we will continue our diligent and are looking forward to the remainder of 2015. We will now open the call to questions..

[Operator Instructions]. Our first question comes from the line of Matt Carletti with JMP Securities. Your line is now open. Your question, please..

I’ve two questions, first one relates to just top line and Janelle, I appreciate the comments. Thank you for the color. Really what is -- I know that as we discussed last quarter I mean in Q4 and Q1 even prior to David arriving, you guys have taken some efforts to kind of push price a little less where warranted and some other things.

How long did those take to become implemented? Are those complete now? And therefore maybe going forward start to get a little traction before even David really gets a chance to get his hands into things or are those still being formulated and implemented and maybe it takes a little longer?.

Yes, I wish it was easy as making a decision today and I saw it tomorrow but it doesn’t happen that way. We are constantly making adjustments. I will say it does take time and without being too forward looking, but we’re seeing improvements.

If you remember in the fourth quarter call I talked about -- October actually was looking pretty good and then things started slipping mid-November, December so we started making really digging and making those changes and we’re seeing some improvement. So yes as I said in my prepared comments it is our intention to grow..

And then my second question relates to just capital management and if we just for the argument sake assume that top line is flat this year, makes it kind of easy math and that can you give us maybe some insight into how the -- I know it's tough to speak for the Board but how you guys and potentially the Board are thinking about capital management and in regards of you know if there is not eminent growth opportunity of any size.

Should we expect to see the capital management which at this point has been regular and some special dividends, approximate earnings or is there a reason for the company to build capital at this point and that it might be somewhat less and you want to have more capital going forward?.

I think the best way for me to answer that remain in the good gracious of the Board. The Board has demonstrated an interest in maintaining adequate capital but managing that capital to serve the needs of the company.

We watch our operational leverage closely and quarter like the first quarter, exacerbates the lack of leverage in the operations and so if you can grow to manage that or grow more than you’re growing premium then you will have to make adjustments in capital.

I think as we have indicated last year we did two extraordinary dividends last year, one in March and one announced on the third quarter earnings call and as I’ve tried to indicate then it's more of a later part of the year, third or fourth quarter sort of adjustment but I would anticipate that we look at capital every quarter and certainly later in the year that the Board would have a much better look at how much capital we need.

We have no debt, so it is certainly that if we wanted to. But I do believe the Board is very focused on that, they are focused on the regular dividend as well as managing capital fee of extraordinary dividends..

[Operator Instructions]. Our next question comes from the line of Mark Hughes with SunTrust. Your line is now open. Your question, please..

Touch again on the sales and pricing trends, your effective LCM has been up sequentially in the last couple of quarters, it's a little bit below the peak but you’re still at very healthy levels in historical terms but you’ve been pushing it even higher in a market that’s got a bit more competitive.

Can you talk about the your thinking in doing that, I hear what you’re saying, it sounds like you say you’re seeing improvements in sales trends in the first quarter.

How are you going to be striking that balance through the remainder of 2015?.

I think it's safe for me to say you will not find us being aggressive on pricing market, it's just not what we do. We are as I mentioned on the previous calls, from a renewal perspective we’re really focusing on those tenured accounts that we know the best.

From a new perspective as I think all companies do we go back through our history and figure out what are the things that we have done well on and those are the ones that we are willing to maybe provide more price concession to and then from the same -- from that same side of the equation those are also the accounts that we’re trying to pursue in terms of submissions for new business.

What are those types of businesses, classes of businesses and [indiscernible] that we know that we do well in and that we can offer pricing concession. But I will not say that we’re going to be aggressive on price, it's just not who we’re..

Well maybe aggressive as in aggressive in getting price increases or good pricing that your LCM has been moving up seems pretty striking that you’re--.

Yes, keep in mind the underlying loss cost for states are declining. We look at that continually move -- Allen talked about the CID study that shows how rates are declining. Since with the January 1, rate renewals 29 states rates are loss cost were down and only six were up and one was flat.

So yes while that ELP [ph] may not be moving down in the high-170s keep in mind the underlying loss cost have declined..

Right.

Would it be fair to think that Q1 gross written premium could be steady or up?.

Q2 you mean?.

Yes, I'm sorry Q2..

Well I only know April so I can tell you that we have seen progress in the changes that we have made..

And then on the tax rate, assuming you continue to have a comparable or a better level of profitability the tax rate the 28% - 29% should that be sustained to the balance of the year?.

I think that’s a fair assumption on your part, our business is lumpy to the extent that we continue to see favorable development of that ratio of the taxable versus tax exempt it's going to ebb and flow with that..

Right, and then the expense ratio I think you said 23% excluding one-timers.

Did that also in that included note contingent commission, is that correct?.

That’s correct..

The normal run-rate of contingent commission overtime, what has it been as the percentage of premium?.

Yes so we had -- last year we had it on a quarterly run-rate of about 900,000 and you remember that we changed our reinsurance structure, our reinsurance program in 2014. So I think that’s the run-rate that you’re looking for..

Right, so assuming no large claims, 900,000 might be a useful number..

Correct..

And then Janelle, you had said your loss selection assumes that frequency will flatten, are you talking about on an earned premium basis?.

Yes I'm. I think it's important, at one point in my comment said frequency is down which is absolutely true but I didn’t wanted people to think that our loss selection for 2015 was all roses and flowers. We do expect frequency to flatten..

As you know the industry reports that metric on a payroll basis as well as on premium basis and I know people can get confused about that there, there is a 70 year trend declining on a payroll basis. On the other hand on a premium basis the market is somewhat cyclical.

So we measure it on a premium basis and that’s how we always report it because quite frankly we don’t pay claims with payroll, we pay it with premium and we want to know what the frequency is per $1 million of earned premium and the average severity and that helps us in our projections.

And I think what Janelle is saying is that in terms of how we’re looking forward, we’re assuming some flattening in that slope. If that doesn’t occur then that will be better news in terms of results..

Right.

And then, my final question escaped me so if I can remember it all I will get back -- I'm sorry I just remembered, you’ve been willing to sort of name names and talk about the behavior of competitors and maybe you don’t want to do it on a name basis but any comments on what you’re seeing in the competitive environment kind of whose in, whose out, just some observations there?.

I usually take the market -- so let me give a shot at that. In looking both at our data as well as national data. The top 20 writers of workers' compensation insurance in terms of premium volume write 70% of the market, okay? And I would say with almost no exception those people are not being very aggressive.

Most of the competition comes in the remainder portion which are smaller companies like ours and smaller. And what we see is in that regard and what reported in the industry, so largely it is smaller companies in regional carriers or single state writers, self-insurance funds and some of those types of carriers that are being more aggressive.

Now that doesn’t mean a carrier maybe not on a particular account, not be really aggressive but as a general rule it's not the major carriers, and we’re not seeing the wide spread irrationality that we saw 48 months ago.

Now can that change? Absolutely one of the things that I found interesting is on the self-insurance funds which is not a big part of the market but can be troublesome since we write smaller accounts. They are now able to buy reinsurance.

In the past they brought about an excess of loss kind of just excess policy but now they buy reinsurance an some of the new alternative reinsurance markets are pursuing those and that can provide fuel for folks that don’t have the capital otherwise to the write the business. But I don’t see behavior being widespread overly aggressive..

Thank you. And our next question comes from the line of Randy Binner with FBR Capital Markets. Your line is now open. Your question, please..

This is actually Jason Oetting on for Randy this morning.

My first question kind of goes back to the idea of operating leverage in the form of net premiums written to surplus, obviously we each have to make our own assumptions on premium growth and potential capital deployment in the form of special later in the year if that ends up happening but the ratio has been hovering around onetime to just under one lately, is there a kind of target range that you have or maybe how do you broadly think about operating leverage?.

I think by and large, we would love to move that needle on the operating leverage front and we have spoken about in the past but I think maybe the metric to keep in mind is ROE, and to the extent that we can continue to generate these sorts of ROEs I think that’s the key ingredient for us in terms of whether or not we’re losing ground in terms of our capital management.

But by and large on the operating leverage front that as you said an assumption that you all need to make in terms of the growth in premium throughout the year..

And then we appreciate the comments obviously on premium growth and you know there is some improvements being made there. But if it takes a while to restore growth, does at some point M&A start looking more attractive or maybe even spreading organically into other geographies.

I know in the past we have asked about California and I assumed your stance is the same there but maybe just other areas like perhaps, North-East U.S.

exposure, how do you think about growth outside of just the typical route?.

First of all, yes you’re correct about California and our stance has not changed, we’re not going into California. We focus on operating leverage as Mike was just talking about, we would like to expand organically.

We continually look at M&A as we mentioned but there is just nothing out there that we have been able to find a fit for it but yes we would like to grow organically.

If that were to mean expanding geographies, we’re not opposed to that but we know and we believe that we can expand in our markets that we’re in now but we don’t have -- we haven't reached the market shares that we would like to be particularly in certain classes of business in particular state?.

Okay, and my last one is just on the 6.1 million of favorable PYD in the quarter, can you just a split between the 2009, 2011 and 2012 accident years?.

Yes, sure..

Were they equal or?.

2009 was 350,000 rounded, 2011 was 1.1 million and 2012 was 4.7 million..

Okay so it's inversely 2012 then?.

Yes..

So, how do you guys think about 2012 and more recent years shaping up versus kind of initial expectation, should we -- I mean is it reasonable to think there might be more coming out of there?.

We have been very fortunate as I said in my earlier comments that these changes were led by case development where we had on an individual case basis had I guess you would say over-reserved and we have had something go our direction and go favorably.

We have those things go in the opposite direction as well but at the same time I will be foolish to say I think we Amerisafe and the industry learned quite a bit of few lessons from accident year 2010 and I know it was very uncomfortable here to have to have that year developed adversely for us and so I think that trickles down even to the case level where maybe field case managers or senior field case managers or maybe a little more prudent about the reserves and thinking forward and things that could go wrong.

So we have benefited from case development particularly in exiting year 2012..

Let me add the industry color on that, the industry itself is seeing some improvement in the claims metrics. The NCCI will report it's workers' compensation results next Thursday, no two Thursday from now on the 14th.

And I think what you’re going to see is you’re going to see a mark drop there has already been report to mark drop to 11% in the use of opioids scheduled to narcotics for claimants.

I think you will start to see some shortening of claim duration and the ability to return people to work which was something that was very lacking during the great recession.

I think the reserves of the 2011 and 2012 and 2013 year as Janelle has pointed out, were made -- and estimates were made with a view back towards the great recession and so as employment changes and opportunities expands the ability to get these matters closed improves and they improve not only in being able to get them closed, but get them closed and returning people to work and taking down those excess reserves..

Thank you. I'm showing no further questions in the queue at this time. I would like to hand the call over to Ms. Janelle Frost, Chief Executive Officer for any additional remarks..

Thank you for your questions today. Tomorrow we will celebrate our 29th Anniversary of writing our first policy. I would like to use this public forum to acknowledge our greatest asset. Thank you Amerisafe employees, your hard work and dedication are the foundation of our success. Thank you all for joining us today..

Ladies and gentlemen, thank you very much for your participation. This does conclude the program. You may now disconnect..