AMERISAFE, Inc.
Q4 2008 Earnings Call Transcript

Published: 23 Feb 2009

[Operator:]

Welcome to the Amerisafe fourth quarter earnings conference call. (Operator Instructions) I would now like to turn the conference over to Mr. Ken Dennard of DRG&E. Please go ahead.

[Ken Dennard:]

Good morning everyone. We appreciate you joining us for Amerisafe’s conference call to review fourth quarter and 2008 full year results. We’d also like to welcome our Internet participants as this call is being simulcast over the web. Before I turn the call to management, I have the normal housekeeping details to run through. You could have received an email of the earnings release yesterday afternoon but occasionally there are technical difficulties so if you didn’t receive your release or you would like to be placed on the email distribution list, please call our offices at DRG&E and that number is 713-529-6600. Also, there will be a replay of today’s call. It will be available via web cast by going to the company’s website and that address is www.Amerisafe.com. There will also be a telephonic recorded replay available for seven days until March 2. Details on how to access that feature are in the yesterday’s press release. Please note that information on this call speaks only as of today, February 23, 2009 and therefore you are advised that time sensitive information may no longer be accurate as of the time of any replay listening. Also, statements made in the press release or in this conference call that are not historical facts, including statements accompanied by words such as will, believe, anticipate, expect, estimate or similar words are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 regarding Amerisafe’s plans and performance. These statements are based upon management’s estimates, assumptions and projections as of the date of this call and are not guarantees of future performance. Actual results may differ from the results expressed or implied in these statements as the result of risks, uncertainties and other factors including, but not limited to, the factors set forth in the company’s filings with the Securities & Exchange Commission including Amerisafe’s 10K for the year ended December 31, 2007 and all subsequent filings. Amerisafe cautions that you do not place undue reliance upon forward-looking statements contained in the release or in this call. Amerisafe does not undertake any obligation to update or publicly revise any forward-looking information or statements to reflect future events, information or circumstances that may arise after the date of the release and call. For further information, please see the company’s filings with the SEC. Now, I will turn over the call to Allen Bradley the company’s Chairman, President and Chief Executive Officer.

[Allen Bradley:]

Thanks Ken and good morning ladies and gentlemen. Thank you for joining us for our 2008 year-end investor conference call. I’m going to make a few comments about the quarter and year before turning it over to our Chief Operating Officer, Geoff Banta and then our CFO, Janelle Frost for more details. We are very pleased with our fourth quarter and full-year results which were achieved in an environment of significant market upheaval. Amerisafe’s fourth quarter was highlighted by an increase in gross premiums written of 5.3%, the first year-over-year increase for us in 2008. We also achieved a net combined ratio of 73.7% and operating return on equity of 27.8%. Our reported results, however, were impacted by after-tax, realized investment losses of $13.4 million in the fourth quarter, most of that the result of other than temporary impairments to our equity securities which Janelle will discuss more in a few minutes. Excluding the effect of those realized losses, our fourth quarter earnings were $0.94 per share. During 2008 we continued our focus on disciplined risk selection and pricing, aggressive claims management and controlling our expenses. As a result of those efforts we produced an excellent combined ratio of 81.4% for the year. For the full year excluding the after-tax impact of realized losses of over $15 million our operating earnings per share were $2.90 and our operating ROE was 23.2%. Even after accounting for realized losses we produced earnings per share of $2.15 on a reported basis and grew our book value per share almost 19% during 2008. As I said on our third quarter earnings call I am cautiously optimistic that pricing in the marketplace is firming. That optimism is based upon early signs of improvement such as sequential improvement in our third quarter LCM along with a year-over-year increase in our voluntary workers comp business written and an increase in our new business submissions. All of these positive factors must be considered in the light of the national economic recession that is impacting payrolls and thus workers compensation premiums. We continued to see improvements in the fourth quarter. Again, new business submissions were up this time by about 4%. Our new bound policies were up almost 7% and new written premiums increased more than 12%. At the same time our policy count retention or our renewal business was 91% and the premium retention was 84%. Both figures were marked improvement over the fourth quarter of 2007. At this point I am going to turn the call over to our Chief Operating Officer, Geoff Banta, for some operational metrics. Geoff?

[Geoff Banta:]

Thank you Allen. Good morning everyone. I will make several comments about company performance and trends before turning it to Janelle to review our financials in more detail. I join Allen in stating that we are very pleased with our fourth quarter results especially given the current state of the economy and the continued downward pressure on workers compensation rates. As we stated throughout 2008 our experience in the high hazard, sub-segment of the market along with our adherence to stringent underwriting standards and pricing discipline have enabled us to generate superior returns even in the soft market cycle. As Allen mentioned we are especially pleased that our top line actually grew in the fourth quarter by 5.3% when compared to the 2007 fourth quarter and we accomplished this premium growth while maintaining our pricing at an effective loss cost multiplier (ELCM) of 1.46, exactly the same as achieved in the third quarter. Regarding business on the books, our voluntary workers compensation policy count was up 1.5% in the fourth quarter and 5.3% for the 2008 calendar year. Our voluntary, in force premium declined for the year by 2.1% but increased slightly during the fourth quarter by 0.3%. Our insured payroll which can be viewed as a proxy for economic activity among our insured increased 7.3% for the entire year. Finally, our average premium for voluntary workers comp business decreased both in the fourth quarter and for the full year by 1.2% and 7% respectively. These decreases reflect increased competition as well as continued decreases in state mandated loss costs. While most of the loss cost decreases have been justified by regulatory reforms and decreasing loss frequency we believe that escalating medical costs as well as a flattening of downward frequency trends will soon bring an end to the period of decreasing loss cost and we are seeing signs that is starting to occur. Regarding losses, the third quarter was the fifth consecutive quarter in which we have experienced favorable loss development for prior accident years. In the fourth quarter our favorable development totaled $9.3 million and for the whole year we had favorable development of $20.4 million. This favorable development reflects not only our decrease in claims frequency but also the continued improvement of our claims management and adjudication process as manifested through increased speed in closing claims. In 2008 we had almost 600 fewer claims reported to us than in 2007 and as of December 31, 2008 our open claim count was 4,793, down 9.6% from year-end 2007 and at its lowest year-end point in more than a decade. Needless to say, we will continue to pursue our aggressive approach to closing claims. As my boss Allen Bradley likes to say, “Claims are not like wine. They don’t get better with time.” In addition to favorable reserve development, our expense management efforts continue to produce benefits even as our net premiums earned dropped 3.4% in the fourth quarter versus the prior year’s fourth quarter our expense ratio decreased by 6 full percentage points to 17.8% from 23.8%. Actual fourth quarter underwriting expenses decreased year-over-year by $4.9 million or 27.6%. Our competitively low expense ratio reflects the impact of our aggressive expense management as well as our 2008 working layer reinsurance treaty which acts as an offset to overall expenses. We should continue to see benefits from this 3-year treaty through the next two years as we have locked in almost 85% of our reinsurance costs through 2010. Janelle will provide more detail on the performance of our investment assets but I will tell you that we incurred $16 million in net realized losses in the fourth quarter and $18.9 million for the full year, almost all as a result of losses from our equity portfolio. Our pre-tax investment yield was a respectable 4% per annum as of year end. While it is impossible to predict the duration of this economic downturn we have all been witnessing, we at Amerisafe believe that we are strongly positioned for the near-term with a very conservative investment asset base, a book of business that is strongly priced and expenses that are carefully managed. Overall in spite of daunting external challenges in 2008 the insurance professionals of Amerisafe produced a return on average equity of 17.1% and a combined ratio of 81.4%. We are extremely proud of these results. With that I will turn the presentation over to Janelle.

[Janelle Frost:]

Thank you Geoff and good morning everyone. In the fourth quarter 2008 Amerisafe reported net income of $5.7 million compared to $18.6 million in the fourth quarter 2007. When we exclude net realized after-tax capital gains and losses our fourth quarter 2008 operating net income was $19.1 million, an increase of 2.6% over the fourth quarter 2007. Now onto the components of earnings. As Allen just mentioned, gross premiums written in the fourth quarter of 2008 were $65.1 million compared to $61.8 million in the fourth quarter 2007. This was a 5.3% increase from a year ago. Also this follows five successive quarters of year-to-year declines in gross premiums written. Net premiums earned decreased 3.4% from the year-ago quarter. Earnings lagged writings and our decreased earning premium in the fourth quarter was the result of decreases in written premiums from previous quarters. Our net investment income totaled $8.1 million which was 1.7% higher than the same revenue component in the fourth quarter 2007. In the 2008 fourth quarter we recognized $1.2 million of realized losses primarily from the sale of equity securities and $14.7 million in other than temporary impairment of certain equities and asset backed securities. These impairments pertain specifically to one sub-prime mortgage backed security and four broad market exchange traded funds. As of December 31, unrealized gains and losses on the investment portfolio totaled $16.8 million or 2.1% of our total cash and invested assets. Keep in mind our fixed maturity portfolio of $680 million is classified as held for maturity. Any unrealized gains or losses on those securities do not affect income or equity unless such securities are deemed other than temporarily impaired. In total, revenue in the fourth quarter 2008 was 22.3% lower than the same period in 2007. Our incurred loss and loss adjustment expenses were essentially flat when compared to last year’s fourth quarter. Our net loss ratio rose slightly to 51.8% from 51% in the fourth quarter 2007. This increase was mainly a function of our decreased premiums earned. Our 51.8% overall loss ratio includes a current asset year ratio of 64.8% and favorable prior year development of 13%. Underwriting expenses decreased 27.6% in the fourth quarter of 2008 to $12.8 million from $17.7 million in the fourth quarter 2007. The primary component of this decrease was $2.4 million of experience rated commissions from our $4 million excess of $1 million layer reinsurance contract. This experience rated commission acts as an offset to expenses as long as the company does not penetrate the $20 million annual aggregate deductible. Should the deductible be reached the benefit would switch from the expense ratio to the loss ratio in the form of seasoned losses. This contract is a structured product in effect for 2008, 2009 and 2010. In a period of rising insurance costs we have locked in our costs for three years and at the same time gained benefit to our expense ratios. Our underwriting expense ratios decreased to 17.8% from 23.8% in the same period a year ago. Our policy holder dividend ratio was 4.1%, an increase from a negative 1.8% in the fourth quarter 2007 primarily the result of dividends payable to Florida policy holders under a statutory formula unique to that state. In total our combined ratio was 73.7% in the fourth quarter 2008 versus 73% for the same period in 2007. In terms of earnings per share our reported fourth quarter 2008 diluted earnings per outsold to common share holders was $0.28 compared to $0.92 for the fourth quarter 2007. Excluding net realized gains and losses our operating earnings per share were $0.94 in the fourth quarter 2008 compared to $0.92 in the fourth quarter 2007. Book value per share was $13.86 at the end of the fourth quarter representing a growth of 18.9% over the past year and 91.4% since our IPO in November 2005. For the full year 2008 we reported net income of $43.8 million compared to $50.2 million in 2007. When we exclude the net realized after tax capital gains and losses our 2008 operating net income was $59.1 million, an increase of 17.8% over 2007. Our gross premiums written in 2008 decreased 6.1% to $307.8 million from $327.8 million in 2007. Net premiums earned for 2008 decreased 5.7% to $289.5 million from $306.9 million. Net investment income for 2008 was $31 million compared to $30.2 million in 2007, an increase of 2.6% mainly due to an increase in our average cash and invested assets to $778 million from $713 million in 2007. Offsetting this increase was a slight decrease in pre-tax investment yield to 4% versus 4.2% a year ago. Net realized losses in 2008 consisted of $1.6 million in realized losses primarily on the sale of equity securities and $17.3 million in other than temporary impairments as I discussed in relation to the fourth quarter. In total, revenue in 2008 was $302.4 million versus $338.3 million in 2007, a 10.6% decline. Offsetting the annual revenue decline were lower losses in underwriting expenses. Our incurred loss and loss adjustment expenses declined 11.2% for the year. Our 2008 net loss ratio declined to 60.9% from 64.7% in 2007. Our 2008 overall loss ratio of 60.9% included a current exiting or loss ratio of 68% and favorable prior year development of 7.1%. Underwriting expenses decreased 14.6% in 2008 to $55.9 million from $65.5 million in 2007. Our underwriting expense ratios decreased to 19.3% from 21.3% in 2007. In total our combined ratio was 81.4% in 2008 versus 85.9% for 2007. That concludes my prepared remarks on the financials. I will now turn the discussion back over to Allen.

[Allen Bradley:]

Thanks Janelle. The outlook for the workers compensation industry in this country in 2009 is uncertain. On the one hand, lower investment returns are forcing underwriters to focus on producing and underwriting profit and that will help stabilize pricing. By most estimates the United States property and casualty industry lost more than 15% of its statutory capital in 2008 and that too should help stabilize pricing. We are aware that underwriters are exiting certain classes of risk and doubts about carrier viability have caused agents and brokers to shop accounts providing many carriers including Amerisafe with the opportunity to quote on additional business and increase market share. These factors should provide Amerisafe with an opportunity. On the other hand, the economy is in a serious recession. The impact of the recession on the exposure units for workers compensation, namely payrolls, is critical. Amerisafe insures infrastructure builders and to the extent that activity is diminished the impact is adverse to us. Declining loss costs approved by a number of states will exacerbate the impact of reduced payrolls. Only time will tell which of these opposing forces has the greatest impact on Amerisafe. I have often heard we cannot change the wind but we can adjust the sails. For our part, Amerisafe will remain focused on risk selection and appropriate pricing, intuitive safety services, personalized claims administration, diligent expense management and conservative investment policies. I believe that Amerisafe is well positioned to weather the current financial turbulence and to return superior results to our shareholders. With that we will be happy to try to answer your questions.

[Operator:]

(Operator Instructions) The first question comes from the line of Matt Carletti – Fox-Pitt Kelton.

[Matt Carletti:]

First, relating to the favorable reserve development, following the fourth quarter development could you give us an update on where the accident year ratios now stand for the past couple of accident years? 2007 and 2006?

[Janelle Frost:]

Certainly. For 2008 the accident year loss ratio on a net basis is 52.8%. Of course the numbers I am giving you are loss in DTC not including AO. For 2007, 66.6%. For 2006, 54.6%.

[Matt Carletti:]

What was 2008 again?

[Janelle Frost:]

62.8%.

[Matt Carletti:]

On the expense ratio, it has kind of gone along at 20 points for most of the year and then dropped in the fourth quarter. Is there seasonality to the reinsurance contract or is that something else?

[Janelle Frost:]

No, there is not really seasonality to the reinsurance contract. The two things that mainly contributed to the decrease in the fourth quarter were the experience raised commission as well as a decrease in our loss and premium base assessments.

[Geoff Banta:]

We should probably point out those loss base assessments are very hard to predict because they depend in part on experience within the whole state that makes those assessments of all carriers and they may or may not be one time. We may see them again some additional quarter.

[Operator:]

The next question comes from Mark Hughes – SunTrust.

[Mark Hughes:]

Do you have any insight into the payroll trends of your policy holders in December and January? What does that imply in terms of gross premium for the first quarter?

[Geoff Banta:]

I really can’t comment on January but let me just say this, I have been pouring over the changes in payroll by class code over the last couple of days and I am not seeing, Allen may want to jump in here but I am not seeing material changes in payroll either positively or negatively in our major classes of business. There are some classes that are down. There are some classes that are up. This is my opinion, but nothing causes me concern yet that we are falling off the cliff in terms of the national economy.

[Allen Bradley:]

I would agree. With what we are seeing so far, the economy is not monolithic. It is not the same in each and every state we serve and each and every industry we serve. So far we have not seen dramatic changes. It is just difficult to predict where it is going to go from here.

[Mark Hughes:]

For the fourth quarter how much did the change in audit premium effect the gross premium?

[Allen Bradley:]

I think Geoff has those numbers. As I recall we had negative audit premium in the fourth quarter 2007 of roughly $2.1 million and I think that was around $400,000 negative this year or maybe $500,000 so the difference was actually an improvement of about $1.5 million.

[Geoff Banta:]

I think that is right Allen.

[Operator:]

The next question comes from Mike Grasher – Piper Jaffray.

[Mike Grasher:]

Could you talk a little bit more about the market disruption you are seeing out there and I think if you could compare and contrast some of your comments around the competition in the workers comp market place in some of your own classes? That would be good to get some insight on that.

[Geoff Banta:]

I’ll give you some numbers. I have been kind of holding off on giving numbers on this issue but as you know one of the competitors we have that we see in virtually every market is AIG. Their average policy size is generally a lot larger but we do see them in all markets. We started tracking new business from AIG where AIG was expiring carrier in the middle of September shortly after some of their announcements. Since the middle of September through the end of the year we wrote 142 new accounts from AIG totaling about $7.3 million. So that is a specific competitor in a specific event. By the way I want to comment on one thing there. I cannot say, I have heard some comments in the industry that perhaps AIG has been overly aggressive on pricing. I am not in a position, I don’t necessarily think that we have seen that sort of behavior for what that is worth. There has been other disruption in the market. As you know, Liberty Mutual has gotten out of the direct distribution business and has transferred that out on renewal rights transactions to several different agencies. There is some indication they are also restricting their writings in terms of class codes. There are other national carriers who have decided to pull back from some of the more high hazard workers comp events and then we have seen some local or smaller, regional type carriers like Michigan Millers was an example of that which have had some market disruption. All of these things provide us with opportunity. I think it goes back to the general comments I made earlier that if you are not receiving earnings through your investment portfolio you have to look even more closely at your underwriting procedures and quite frankly over the last couple of years with the collapse of the housing market a number of carriers that were involved in the residential construction industry have chosen to get involved in the heavier construction and more dangerous types of risk. I think perhaps some of those folks are looking at the prudence of that decision.

[Mike Grasher:]

That leads me to sort of my follow-up question here which would be what line of business or which class of business do you see being most impacted right now?

[Geoff Banta:]

I will tell you in 2007 41.7% of our business was construction. In 2008 it was 41.5%. So there is no significant movement there. Trucking had dropped from 22.3% of our portfolio to 21.8%. Agriculture rose to the third largest of our industry groups and logging dropped from third to fourth. I would expect logging would contract even further with some of the things that are occurring in the housing industry and construction trades perhaps. Oil and gas is up. Maritime is pretty flat. The other thing that is remarkable is that if you look back at 2006 and look at our total portfolio, our industry scatter of business we wrote, almost 5%, 4.9% of our business came out of the residual market. That was only 2.8% for this year. So carriers have gone in and pulled a lot of risk out of the residual market and it is now in the voluntary market. You might look to see that begin to reverse itself in the coming year.

[Mike Grasher:]

Opportunities out of the administration spending package?

[Geoff Banta:]

As I said in my prepared remarks, we insure infrastructure builders; heavy construction, trucking, oil and gas business, maritime risk, the like. To the extent that the President’s stimulus package will involve building infrastructure then those things should benefit us. It is hard to put a percentage around it. I will tell you looking at some of the construction projects that are listed for this part of the country a lot of those deal with hurricane evacuation type building and those are in areas in which we have a certain geographic density of business.

[Operator:]

The next question comes from Mark Lane – William Blair & Company.

[Mark Lane:]

My first question is regarding premium growth in the quarter. You highlighted the ambiguity in the outlook this year and potentially seeing a flat claims frequency trend and the market is maybe stabilized. It hasn’t changed dramatically. I was very surprised that your business actually grew in the quarter. Why are you so confident that you feel you are comfortable growing the business right now when still the outlook seems pretty ambiguous and if we hit a bottom it is not a very deep one yet?

[Geoff Banta:]

Two things; Number one, the pricing on the business, the hit ratios, the declination ratios, the success ratios where we quoted business did not materially change from any other point in the year. So I don’t think there was any compromising of risk selection. Number one point. Number two point, if you look back at the fourth quarter 2007 you would see we had a rather precipitous drop in premium written over the fourth quarter 2006. So the bar wasn’t extremely high. I don’t think that taking advantage of disruptions in the marketplace and taking advantage, which largely by the way we showed up in October and November, represented any compromise whatsoever in the risk selection process. I think it was opportunistic and we took advantage of it. The other thing which was interesting, as I mentioned earlier, the audit premium adjustments were an improvement of about $1.5 million. I think that reflects employers being more realistic in their estimation of annual premium going forward because those audit premiums reflect audits on policies that were written in prior periods outside of the fourth quarter 2008.

[Mark Lane:]

Was there a difference in the profile of the business flow in the fourth quarter? Because you did state that your new business growth was higher than your new submission growth which is kind of a counter-trend to what we have seen in the rest of the industry this quarter.

[Geoff Banta:]

I would tell you that we got to look at some business in the fourth quarter that we did not have an opportunity to look at in the past and some of those policies were larger. The quick math and the numbers I gave you awhile ago would indicate the average policy we took from AIG in terms of new business was over $50,000 per policy. Our average policy size for the year is about $36,600.

[Mark Lane:]

What about the expense ratio? So this is the first year for the reinsurance treaty. Have we seen the big delta on the impact there then?

[Janelle Frost:]

Correct. You will see that impact each quarter for the three years. So 2008, 2009 and 2010.

[Mark Lane:]

Meaning there shouldn’t be much positive incremental impact in 2009 versus 2008?

[Janelle Frost:]

No.

[Mark Lane:]

What about the favorable development? You gave the accident you are excluding LAE so it doesn’t look like…how much of the $20.4 million favorable development was attached to the 2007 accident year?

[Janelle Frost:]

2007 was actually unfavorable development of $10 million. 2006 was favorable development of $16.1 million. 2006 and prior was $14.3 million.

[Mark Lane:]

2007 had unfavorable development of $10 million?

[Janelle Frost:]

Correct.

[Allen Bradley:]

We actually strengthened there.

[Mark Lane:]

Any particular reason why?

[Geoff Banta:]

It was largely related to one very large claim that adversely developed on us.

[Operator:]

The next question comes from Bijan Moazami – Friedman, Billings, Ramsey & Co.

[Bijan Moazami:]

I just wanted to stay on the same line of questions. In particular about the frequency trends, is this recession any different from previous recessions? In other words, are you seeing people staying out of jobs for longer periods of time? Any increase in severity of medical claims? What are the trends you are seeing if you have any specifics?

[Geoff Banta:]

I don’t have any numbers to put around that, specific numbers, but I will tell you that the frequency trends that we are seeing are down to flat. We are not seeing any increase in frequency of new, reported claims number one. Number two, in terms of I’m going to call it duration my concern has been for some time that in a slowing economy it is difficult for us to resolve claims because it is difficult to convince people they are ready to go back to a job that doesn’t exist. I think that is the biggest challenge that we have going forward in terms of claims is what do we do with claims that are already in our inventory as opposed to the new claims coming in. Medical cost inflation, as you know, workers comp according to the NCCI increasing at about roughly 6% as opposed to 4.4% for general health CPI. So that is of course a concern. Anything that stretches out duration is a concern. Let’s talk about how we have tried to manage that a little bit. At the end of 2008 we had open workers comp claims of 4,732 claims. Now of those 56.6% were 2008 claims. If you add in 2007 claims that covers 73.9% of all of our open claims or claims that are in the last two years; 2007 accident year and 2008 accident year. So we have reduced our inventory of open claims. You have heard us talk about this, the oldest 75 initiative. We have been able to reduce our open claims to the older inventory and we think that mitigates as much as possible that risk of the duration stretching out on the claims.

[Bijan Moazami:]

The reserve addition you took on 2007 is it all related to that one large claim which I doubt would be the case? Your retention ratio is way below that. Or is it your conservatism and just wanting to be more careful with the newer accident years and the trends that are happening there?

[Geoff Banta:]

It is more the latter than the former. That one claim, the case incurred increase was either 3.4 or 3.7 million. It was quite a surprising development. That can happen when you are in the severity driven business. Yes we are conservative about that and we are very, very comfortable with the level of our reserves both case reserves as well as IB&R.

[Bijan Moazami:]

You talk about frequency flat to down still. What about severity? When the frequency was dropping previously you had the frequency of the more serious accidents dropping at a faster rate and the frequency of the less serious accidents.

[Geoff Banta:]

We had an interesting year in 2008 and I think you will be able to see more color on this when the K comes out. As I recall, we had for years 2004 through 2008 we had an average of 27 claims per year that had reserve incurred amounts of greater than $500,000. The highest year was 31 and the lowest year was 2008 at 18. So in 2008 we had a relatively low number of severe claims. Those severe claims tend to be a little lumpy. I would have to tell you we begin each year with the assumption that the average claim size in that year is going to be slightly higher than the previous year as a result of medical cost inflation and wage inflation. But that doesn’t always play out. That is our assumption going in and that plays into our reserving.

[Operator:]

The next question comes from Michael Nannizzi – Oppenheimer.

[Michael Nannizzi:]

I have a quick question about the investment loss. When I look at the number it looks like the tax rate is maybe 18% comparing the gross to net. Am I calculating that right? Can you walk through the tax implication or tax component of that realized loss on the income statement?

[Janelle Frost:]

Sure. One of the things we had to do was we had to put up a valuation allowance on our deferred taxes so that is what is driving the tax rate. That was $3 million. If you were to exclude that from the tax rate we would have been in the 26.9% effective rate.

[Michael Nannizzi:]

So the deferred tax bounce went up $2.5 million or so and that was primarily driven by this piece?

[Janelle Frost:]

Correct.

[Michael Nannizzi:]

Would you have the investment portfolio yield average for the quarter?

[Janelle Frost:]

For the quarter no. I can tell you our money [rate]. [Cash] were about a 1.7 and on the fixed maturities about 3.3.

[Michael Nannizzi:]

Just in terms of cash, there is about $100 million at the end of the quarter. Does that include stuff that matures in the forward 12 months or is that another component of the investment portfolio?

[Janelle Frost:]

Cash and cash equivalents is 11.9% of the portfolio and that would equivocate 3 months or less.

[Michael Nannizzi:]

So there is probably another group of investments in the portfolio that do mature in the next 12 months?

[Allen Bradley:]

Yes. Turnover is about 14% per year.

[Janelle Frost:]

9.2% of the portfolio is going to mature in less than one year.

[Michael Nannizzi:]

So 9.2% and that is in addition? So that is 3 month to 12 month or is that the whole? I guess that would be because 3 months or less is in the cash side.

[Janelle Frost:]

9.2% of the $680 million in fixed maturities.

[Michael Nannizzi:]

What is the duration of the portfolio right now?

[Janelle Frost:]

About four.

[Allen Bradley:]

Including cash.

[Operator:]

The next question is a follow-up question from Mark Hughes – SunTrust.

[Mark Hughes:]

Do you have cash from operations for the full year?

[Janelle Frost:]

$65 million.

[Mark Hughes:]

The inflation in medical expenses, Allen how has it been lately? It seems like broader medical inflation trends have decelerated a little bit in recent months.

[Geoff Banta:]

I don’t have a number around that. That is my impression. My main concern about medical cost inflation is going to be around utilization as opposed to just pure inflation over the same unit of delivery. As duration of claims extend out we get more doctor visits, more hospital visits, more prescriptions, and more durable medical equipment. All of those sort of factors can drive that. It is different from state to state. Some states do a better job of controlling medical costs than others. The NCCI studies on that indicate that states that have medical fee programs and effective cost containment do much better than the reasonable and customary states. So it is affected by some geographical scatter as well.

[Operator:]

The next question comes from Ron Bobman – Capital Returns.

[Ron Bobman:]

Can you explain again the multi-year reinsurance protection you mentioned at least two times in the prepared remarks? I didn’t fully understand it.

[Allen Bradley:]

We entered into a 3-year agreement effective as of 01/01/08. That agreement is what we call structured product and it said that we would fix the premium and our share of the premium and the expense on the margin for the reinsure our piece would be 86% of the seeded premium we pay remitted and theirs would be 14%. That 86% is what we take back against expenses on a reported basis. The cash stays in both funds with held and funds transferred until we decide to commute the contract and every year the aggregate annual deductible is $20 million. So in other words between $5 million and $1 million, between that corridor we have to pierce $20 million in that corridor the reinsurance kicks in.

[Geoff Banta:]

Reinsurance provides $40 million of coverage in any one year and $60 million maximum over the 3-year time period. You can tell from the accounting that we did not pierce the $20 million layer in 2008.

[Allen Bradley:]

There is no inflationary kicker on the premium. It is $11 million every year for the three years. We are locked in.

[Geoff Banta:]

One other thing you should know about is that it is as respect to our 4X1 layer. For 2009, 2010 and 2011 we entered into a similar product with a 5x5 layer without an annual aggregate deductible with a similar type structure. It won’t have much impact on the financials because the seeded premium at that layer is significantly less. The 4x1 layer represents 80-85% of the cost of our reinsurance.

[Ron Bobman:]

So what is the economic impact and then the reporting impact? From a scenario where you have horrible loss development in this period of time and in contrast if you had favorable over this period of time? What are you giving up and what are you getting out of those two scenarios?

[Allen Bradley:]

If we have horrible loss development what will happen is the expense offset that we build up will start moving from expenses to seeded losses. The expense ratio will go up and the net loss ratio will go down as we start eating into the losses above the annual aggregate deductible. There is a limit to those. If we had a year, for example, where we had $60 million which we have never had before we would take quite a big hit in terms of expense ratio, lowering net loss ratio and then we would take the losses back ourselves over $60 million. The good side of this is if we did not pierce the layer in any of the three years we would have in terms of the funds withheld if we could decide now we are going to commute this contract which we can do after three years we take that cash back and by the way we are earning interest rate on the cash that is withheld. So economically and financially we thought it was a very good deal for us.

[Operator:]

The next question is a follow-up from Mike Grasher – Piper Jaffray.

[Mike Grasher:]

I guess to Geoff and Allen if you could update us on the governance review? Is there anything you could share with us at this time?

[Geoff Banta:]

Just an update, the matter of the corporate governance review is being handled by the nominating corporate governance committee. They have retained counsel to assist them in doing this review. They are proceeding in a deliberate fashion. It is more important for Amerisafe to do this right than to do it quick but I don’t look for it to be an unusual delay in proceeding through the process of making the assessment.

[Mike Grasher:]

With all that would you care to throw out any time frame?

[Geoff Banta:]

No. Since they are doing it I had better be quiet.

[Operator:]

The next question is a follow-up from Michael Nannizzi – Oppenheimer.

[Michael Nannizzi:]

A housekeeping question, can we have the expense component numbers for the commission, salaries and other underwriting? Is that possible?

[Janelle Frost:]

On a year-to-date basis?

[Michael Nannizzi:]

For the quarter if that is okay.

[Janelle Frost:]

I do not have those handy.

[Michael Nannizzi:]

Or the year-to-date. I can figure out the quarter.

[Janelle Frost:]

Commissions $20.592 million; Salaries and benefits $20.411 million; Underwriting and other operating $14.933 million.

[Operator:]

Management there are no further questions at this time. Please continue with any closing comments.

[Geoff Banta:]

Thank you all for joining us this morning. We appreciate your interest and your support of Amerisafe. We look forward to continuing to return superior shareholder returns over the coming year.