Good day. And welcome to the AMERISAFE 2022 Third Quarter Earnings Conference Call. Today’s conference is being recorded. At this time, I’d like to turn the conference over to Kathryn Shirley, Chief Administrative Officer. Please go ahead.

Good morning. And welcome to the AMERISAFE 2022 third 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 today’s earnings release, in the comments made during this 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.

Thank you, Kathryn, and good morning, everyone. I’d like to take this opportunity to virtually welcome Andy Omiridis, our new CFO. As previously announced, Andy joined the team in September and has been working with Neal as he transitions to retirement. So welcome, Andy. Moving on to the quarter, we are pleased with this quarter’s results, reporting an 85.4% combined ratio and an operating ROE of 14.4%. The quarter’s results were supported by favorable prior year development, an increase in net investment income due to higher interest rates and strong audit premiums. Premium written is up for the second consecutive quarter, with the current quarter written premium up 1.5%, primarily due to audit premium. Wage inflation continues to be the primary driver for payrolls, with our payrolls up significantly from the same period last year. In maintaining our operational effectiveness, we were successful in retaining 93.5% of the accounts for which we offered renewal. Our overall pricing, as measured by our ELCM was 153, identical to the third quarter of 2021. Overall policy count was down as we continued to face competitive headwinds in the marketplace. We are well positioned to retain our policyholders and successfully compete for new business. In addition, we continue to see growth in payrolls reported in this quarter, driven primarily by wage growth. This bodes well for future audit premium. A smaller percentage of the growth is attributable to new workers. The number of new workers is a trend we closely monitor, as new workers typically translate to more claims. Over 40% of the claims reported in any given year are injuries from workers with one year or less of tenure. Job training, turnover rates and accident prevention measures are risk differentiators our safety professionals evaluate during their on-site visits and are critical to our underwriting evaluations. Continuing with losses, we experienced $10.4 million of favorable prior year development in the quarter, primarily from accident years 2017 through 2020. For the current accident year, our loss ratio was 71%, unchanged from the first two quarters. Frequency for the current accident year is down from accident year 2021 at the same point in time, and severity was within expectations. Before turning the call over to Andy, I want to discuss the special dividend. The company’s Board of Directors declared a special dividend of $4 per share for shareholders of record as of December 2, 2022. This dividend reflects the operational excellence and commitment to our shareholders by seeking to deploy capital to create long-term shareholder value and return excess capital to shareholders. I will now turn the call over to Andy.

Thank you, Janelle, and good morning to everyone. For the third quarter of 2022, AMERISAFE reported net income of $11.4 million or $0.59 per diluted share, down from $19.1 million or $0.99 per diluted share in the same quarter last year. The decrease in net income was mainly due to larger declines in our equity securities compared to last year's third quarter. Additionally, last year's favorable results included significant case reserve development from closed cases. Operating net income for the third quarter was $14.1 million or $0.73 per share, a decrease from $19.8 million or about $1.02 per share in the third quarter of 2021. Quarterly revenues were lower, affected by $4.1 million in unrealized losses on equity securities. Revenues amounted to $71.3 million, compared to $73 million last year. Net premiums earned rose 0.2% to $67.8 million, up from $67.6 million in the previous year’s third quarter, mainly due to audit premium. Regarding our investment portfolio, net investment income increased by 15.4% in the third quarter to $7 million, compared to $6 million in the same quarter of 2021. This rise was supported by yields on money market funds and bank accounts, as well as increased reinvestment rates on fixed income securities. In the first nine months of the year, our yield on new investments was approximately 147 basis points higher than the securities that matured or were sold from the portfolio. We anticipate this trend to persist. The tax equivalent yield on our investment portfolio was 3.16% at the end of the third quarter, up 66 basis points from a year ago. The pre-tax yield was 2.88% at the quarter’s end, also up from 2.21% last year. Realized gains on securities in the portfolio exceeded $600,000 in the quarter, contrasting with a minimal loss in the third quarter of 2021. The investment portfolio remains high quality, with an average -AA credit rating and a duration of 4.09 years. It consists of 58% in municipal bonds, which includes 14% in taxable munis, 21% in corporate bonds, 6% in treasuries and agencies, 6% in equity securities, and 9% in cash and other investments. Approximately 60% of the bond portfolio comprises held-to-maturity securities. Our total underwriting and other expenses for the quarter were $19.6 million, compared to $17.9 million in the third quarter of 2021. The increase was primarily due to a benefit from a reinsurance treaty profit-sharing commission in the previous year’s quarter. Our expense ratio for this quarter was 28.9%, compared to 26.5% in the third quarter of 2021. By category, the expenses for the third quarter of 2022 included $6.7 million for salaries and benefits, $5.4 million in commissions, and $7.4 million for underwriting and other costs. The return on equity for the third quarter of 2022 stood at 12%, while the operating return on equity was 14.4%. In terms of capital management, as Janelle mentioned, the Board of Directors declared a special dividend of $4 per share. I would like to highlight the upcoming quarter, where we will conduct a share repurchase totaling $6.5 million at an average share price of $46.83, inclusive of commissions, with an additional $12.8 million remaining in our share repurchase authorization as of September 30, 2022, for future purchases. Lastly, book value per share as of September 30, 2022, was $19.47, down 5.6% from $20.62 at the end of 2021. We will be filing our Form 10-Q with the SEC tomorrow, October 28, 2022, after market close. That concludes my remarks, and we would now like to open the call for the question-and-answer session.

Thank you. Our first question will come from Mark Hughes with Truist.

Yeah. Thank you. Good morning, Andy. Good morning, Janelle.

Good morning, Mark.

Good morning.

The audit premium outlook, I think you suggest, the growth that you are seeing in payrolls suggests audit premium outlook continues to be pretty strong. Is it looking as good as it did at this time, say, three months ago?

The wage growth and payroll growth we observed this quarter is stronger than what we have seen in recent quarters. Overall, payrolls reported to us this quarter, which have been active for the previous months, grew by 12.1%, with approximately 2.9% of that coming from new employees. This means the wage growth component was 10%, which is an increase from last quarter's rate of about 9%.

Yeah. Okay. And then from a loss cost perspective, you gave us the ELCM, sounds like it’s steady?

Yeah.

Do you have the kind of the update on what you are seeing in terms of loss cost trends?

The loss cost trends continue to decline for the quarter. On average, we saw a decrease of 10% or 10.3%, which aligns with what we reported for the second quarter as well. We are not observing increasing decreases, but on the other hand…

Yeah. Yeah.

… on the other hand we are not seeing net positives either.

Yeah. And then anything on the medical inflation front, there’s been some talk about that in other lines, what do you see?

Yeah. Certainly something that we are keeping an eye on, when we think about medical costs, in particular and rather anecdotally, but we all hear about how much the medical field itself is experiencing wage inflation. We keep a close eye on that for a couple of reasons. We do think that eventually works its way into the workers’ compensation system either via the Medicare schedules or states updating their loss costs. Meanwhile, it’s not built into the rate. So I think the first place we will see it in terms of workers’ compensation is probably companies really just using discretionary pricing to get in front of the costs that they are experiencing on the claims side, and so it’s something that we are closely monitoring. But, as of yet, there hasn’t been a lot of updates to the fee schedules. But it’s something that we anticipate happening, and of course, it takes a while for that to make its way into the actual loss cost or the rates themselves.

Could you elaborate on the trajectory of inflation and how it impacts the fee schedule? What is the lag time for that process?

That's a great question. What is the lag? I only know one state so far that has updated their fee schedule. I think it takes time for those trends to build up, depending on the state. It could be related to the Medicare or Medicaid fee schedule, as many states base their workers’ compensation fees on those schedules, or the state might have a specific fee schedule for workers’ compensation. There is definitely a lag in when that happens. So far, we have only seen one instance. I think we are probably six to nine months away from seeing any significant movement there, given the rate of medical inflation in the healthcare sector.

Yeah. I will ask one more question, and I apologize for being rude by asking again. The question on capital...

Oh! Okay. I pause.

What color of shoes are you wearing? I can’t say. Regarding the capital situation and the dividend…

Yeah.

How you are looking at kind of capital ratios, that sort of thing.

Right. As we have discussed many times, the metrics we focus on include our operating leverage, such as net premiums written to GAAP equity and net premiums written to statutory surplus. From a GAAP equity perspective, we could be at 1 time or 1.1 times, and on a statutory basis, potentially up to 1.4 times. However, we are currently not achieving those targets. At the end of the quarter, our operating leverage was 0.71 times, indicating that there is definitely excess capacity and excess capital available for us to operate, while still maintaining our A.M. Best rating in the markets that are crucial for us.

Understood. Thank you very much.

Thank you, Mark.

Thank you. And our next question will come from Matt Carletti with JMP.

Janelle, I was hoping I could kind of ask you a broad economy question just with everybody kind of thinking about recession. You guys have some specific sectors that make up large portions of your book. What are you seeing in your core sectors in terms of economic activity and has it changed much this quarter to last quarter, so on?

That's a great question, Matt. When we assess our insured base, we primarily look at reported payrolls. This quarter, we noted that wages and payrolls increased by 12%. A significant part of that, about 10%, was due to wage growth, while new workers accounted for roughly 2.5% to 3%. This change in new workers is not drastically different from previous trends. We closely monitor this aspect. Regarding your concerns about a recession, I would expect to see a slight decline in the number of new workers. However, our industry groups typically perform well during minor recessions. For instance, construction, which is our largest sector, is mostly resilient despite current headlines about the housing market and high interest rates. In fact, only about 5% of our construction portfolio falls outside commercial construction, giving us confidence in that area. Notably, our trucking segment tends to remain stable even during economic downturns. Overall, our trucking business has shown consistent performance. I realize this answer was quite lengthy, and I appreciate your patience.

That’s super. No. That’s super helpful. Super helpful.

Okay.

Maybe shifting gears a little bit just to the development, both this quarter, as well as it’s very steady for a number of quarters now. Maybe just can you refresh us on kind of what’s driving that, and in particular, what I am getting at is, is it mostly claims closing kind of below expected and kind of if that happens you are kind of, for lack of a better term forced to release it or are you seeing anything in kind of the loss trends on open claims that you are then kind of adjusting the reserves or keeping up on claims that remain open?

Right. So, when you think about AMERISAFE and I do think this is one of the things that when you think about our loss reserving, you really have to remember how different we are in terms of if you just look at our overall reserves, case reserves as a component of our reserves versus IBNR. So we rely heavily on our case reserves. We believe in the expertise of our field case managers. We keep really low inventories in the field, less than 50 claims per adjuster. And that’s very intentional on our part, simply because we want them to know those claims intimately and get what we believe is the most likely outcome in terms of the case reserve. Fast forward to what we are seeing in loss development or favorable loss development, it’s coming from those case reserves and my claims department really focusing in on how do we close these claims, how do we get best outcomes not only for AMERISAFE, but for these injured workers, and ultimately, for the policyholders themselves in terms of mitigating those costs and getting those claims closed. I’d probably sound like a broken record, but our job is maximum medical improvement and return that injured worker to work. Our claims folks are thinking about that every single day and that’s where our favorable development is coming from, is those case reserves and being able to close and settle those claims, and at the same time, take care of those injured workers.

Okay. Perfect. Can you provide an update on the frequency of large claims as of September 30?

Certainly. As of September 30, we had 12 large claims, which are defined as claims with case incurred over $1 million. In comparison to September 30 of last year, we had nine large claims, and the year ended with 19. For the accident year 2021, we ended with 19 large claims, so we are currently at 12 for 2022. In my opinion, there are no significant differences in frequency or severity, but this business can be unpredictable, and there are still 100 days left in the year.

Okay. Lots of time.

No. There’s 65 days left in the year, 65 days. I think today is day 300.

Perfect. Perfect. Well, thank you very much for the color and welcome, Andy, and Neal. Your best of luck for an enjoyable retirement.

Thank you.

And our next question will come from Mark Hughes with Truist.

Anything we should think about in the expense ratio in terms of inflation that you may be seeing in wages, I know it’s pretty volatile, but maybe it’s been a little bit higher lately. Is that a…

Sure.

… correct impression?

AMERISAFE is experiencing wage inflation pressures like everyone else. We are not immune to it. Therefore, we are dealing with the same challenges that others face. As for the long-term effects, particularly regarding the expense ratio, I don’t have a definitive answer. The long-term impact remains uncertain, as it can vary depending on the job market or the skill levels that are in demand at any given time.

Okay. And then how would you characterize competition, in some earlier quarters you spoke about what you are seeing, the appetite among the bigger carriers or regional carriers. How would you characterize it now versus three months, six months ago?

It’s unchanged. Competition remains strong. There are still carriers willing to write what AMERISAFE writes. The agent force is focusing more on other lines of business besides workers’ compensation due to the availability of coverages in various markets. Considering that loss costs have declined and many are approaching their agents for rate decreases, workers’ compensation is likely not a priority for those agents when it comes to placing that coverage. There are, as we know, other property and casualty lines that are facing challenges. I believe we can improve our efforts in acquiring new business. However, the competitive environment has not seen significant changes, and I would suggest that for the past two years, we have not experienced any noticeable shifts in the level of competition.

Yeah. I had a great question but is a…

My shoes are brown.

Oh! Oh! The question was, you have also, I think, sort of characterized, when you look at your customer base, it’s mostly commercial. Maybe it’s that next job that’s important when you think about the future?

Right.

Any perspective on what they are saying about backlog, bidding activity? What do you feel like there?

One of our concerns during and after the pandemic was whether the next job would be available, despite our insurers working diligently. Based on the payrolls we are seeing, the answer is yes, the next job will be there. When I observe consumer demand, it remains robust. Even with rising interest rates, we haven't noticed a decline in demand, and as long as that continues, I believe the next project will be forthcoming.

Yeah. Yeah. Okay. Thank you again.

You are welcome.

Thank you. And that does conclude the question-and-answer session. I will now turn the conference back over to Janelle Frost.

Thank you. I started today’s call welcoming Andy to the team. So I’d like to end by thanking Neal Fuller for his service and leadership at AMERISAFE. The company and our community are better today because of the influence of Neal and his wife, Maria. We wish them the very best. Thank you for joining.

Thank you. And that does conclude today’s conference. We do thank you for your participation. Have an excellent day.