Good day, and welcome to the AMERISAFE 2023 Second Quarter Earnings Call. Today's conference is being recorded. At this time, I would like to hand the call over to Kathryn Shirley. Please go ahead.

Good morning. Welcome to the AMERISAFE 2023 Second 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, in the comments made during today's call, and in the Risk Factors section of our Form 10-K, Form 10-Q, and other reports and filings with the Securities and Exchange Commission. We do not undertake any duty to update any forward-looking statements. I will now turn the call over to Janelle Frost, AMERISAFE's President and CEO.

Thank you, Kathryn, and good morning, everyone. The state of the workers' compensation market overall remains profitable despite continued rate softening. The line is reporting an industry-wide combined ratio below 100%, reserves remain redundant and approved loss cost declines are expected to continue. AMERISAFE is a disciplined underwriter in the high-hazard workers' compensation market that has demonstrated the ability to maintain strong margins throughout many market cycles. In the second quarter, we reported a combined ratio of 85.4% and a return on average equity of 18.6%. During the quarter, our top line decreased 3.7%, driven by continued rate declines and wage inflation slightly slowing, when compared with a strong year-over-year growth in the second quarter of 2022. We continue to see strong retention in policies for which we offer renewal, with 93% retention for the second quarter, largely in line with the recent experience, despite continued competition. As we look ahead, competitive pressures and rate declines are expected to remain a headwind, offset by strong payrolls. Moving to losses. The current accident year loss ratio remained a steady 71%. During the quarter, our claims handling practices drove better-than-expected outcomes, resulting in favorable prior period development of $10.9 million or 16.7% loss ratio points. These reserves were primarily released from accident years 2018 through 2021. As it relates to loss trends, frequency and severity are both in line with our expectations, trending slightly lower than compared to the previous accident year at six months. As stated last quarter, we continue to expect medical inflation to increase as the year progresses and reflect these trends in outstanding case reserves. Our balance sheet is conservatively positioned with roughly $960 million in investments in cash, a solid reserve position and no outstanding debt. We expect our market dynamics to remain challenging. However, given our long tenure of experience through market cycles, we are well positioned to retain our policyholders and attract business, while delivering robust returns to our shareholders. Finally, I'd also like to highlight AMERISAFE's inclusion in the Ward's 50 top-performing property and casualty companies for the 15th consecutive year. This recognition is a testament to our employees' expertise in the high-hazard workers' compensation niche, resulting in financial strength and stability of our company. With that, I'll turn the call over to Andy to discuss the financials.

Thank you, Janelle, and good morning to everyone. For the second quarter of 2023, AMERISAFE reported net income of $15.6 million or $0.81 per diluted share, and operating net income of $14 million or $0.73 per diluted share. This exceeds the second quarter of 2022 net income of $6.1 million or $0.32 per diluted share, and operating net income of $13.1 million or $0.68 per diluted share. The increase in net income was primarily due to gains in our equity securities compared to losses in the second quarter of 2022. Gross written premiums were $71.7 million this quarter, down from $74.5 million in the second quarter of 2022, a decrease of 3.7% year-over-year. During the quarter, voluntary premium decreased by 2.3%, largely due to ongoing rate pressure. Payroll audit and related premium adjustments fell by $800,000 for the second quarter of 2023 compared to the second quarter of 2022. However, payroll audits increased by $200,000 for the quarter compared to the previous year. While audit premium remains strong, we are noticing some stabilization in the incremental growth attributed to lower wage growth. Ceded premiums rose by $1.2 million for the quarter and $2.9 million for the first half of 2023 compared to the second quarter of 2022, primarily due to additional reinsurance coverage costs. In terms of our investment portfolio, net investment income increased by 19.1% to $7.7 million from $6.5 million in the same period last year. This growth was fueled by higher yields on cash and elevated reinvestment rates on fixed maturity securities. New investment yields rose by approximately 260 basis points this quarter, raising our tax-equivalent book yield to 3.62%, an increase of 76 basis points compared to the second quarter of 2022. AMERISAFE's investment portfolio is of high quality, with an average AA- credit rating and a duration of 3.9 years. The portfolio consists of 57% in municipal bonds, 28% in corporate bonds, 3% in US treasuries and agencies, 7% in equity securities, and 5% in cash and other investments. Approximately 57% of our bond portfolio consists of held-to-maturity securities, which, alongside the moderate rate increase this quarter, resulted in a net unrealized position of $21 million. Please remember that these held-to-maturity securities are recorded at amortized costs, so unrealized gains or losses do not impact the book value. Our total underwriting and other expenses were $20 million this quarter, consistent with the previous year, leading to an expense ratio of 30.4%, up from 28.3% in the second quarter of 2022. Although the overall expense level remained stable, the expense ratio increased due to a lower level of net earned premiums. Our tax rate stood at 20.1%, compared to 13.9% in last year's second quarter, mainly due to the lower share of tax-exempt income against underwriting income this quarter. Our capital position remains strong, supported by a high-quality balance sheet, solid loss reserve position, and conservative investment portfolio. The company paid its regular quarterly cash dividend of $0.34 per share in the second quarter. Earlier this week, the Board declared a quarterly cash dividend of $0.34 per share for the third quarter, payable on September 22, 2023, to shareholders of record as of September 8, 2023. Additionally, book value per share as of June 30, 2023, was $17.76, an increase of 7.2% from $16.57 at December 31, 2022, with a return on equity of 18.6%. Our statutory surplus reached $284 million at the end of the quarter, up from $270.1 million on March 31, 2023, and $252.5 million at December 31, 2022. Lastly, we will be filing our Form 10-Q with the SEC later today after market close. Now, I will open the call for the question-and-answer session.

Thank you. We will now take our first question from Matt Carletti with JMP. Please go ahead.

Hi. Thanks. Good morning.

Good morning, Matt.

Janelle, I was hoping you could elaborate on wage inflation since you mentioned it in your opening comments. I'm interested in how those trends have changed over the past several quarters. Are there specific areas in your business that are stronger or weaker, or is it relatively uniform across different clients? Also, what is your outlook for how this might affect your results moving forward?

I think in the last few quarters, we've been observing payroll trends as they're reported, which may indicate future audit premiums. We continue to see wage growth, although not at the record levels we had previously; it seems to have moderated somewhat. Starting in the third quarter of 2022, we experienced double-digit payroll growth, primarily from wage increases. Recently, wage growth has averaged around 8%, excluding new employees, and in this quarter, it was closer to 5%. This is still a robust growth number, aligning with the national average, which is reported to be about 5.5%. In the construction sector, which is a significant part of our business, we noticed a slowdown in wage growth, but the figures remain strong. According to Bureau of Labor Statistics data, construction spending continues to rise, and the labor market in that sector is stable, with layoffs decreasing recently. This suggests a positive outlook for this industry segment, which comprises over 40% of our business. As for new employees, the count has remained steady around 2%, consistent with previous quarters. We are not seeing any significant workforce increases.

Perfect. That's super helpful. And then maybe shifting gears a little bit. Could you just update us on kind of how you might be thinking about capital management as you come into the end of the year? Top line has been kind of flattish year-to-date, you continue to throw off really good returns. Just how should we think about that going forward?

Yes, absolutely. Our Board discusses capital management every quarter. As you mentioned, we're delivering strong returns this year. Our approach over the last few years has been to return capital to shareholders. The outlook for this year is positive, so I don't foresee any changes to that strategy at this point, considering we are halfway through the year. Of course, we would like to see some organic growth, and we believe there are opportunities for that. We experienced an increase in policy count this quarter, although the premium dollars didn't align as well as we wanted due to changes in loss costs. I feel like we've gained some momentum in our approach to new business. However, as we stand at the six-month mark, I don't anticipate that impacting our ability to pay a special dividend before the end of the year.

Okay. Perfect. And then last quick one, and I apologize I probably missed it in your opening comments, just the ELCM for the quarter.

146.

Wonderful. All right. Thank you very much. Appreciate it.

Thank you, Matt.

And we'll go ahead and take our next question from Mark Hughes with Truist. Please go ahead.

Thank you. Good morning.

Good morning, Mark.

The audit premium in the quarter, you kind of broke that out in a little more detail, but I'm not sure that I could put the pieces together properly. I think your audit premium in the second quarter of last year was $5.5 million. What's the number that I should use for the second quarter, if you could just report...

$4.8 million.

$4.8 million, okay. Very good. The ceded premium, you mentioned was up a little bit because of reinsurance. Is this the kind of level we should expect going forward, about $5 million $5.5 million, something like that?

Yes, great question, Mark. As you may recall, we have a structured product that we refer to as our working layer product, which has an $8 million excess of $2 million and renewed this year. In addition to that, we added a 10 times of 10 layer, which extended our topside to 20 times of 80. This provides us with additional coverage, and there are obviously costs associated with that. The run rate you see this quarter would be an accurate representation moving forward.

Yes, the expense ratio was relatively steady, but the ratio is a bit higher. Were there any assessments or factors that influenced this number?

No, there were no assessments this quarter that would have affected our results; they remained flat.

Okay. So is the kind of expenses, $20 million, $20.5 million, is that a good baseline perhaps on a go forward?

I would say yes. The difference between the two years was $50,000, so the $20 million, $20.5 million, I think, is correct from a run rate perspective.

Yes. Okay. And then Janelle, you had mentioned the idea of potentially pursuing partnerships with other carriers. Any update on that or any other kind of marketing or new business initiatives that you can speak to at this point?

Sure. There is no update to share right now. We are still exploring opportunities. I'm very excited to announce that we've added a new Chief Sales Officer, Ray Wise, who will be joining the company. We are thrilled to have him on board as he brings a wealth of experience, especially in workers' compensation. We've discussed our agent relationships and how we plan to broaden our reach. This doesn't necessarily mean we will focus solely on agents, but rather aim to be more efficient and effective with our agent network. I believe Ray will excel in this area for us.

Yes. Regarding medical inflation, you mentioned that it has been as expected. You believe it will increase over time and are setting aside reserves accordingly. Are there any new indications or actual data points you have observed in the claims trends?

No. Other than the specific areas we've discussed multiple times on these calls, there are just pockets here and there. I've had this conversation with you, Mark. One of our concerns is that everything happening in the healthcare industry might lead to inflation impacting our costs in one of two ways. We could either see revised fee schedules or changes in expenses tied to our reimbursement rates for medical care, or we could start noticing a limitation in the supply. In previous calls, I've mentioned home health as an example of where there is simply less supply available. Personally, I believe if providers reach a point where their reimbursement rates for workers' compensation are not favorable for them, they may restrict their availability for workers' comp carriers. This is a concern shared by many in the industry. While we haven't witnessed a widespread issue, it is clear that the increased labor costs faced by the medical community will eventually affect the system in some way. Typically, in any given workers' comp company, whether or not they deal with high hazards, medical costs account for 50% to 60% of expenses.

No, no, please continue.

Using AMERISAFE as an example, one of our key focuses is closing claims. This year, we've been fortunate. Although the number of claims is starting to rise, we still have 56 fewer claims reported this quarter compared to the second quarter last year, and our closing rates have been very strong. My open inventory shows 275 claims less than in the second quarter last year, and over 100 fewer than at year-end, despite the increase in reported claims. We are dedicated to closing and settling these claims to help manage future medical costs. This approach not only reflects in our case reserves but also helps us limit our liability by finding ways to close and settle claims.

Yes, exactly. And Andy, what is a good tax rate going forward?

I would say the 19.5% is a good tax rate.

Okay. All right. Great. Thank you very much.

Thank you, Mark.

And with that, that does conclude our question-and-answer session. I would like to hand the call back over to Janelle Frost for any additional or closing remarks.

Thank you. I would like to officially welcome Ray Wise to AMERISAFE's leadership team. Ray has been appointed as our Chief Sales Officer. He has over 30 years of experience in the industry. His background in driving results through customer experience aligns well with AMERISAFE's model and will be crucial for the company as we move forward. Thank you for joining us today.

And with that, that does conclude today's call. Thank you for your participation. You may now disconnect.