Good day. And welcome to the AMERISAFE 2024 Second Quarter Earnings 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. Welcome to the AMERISAFE 2024 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 a result of risk, 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 remains profitable, despite continued rate softening. The industry-wide data published by NCCI in May was similar to what we've seen over the last few years. An accident year combined ratio below 100 and redundant reserves driving approved loss cost declines. These conditions translate to a competitive marketplace, one in which AMERISAFE's disciplined underwriting is critical to long-term profitability. For several quarters, we have discussed our investment in profitable growth through greater agent engagement and pipeline efficiency. These actions drove year-over-year gross premiums written growth of 6.6% in the quarter. We saw policy count growth in the quarter, and we continue to see strong retention for policies for which we offer renewal with 93.3% retention. Audit premium supported by wage inflation also boosted the top line. Turning to losses. Our accident year loss ratio was in line with the prior year at 71%. The loss cost trends remain in line with previous quarters. We continue to monitor medical inflation. However, medical fee schedules are in general containing costs. The company experienced $8.1 million in favorable development on prior accident years, primarily from accident years 2020, 2021, and 2022. We attribute our favorable development to lower claim severities and proactive claims handling. Despite challenging market conditions, AMERISAFE's focus on providing protection to small to midsized businesses and caring for their workers has a track record of strong retention and delivering robust returns to shareholders throughout the cycle. 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 2024, AMERISAFE reported net income of $11 million or $0.57 per diluted share and operating net income of $11.1 million or $0.58 per diluted share. During the second quarter of 2023, net income was $15.6 million or $0.81 per diluted share and operating net income was $14 million or $0.73 per diluted share. Gross written premiums were $76.4 million in the quarter compared with $71.7 million in the second quarter of 2023. The increase in the top line was driven by a combination of increased sales efforts with agents, which drove increased new business and strong retentions. Audit premiums increased the top line by $7.3 million compared with $4.8 million in the second quarter of 2023. Our total underwriting and other expenses were $20.4 million in the quarter compared with $20 million in the second quarter of 2023, resulting in an expense ratio of 29.8% compared with 30.4% in the prior year. We continue to invest in our business leveraging AMERISAFE's disciplined approach to take advantage of attractive market opportunities. For the quarter, our tax rate was 20% compared to 20.1% in the prior year. Turning to our investment portfolio. In the second quarter, net investment income decreased 3.6% to $7.4 million due to a lower asset base versus the prior year. On a consecutive quarter basis, net investment income increased 1.1% for Q2 of 2024 versus Q1 of 2024. For the quarter, the yield on new investments increased approximately 165 basis points in relation to roll-off, driving our tax equivalent book yield to 3.79% or 17 basis points higher than the second quarter of 2023. The investment portfolio is high quality, carrying an average AA- credit rating with a duration of 3.9 years. The composition of the portfolio is 58% of municipal bonds, 28% in corporate bonds, 3% in U.S. treasuries and agencies, 6% in equity securities, and 5% in cash and other investments. Approximately 57% of our bond portfolio is comprised of held-to-maturity securities. As a reminder, these held-to-maturity securities are carried at amortized costs, and therefore, unrealized gains or losses on these securities are not reflected in our book value. Our capital position is strong with a high-quality balance sheet, solid loss reserve position, and conservative investment portfolio. At quarter end, AMERISAFE carried roughly $884 million in investments, cash, and cash equivalents. The company's Board of Directors declared a regular quarterly cash dividend of $0.37 per share on Friday, July 26, 2024, to shareholders of record of September 6, 2024. And finally, a couple of other topics. Book value per share was $15.78 and operating return on average equity was 14.4%. Our statutory surplus was $280.6 million at quarter end, up 10.1% from $254.9 million at December 31, 2023. And finally, today, July 30, 2024, we will be filing our Form 10-Q with the SEC after market close. With that, I would like to open the call for the question-and-answer portion of the call.

Thank you. Our first question is coming from Matt Carletti with Citizens JMP.

Hey. Good morning, Janelle. Good morning, Andy.

Good morning, Matt.

I was hoping Janelle, maybe you could expand a little bit on the growth in the quarter. I know you made a comment in your opening comments about some of the recent efforts and investments you've made in kind of agency relationships. Yes, I'm hoping maybe you can just give us a little more color. I mean, noted it was the voluntary grew nicely. The press release referenced PIF growth. Just kind of how you feel about the sustainability of that as we move forward or kind of the ability to build that going forward?

Certainly, Matt. You know, this is our fourth quarter, I want to say of either slight growth in voluntary debt premium or relatively flat. So that's something that we have made a concerted effort on, and with our employees and with our agents and just trying to make the pipeline more efficient, in terms of ease of doing business and building on those agent relationships. So I do feel like we're gaining some momentum there through our employee effort. It's really not a change in AMERISAFE's approach to the business at all. It's really just about creating efficiencies and valuing those relationships. So I feel pretty good about the growth. You're absolutely right. We've had voluntary debt growth of 2.7% in the quarter. We've grown policy count, I believe, for the last five quarters. So those are all signs there pointing to the efforts that we're putting in place are generating business growth for us.

Wonderful. And then there's a couple of numbers questions, if I could. One is what was the ELCM in the quarter?

148.

148, okay. And then on audit premium, do you have handy what third quarter of 2023 audit premium was just to get an idea of the potential comparison in this quarter?

Exactly. Third quarter last year was $5.6 million. Second quarter was $4.8 million.

Wonderful. All right. Thank you so much.

You're welcome.

Our next question is coming from Mark Hughes with Truist. Your line is open.

Good morning, Janelle. Good morning, Andy.

Good morning, Mark.

Janelle, if I heard you properly, it sounds like the 148, I think that's up year-over-year, which I think you had a flat result in 3Q, but then that's the first positive number, still scrolling, still scrolling for quite a while.

Yes, that's correct, Mark. When we discuss the ELCM report, I want to emphasize that it's really an index based on the underlying loss cost. As we know, the approved rates from the states are continuing to decline. Since we underwrite each account individually, it's important for us to ensure that we do that profitably. Like all carriers at this time, we're facing the challenge of softening rates. While the industry's results are below 100, if you examine the accident year combined ratios for the entire industry, there has been a consistent deterioration each year. I believe we are at a point where we need to be very cautious.

Right, yeah. Any details on the approved loss costs? Obviously, they're down. Any trend of new state data in the quarter is worth noting?

No. The overall approved loss cost is estimated to decrease by approximately 8% to 9% for the year in the 2024 filings. This aligns with the predictions made by NCCI. Currently, the industry remains below a 100% combined ratio, even when considering accident year data.

Yeah. You talked about medical inflation, and that the fee structures or the fee schedules continue to restrain that. Is that ever going to separate? I mean, is there ever any reason to think that's not going to just keep a lid on it and you'll continue to benefit from kind of the government rate suppression one might say?

Mark, I believe that's actually where we're going to see pressure. For the most part, fee schedules have been doing their job in terms of containing costs. But I do believe there are pressures, and particularly in certain types of services. There is pressure from the provider side of what they're being reimbursed for workers' compensation. And when I talk about we're keeping our eye on medical inflation, that's actually what I'm referring to, the fact that at some point, rubber hits the road in terms of what providers, whether it's hospitals, physicians, surgeons, whatever the case may be, are being reimbursed for workers' compensation and what fits within their own operating models. There will be, in my opinion – in my humble opinion, there will continue to be pressure there.

Yes. Does the uptick in the ELCM, does that reflect a little less competition? I know you're being disciplined around.

I wish. No, it does not reflect less competition. It is still a very competitive marketplace.

Yes. And then anything on the large claims? How have they trended through the six months?

Throughout the past six months, we have experienced four claims exceeding $1 million. I want to emphasize that this number can vary significantly. It's unpredictable when these claims will occur. As of now, we have not observed an increase in the frequency or severity of million-dollar claims.

Yes. Regarding the reserve development, you are still performing very well, but it was slightly down from an exceptional performance in recent quarters. Could you explain why it was a bit lower this quarter compared to the last couple of years?

Yes, I appreciate how you expressed that. For AMERISAFE, reserve development is not a straight line. I often mention that the favorable case development we see really comes from individual cases. I cannot predict which quarters we may not experience this. It’s difficult for me to question $8 million of favorable development, even though it is less than the $10.9 million from the second quarter of last year. Nonetheless, I still view that as a strong figure. I can confidently say that our reserving philosophy at AMERISAFE has remained consistent. I believe my claims adjusters, with their practices, reserve plans, and deep understanding of their claims, reflect in our reserves what we believe to be the most likely outcomes. They are well-attuned to what is happening regarding survivability, procedures, and the assumed inflation associated with those factors. I think we have this incorporated into our case reserves, enabling us to seize opportunities to assist injured workers in returning to work and ensuring their medical care is addressed, which has led to favorable development for us. I don't see that pattern or philosophy changing.

Understood. And then how about the construction end market, the question about the next job, of we talked about many times over the years, but how does that stand today?

Our insurance is working, hence why we have it. We're having this favorable audit premium. We're still experiencing wage inflation within our industry groups. For the quarter, wage inflation was around 6%, 5% — almost all of that really came from increased wages, less so from new employees. So — and that's been very consistent. So the fact that we're not seeing a large influx of new employees doesn't really surprise me, given that we insure small to mid-sized employers. But they're obviously working, and wages and payroll — insured payrolls are going up. So I think that speaks positively for our industry groups.

Great. Thank you very much.

Thank you, Mark.

Our next question is coming from Gregory Peters with Raymond James.

Good morning, everyone.

Good morning, Greg.

Good morning.

Just looking at the six-month result on the expense ratio versus last year, it's up a little bit, say, 90 basis points. Just curious if there's anything structural that's going on driving that expense ratio higher?

Greg, how are you? The growth that you're seeing in the expenses for the six months is really just further investing in the sales side underwriting, just the front of the house. But again, based on the fact that expenses are never linear either, the investment is probably more upfront now in these first six months, and then it should level off and then we assume to be back in what the range is for us for an annual expense ratio.

Okay. And then just pivoting back to the growth comment. Janelle, I thought you said in the comment on the call, policy count growth has been positive for the last five consecutive quarters. I don't want to misquote you, but has it been concentrated with certain distribution partners or certain geographies? Or maybe you can give us some color on where the growth is coming from?

Yes. Great question. And the answer is no. It's not coming from a particular distribution network. As you know, we use independent agents; that hasn't changed. Actually, if you look at our agent count, they're probably slightly down. And that's really because, as I mentioned earlier, we're really working on pipeline efficiency, making sure that we're doing business with the right agents and the agents that we can serve best. So that's been a very positive thing for us. The policy growth has really been, I'm going to attribute this to what I just mentioned, which is just the pipeline efficiency, trying to make things a little bit more efficient for our agents in terms of ease of doing business, the time we turn around quotes, making sure that we're giving — we are making the most of the opportunities that we have. And because of those things and the efforts of our employees, we have been able to grow policy count, but it's not, to your point about industry groups or state. It's not particular to an industry group. It's not particular to a certain type of agency distribution. And I guess, it goes back to what I was saying earlier in the call, it's not — I wouldn't say it's anything new that AMERISAFE is doing. It's really just being better at the way we're handling our agency relationships.

And I'm going to come at the severity question again. I know you were addressing it in your previous answers, but on some of the other conference calls, the concept, the fact that Florida has raised its reimbursement schedules, Medicare reimbursement rate schedules beginning next year, that's come up in a couple of other calls. And so I'm just curious, as we look forward, what you think about, how are you measuring out or gauging what your outlook is on severity?

Florida is definitely a key focus for everyone due to the changes they have made to physician charges and surgical procedures, which are widely discussed. The percentage increases are notable, indicating a significant impact. These issues relate to medical inflation, which we monitor closely. It's important to note that while there are large percentage increases in reimbursement rates for physician services, we also have networks in place to manage costs. Thus, it's not a direct one-to-one increase. Another point I want to highlight is how effectively AMERISAFE operates when it comes to severity and case reserving. Utilizing Florida as an example illustrates our model's efficiency. Our claims adjusters are experts focused solely on workers' compensation reserves, so they quickly adapt to changes in their states, incorporating them into our initial reserves without delay. This approach is crucial for understanding severity and its effect on our loss ratio, and it also informs our pricing strategy. When underwriting accounts in Florida, we consider these real loss costs and incorporate them into our rates. That addresses your question about severity in detail.

Excellent. Well, thank you both for the detailed answers.

You’re welcome.

And our final question is coming from Bob Farnam with Janney. Your line is open.

Hi there. Good morning.

Good morning, Bob.

I've got more of a philosophical question. I'm thinking of the loss cost and they keep going down. And I'm wondering — what is it going to take or what's the market condition is going to look like to have the loss cost bottom out? And how much of a lag would there be for the actual filings to catch up with the actual need to start raising rates?

Yeah. Great question. So what's it going to take? As I mentioned earlier, that accident year combined ratio for the industry continuing to tick up and eventually break a 100, that will help, at least, I believe, slow the bleeding in terms of the rate decreases because then accident years will not be considered profitable. To your point about these changes and using — again, using Florida as an example, typically what happens when there's a major change going on, and I'll use Florida as an example in NCCI state. NCCI will take those costs and try to figure out what's that actually going to cost the industry. And even if it's off cycle from a normal rate filing because each state has their own rate filing date, they can make like a law-only filings. So in other words, something change in the law that needs to be reflected in the rate, and that should theoretically happen. But what happens immediately is when a carrier is aware of it, they start trying to reflect that in their pricing. So hence, in their ELCM, so forget if the underlying loss cost, let's use as an example, Florida, it wouldn't change anything at all. Then I would assume carriers within their Florida — within Florida try to within their own pricing. Of course, for an administrative pricing base is a little tricky. But through their own competitive methods, so let me just use it that way, try to make sure that they're building that into their premium dollars, the fact that they're going to be paying out more on the loss cost side. I believe that pressure will continue, and we're going to see more and more examples of that, which hopefully will slow the rate of decline or even flatten out the declines in approved loss costs because I think those pressures are going to continue to happen. For the very reason, I was speaking of earlier, physicians have an operating model for which they have a profit margin that they're trying to achieve. And if they're getting reimbursed by workers' compensation for something less than that, there's going to be either a shortage of providers. In other words, they're going to say, you know what, I don't want your workers' compensation patients? Or there's going to be some adjustment in the pricing.

Right. So I mean, it sounds like, yes, despite the fact that loss costs are going down, the fact that even just this quarter, your ELCM increased, it's kind of taking away some of that loss cost pressure just because you are getting more rate there. Is there a happy point with your retention that you'd be willing to go to, if you keep raising rates and customers choose to go elsewhere?

That's a great way to summarize it. When considering how low I would allow my retention to drop, it's an important question. We have consistently maintained strong retention numbers because generally, loss ratios and experience tend to be better for renewal accounts compared to new ones, given that we already have a deep understanding of those accounts. In the case of AMERISAFE, we not only know the accounts well but also provide safety services to them, which helps us understand their approach to safety. Retention is critical for us. While we do evaluate the market and recognize the need to underwrite profitably, which can impact retention, our primary focus remains on achieving underwriting profit above all else.

Right. And I'm not saying you should start raising your rates significantly; I don't want to say dragging adverse selection in the well. So it's just something that — I was curious as you hopefully start to tweak your ELCM up. I just want to make sure your retention stays where it is.

Absolutely. Absolutely. And the other thing I'll say this about rates, I have I don't think I've really talked about on this call, Bob, one of the things we have to consider is the fact that wage inflation has been really strong for over a year now, and it's starting to wane a little bit, but it's still — 6% is nothing to mock at. And that, in some ways, has effectively acted as rate for lack of a better term, right? If you have the same employees, but they're making higher wages, and that's the basis of premium. It's sort of helps bridge the gap a little bit in terms of the approved loss cost declines.

Okay. Thanks for all the color.

Thank you.

There are no further questions at this time. I will now turn the conference over to Janelle Frost, CEO, for any additional or closing remarks.

I'd like to highlight AMERISAFE's inclusion in the Ward's 50 top-performing property and casualty companies for the 16th consecutive year. This recognition underlies our employees' ability to use their expertise in the high hazard workers' compensation niche to produce financial strength and stability for the company's stakeholders. Congratulations to the AMERISAFE team, and thank you for joining us today.

This concludes today's call. Thank you for your participation. You may now disconnect.