Good day, ladies and gentlemen, and welcome to the AMERISAFE's Second Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder this conference call is being recorded. I would now like to turn the conference over to Vince Gagliano, Chief Risk Officer. You may begin.

Good morning. Welcome to the AMERISAFE 2017 second quarter investor call. If you have not received the earnings release, it is available on our website at www.amerisafe.com. This call is being recorded. A replay of today's call will be available. Details on how to access the replay are in the earnings release. During this call, we will be making forward-looking statements. These statements are based on current expectations and assumptions that are subject to various risks and uncertainties. Actual results may differ materially from the results expressed or implied in these statements if the underlying assumptions prove to be incorrect or is 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-Qs and other reports and filings with the Securities and Exchange Commission. We do not undertake any duty to update any forward-looking statement. I will now turn the call over to Janelle Frost, AMERISAFE's President and CEO.

Thank you, Vincent, and good morning, everyone. Before I discuss the operations this quarter, I'd like to provide some color regarding the worker's compensation industry in general as competition continues to intensify this quarter. As reported by NCCI in May, the workers' compensation industry, excluding state funds, reported a 94% combined ratio for 2016, which was unchanged from the 94% combined ratio reported for 2015. To add perspective, the P&C industry's combined ratio increased from 98% in 2015 to 101% in 2016. Workers' compensation was the only line within the P&C line whose combined ratio did not worsen from 2015 to 2016. Also adding to the competitive environment, loss costs continue to decline in the second quarter. NCCI reported, through May, approved rates were down 6.7%. I share this industry overview to provide background as we are pleased with this quarter's 81.9% combined ratio and the financial strength of AMERISAFE, which was achieved by focusing on underwriting discipline and consistent approach in handling our claims and expenses. Now on to the second quarter's operational results. As I've already stated, competition increased this quarter, and our gross premium written decline of 15.7% reflected it. The decline was driven by both policies written in the quarter as well as audit and related adjustments for policies written in prior quarters. Of the policies written this quarter, renewal premium was down 6%, however, policy retention remained high at 92.2% for those policies for which we offered renewal. Our renewal premium was obviously impacted by declining rate. In the aggregate, pricing in the quarter, as measured by ELCM, was a 168, down from a 173 in the second quarter of 2016, but slightly higher than the 1.65 in the first quarter. While comparing consecutive quarters is not apples-to-apples, I do feel this emphasizes our commitment to risk selection with appropriate pricing for long-term stability. As for audit premiums and other adjustments, audit premiums themselves were positive. However, the change, quarter over prior quarter, for audit and all premium adjustments was a headwind to topline, decreasing gross premiums written $4.1 million. Moving on to losses. The loss and LAE ratio for the quarter was 56.1%. The current accident year ratio was 69%, and the prior accident year loss ratio was a negative 12.9%. Here are some key metrics to note regarding loss expenses. Reported claims in the calendar year were down 5.1% and the open inventory of claims was down 5.8% for the first half of 2017. The $10.7 million of favorable development this quarter resulted primarily from favorable case development, most impacted accident years 2015, 2014 and 2013. To delve more into the financial metrics, I will now turn the call over to Neal.

Thank you, Janelle, and good morning, everyone. For the second quarter of 2017, AMERISAFE reported net income of $15.5 million or $0.81 per diluted share compared with $16.6 million or $0.87 per diluted share in last year's second quarter, a decrease of 7%. Operating net income in the second quarter of 2017 totaled $15.7 million or $0.82 per share slightly below last year’s $0.85 per share in the second quarter. Revenues in the quarter decreased 7.8% to $89.9 million compared with last year's second quarter. Net premiums earned decreased 8.8% to $82.7 million when compared to the second quarter of 2016. Net investment income was $7.5 million in the second quarter of 2017, an increase of 20.5% when compared with last year's second quarter. The significant driver of this increase was the decline in the value of a limited partnership hedge fund in last year's second quarter. This limited partnership is mark-to-market through net income each quarter. Without the hedge fund, net investment income was up 9.6% compared to the second quarter of 2016. The tax equivalent yield on our investment portfolio at the end of the quarter was 3.3% up slightly from 3.2% at the end of the second quarter of 2016. There were no impairments of securities or significant realized gains or losses during the quarter. The investment portfolio continues to be high quality carrying an average AA minus rating our duration of the portfolio at quarter end is 3.69% and we hold 57% in municipal securities, 25% in corporate bonds, 11% in U.S. Treasury and Agencies and the remainder in cash and other investments. Over the past year, our allocation to municipal bonds has increased slightly and our allocation to corporate bonds has decreased slightly. Approximately 51% of our investment portfolio is classified as held to maturity…

Thank you. [Operator Instructions] The first question is from Matt Carletti of JMP. Your line is open.

Hey, good morning.

Good morning Matt.

Congrats on a nice quarter.

Thank you.

Just really wanted to dig into one topic and that's just being the top line, which is clearly has a lesser importance than the bottom line. But nonetheless, I'm hoping you'll provide a little more color on it. And I apologize I got on a few minutes late, so if you already covered this, my apologies. The 12% decline in voluntary was, I think, a bit larger than maybe the market was expecting, anything stick out there? I mean is that I guess the sort of trendable number in your mind or were there some – maybe a large client or something like that that skewed it? And by month during the quarter, does it kind of build across? Was there one month that came to have more competition than the others?

Yes, so let me start with this, and I'll give you three aspects of the voluntary premium decline.

Okay.

This would be the rates themselves. We've been talking about that loss costs have been continually declined. Our renewal policies that were coming into this quarter, this was basically our third year where those policyholders were getting net rate changes of significance to us, so – and that environment continues to happen. So that puts pressure on the premium dollars themselves as well as the large policies. We've talked about that the last two quarters specifically, as competition has increased, we find multi-line carriers wanting to write comp, demanding to write comp, and that typically for AMERISAFE triples into our larger policies first. So we definitely see our shrinkage in the large policies. And then the third component would be new business itself. New business was down in the quarter, and again I think that speaks just to the competitive environment that we're facing in terms of companies picking premium. Your question about was it prolific throughout the quarter, I think it was a great question and no, it wasn't. The quarter started off more rocky than you would have liked and improved as the quarter went on. So that was a good sign for us.

Yes, that’s definitely encouraging. Okay, great. Well really appreciate the color and again congrats on a very nice quarter.

Okay, thank you.

Thank you. The next question is from Mark Hughes of SunTrust. Your line is open.

Yes, thank you. Good morning.

Good morning, Mark.

The increase in ELCM sequentially, very good to see, but it seems like you're almost pushing the line a little harder on pricing even as competition picked up. Was that just something that you looked at, at the end of the quarter? And I won't say we're surprised, but – or was it something that you deliberately implemented, that you're going to be a little bit more aggressive on the pricing front?

Right that's a really good angle. We individually underwrite every account. So we do monitor ELCM in the aggregate. But we do base it on the risk that we're evaluating at that time. And I can tell you, in the quarter I was surprised at some of the lower ELCMs that we have that quoted and failed. So there are some pricing out in the marketplace that is well significantly below AMERISAFE. And at that point, we're not going to chase the price that low. It's just not what we do.

Right. Was that more of – the ELCM was that you had success with your renewals and so that was more reflective of your renewable book? And so you’re pricing less new business, and so therefore the ELCM is maybe a mix shift, so to speak? Is that makes sense?

Yes, that’s a good way of looking at. Our renewal book average is out somewhere around 75% – in terms of premium dollars, about 75% of our premium and the other obviously new business. Quarter over prior year quarter, the ELCM was down for both new and renewal. But we’ve talked about this before. When we are talking about the competitive environment, we're most interested in protecting that renewal book. And that's where I think 92.2% policy retention is a good number. It's a high number what I like that number to be higher, absolutely.

And Mark, I think sometimes we see in makeshift and that maybe the retention was in states where we had higher ELCM. So that can drive the number a little bit in terms of what's happening, where we have renewed. But as Janelle mentioned, there were some close out there that were pretty low relative to an ELCM and much lower than where we would want to go.

Any particular end markets, trucking, and construction that were notably better or worse?

We’re not seeing any specific trends that I think are of note. We're probably – I'm probably going to be a little bit more cautious on this call than maybe we have been in prior calls in giving state specific data because it is highly competitive out there, and I wouldn't want to give away competitive data. But obviously, our larger segments, our construction and trucking, we see declines in those. From an audit perspective, oil and gas was still negative audits. But the payrolls were improving from prior quarter. So we take that as a good sign.

Great, the audit premium was in the negative overall corrected with those audits?

Right now audit premiums in sales were positive. Now we had demand with endorsements and cancellations. Yes, they were negative. But audit premium themselves were positive. It’s a quarter-over-quarter change that brought with the $4.0 million decrease. But the only class of business where we've actually had negative audit premium in the aggregate is oil and gas.

Right. So when I read the – gross premiums written decreased by – so payroll audits and related premiums decreased premiums written by $2.6 million in the second quarter, compared to an increase of $1.5 million. So that $2.6 million is the year-over-year change?

No, the $2.6 million is audit premium, endorsements and cancellation premium?

Okay, so why the changes is endorsements and cancellation premium?

We see and typically you see this in a competitive environment. You see more cancellations. We see a slight uptick. It's not been dramatic, but certainly we’re seeing more cancellation than we saw last year. Someone gets a better rate partway through their cycle and cancels the policy with us. It doesn't happen as often but that to some of the change in the quarter.

Yes. Does that have a seasonal component to it? Is that more likely to happen at mid-year or is that consistent throughout the year didn’t really matter seasonally?

It’s pretty consistent. It’s just tends to be in more competitive markets, and it also tends to be in those classes of business that have the highest rates. Right there are much more price-sensitive if you're a roofer versus if you're a landscaper, for instance.

Right, okay. Anything from a distribution perspective? Are brokers doing something different this time around, treating you differently? Is that having any influence?

Brokers are, in some regards, in the same predicament that insurance companies are. They're looking for premiums because they are basing their commissions to premiums. So they're very protective of their large accounts in placing those and making sure that they get renewed at appropriate rates for the client, that the client can accept, at the same time, commissions that are beneficial to the agent.

Right. So you don't think that the distribution is a factor? I know competition in the – more competition in the middle and large markets are an issue, but…

Yes, that's a good point. I haven't really seen a swing in the distribution, no.

Okay. And then the expense ratio, if we do – or if you continue to sustain topline decreases, I might have asked this last quarter, do you expect the expense ratio to pick up are you prepared to make adjustments to the cost structure to keep it in the mid-20s, let's say?

Yes, Mark, I'll give the same answer I gave last quarter, which is we sort of expect the expense ratio to be 24% to 25%. And obviously, if net earned premium declines, then we'll be towards the higher end of that range. But we're not expecting any dramatic changes, but we are aware that we're in a soft market and we have to continue to manage our expenses the way that AMERISAFE typically has been a pretty frugal culture and focus on underwriting.

So you might go to the top end of that range, but not necessarily above it?

Yes.

Okay. Any early read on July, the sort of better improvement you saw or better dynamics you saw through the quarter, how does July look?

I appreciate you asking, Mark, but we typically wouldn't give out those numbers until the quarter is over because, as I mentioned with the second quarter, it varies month by month.

Okay, all right. Thank you very much.

Thank you, Mark.

Thank you. [Operator Instructions] The next question is from Randy Binner of FBR. Your line is open.

Hey, good morning and thanks. I just have a couple. Just going back in investment income. Was there anything unusual outside of the mark-to-market on the alternatives like bond prepayment or anything unusually good in the quarter just from kind of a core yield perspective in the general account?

Yes. I think we’ve been increasing our duration and investing in higher-yielding securities, particularly when yield spiked up in the muni market and overall in the fourth quarter. So we're starting to see some of that come into the portfolio. There were some calls during the quarter that did influence investment income a little bit, but that is sort of the components. It can be volatile. But it certainly was up still 9% or so without the hedge fund adjustment.

Okay. Yes, that’s helpful to have in the model. And then just on capital. So presuming that the topline continues to be managed in light of a competitive market, the premiums-to-capital measure gets to be pretty darn low. And so I just kind of be curious how you're thinking about that. I mean, the company is well capitalized, but it's – I got you like 0.8 to 1 right now, premiums and surplus, and that could move lower even with special dividends. So is there any change on how you're thinking about it? Because I feel like you're kind of moving from being overcapitalized to maybe really overcapitalized. And I don't know if there is any thought of kind of how to manage that if you have to continue to be really selective in a soft market?

Randy, that's a good question. Our board does discuss our capital situation every quarter and when they look at the regular dividend. And they'll continue to evaluate that. Certainly, you're talking about all the right dynamics in terms of the things that they look out when they look at capital. Whether we're going to need that capital for, organic growth, M&A, whatever it might be, and then what is the likelihood. And then being disciplined about returning that back to shareholders if we cannot use it through dividends and other means and so they'll continue to look at that. But you're right. If the ratio continues to go lower, it certainly causes us to be more capitalized – more well-capitalized than in the past.

Is there any thought that there could be some opportunity out there from a business perspective? Or is the market just – I guess what I mean is, if you go back maybe three or four years, there was this idea that some folks could have some issues out there. Some blocks might become available. Seemed like maybe there were a couple of things that came around, but they went from pretty high prices, are we just past that part of the cycle now? And where would just any kind of strategic opportunities be within comp? Meaning to allocate some of that capital writing more business in size or in bulk.

Right. I think we’re talking about buying books of business in a declining environment, I'm not quite sure what we would be buying at this point because consumers – the end consumer is expecting rate declines. And given our underwriting discipline, I would assume we'd be a little bit more pricey than they were accustomed to or looking for. So if we were to purchase a renewal book, I'm not quite sure how much of that we would actually retain.

Yes. But we do look at it from time to time, and it is something that we think about as the use of capital. I think, as Janelle points out, it’s probably less likely in this market than a few years ago.

Okay, perfect. Thanks a lot. End of Q&A

Thank you. There are no further questions in queue at this time. I’ll turn the call back over to Janelle Frost for closing remarks.

Thank you. AMERISAFE has a consistent history of turning risk into opportunity due to the experience and performance of its employees, evidenced this quarter in our 89.1% combined ratio. Our commitment to maintaining disciplines enhances our financial stability for the protection of our policyholders and our shareholders. Just this month, Ward Group named AMERISAFE to its 2017 Top 50 in the P&C industry. This recognition was for outstanding financial results in the areas of safety, consistency and performance over a five-year period, 2012 to 2016. Congratulations to the AMERISAFE family on this achievement. Well done. And with that, I’d like to thank you for joining us on the call today. Have a good day.

Thank you. Ladies and gentlemen, this concludes today's conference. You may now disconnect. Good day.