Good day, ladies and gentlemen, and welcome to the AMERISAFE 2021 Second Quarter Earnings Conference Call. Today's conference is being recorded. At this time, I'll turn the conference over to Kathryn Shirley, Chief Administrative Officer. Please go ahead.

Good morning. Welcome to the AMERISAFE 2021 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 as a result of risk, uncertainties and other factors, including factors discussed in today's earnings release and 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 statement. I will now turn the call over to Janelle Frost, AMERISAFE's President and CEO.

Thank you, Kathryn, and good morning, everyone. I generally begin these calls with an update on the workers' compensation market. This quarter, there are no substantial changes in the market for which to provide an update. Approved loss cost decreases are averaging in mid-single-digits and competition is strong. As for AMERISAFE, our combined ratio of 74.4% for the quarter resulted from favorable case development from accident years 2019 and prior and a competitive expense ratio. Our long view approach to underwriting discipline and claims management continue to produce underwriting margins above industry levels. We are focused on remaining competitive and disciplined in our underwriting. In the quarter, this resulted in flat policy count, with pricing down from the prior year quarter. Our ELCM was 1.52. New business buys in the quarter were less than the prior year quarter, but we had strong renewal retention of 93.9%. Combined, premium for policies written in the quarter was down 8.9%, with average loss cost down 6.5%. Audit premium in the quarter remained positive despite that the audited policy period covered the full impact of the COVID-19 pandemic. We view this as a strong economic sign for our insurers and their respective industries. In total, gross premiums written were down 8.2% from the prior year quarter. Turning to losses. We experienced favorable case development in the quarter from accident years 2015 through 2019. This favorable case development comes from our focus on injured workers medical care and their potential to return to work starting from the first report of injury until the claim is settled. Experience in reserving and handling claims by our claim staff is one of the many differentiators for AMERISAFE. As a reminder, our field case managers, on average, handle less than 50 indemnity claims. This is well below industry averages and allows for extensive claims management. This quarter, that focus decreased prior accident year losses incurred by $17.9 million or 25.6 basis points. That same experience and consistency also contributed to our loss estimate for the current accident year of 72%. Frequency for the current accident year returned to pre-pandemic levels as expected. We do not know if the Delta variant surge will impact claim count later in the year. Severity for the current accident year was also within our expectations. The pandemic did not materially impact severity in our book of business. We also refer to the number of large claims as a measure of severity. At the end of the second quarter, we had 3 claims with case incurred over $1 million. The timing of when these claims occur can be random, so offer as comparison, 18 claims reported at the end of 2020 and 16 claims reported at the end of 2019. I will now turn the call over to Neal to discuss investments, expenses and capital. Neal?

Thank you, Janelle, and good morning, everyone. For the second quarter of 2021, AMERISAFE reported net income of $23.8 million or $1.23 per diluted share compared with $23.9 million or $1.24 per diluted share in last year's second quarter. Operating net income for the second quarter was $20.2 million or $1.04 per share, an increase of $0.04 from the second quarter of 2020. Revenues in the quarter decreased to $81.2 million compared with $89.1 million in the second quarter of 2020. Net premiums earned decreased 8% to $69.9 million when compared to last year's second quarter. Turning to our investment portfolio. Net investment income decreased 8.1% in the second quarter to $6.7 million compared with $7.3 million in the second quarter of 2020. The decrease was driven by lower interest rates on fixed income securities. The tax equivalent yield on our investment portfolio was 2.60% at the end of the second quarter. The pretax yield on the portfolio was 2.30% at the end of the quarter, down from 2.55% 1 year ago. Realized gains for the portfolio on securities sold during the quarter were $1.2 million compared with $163,000 during the second quarter of 2020. The investment portfolio is high quality, carrying an average AA minus credit rating with a duration of 3.67 and with 63% in municipal bonds, which includes 14% in taxable munis, 20% in corporate bonds, 7% in U.S. treasuries and agencies, 5% in equity securities and 5% in cash and other investments. Approximately 60% of our bond portfolio is comprised of held-to-maturity securities, which were in a net unrealized gain position of $31.2 million at quarter end. These unrealized gains are not reflected in our book value as these bonds are carried at amortized costs. Moving now to operating expenses. Our total underwriting and other expenses…

[Operator Instructions] We'll take our first question from Mark Hughes with Truist.

Janelle, did you give the ELCM, I think I have missed it again?

I did, 1.52, Mark.

And then -- and thinking back on the last quarter, looking back at my note then, you seem to be fairly upbeat about the prospects for new business, potentially growth. The top line decline was a little bit less last quarter. Can you talk about what you might have seen between then and how the second quarter turned out kind of the down high single-digits is where you've been for some time now, but there seem to be some green shoots, perhaps. What do you see?

That's a great question, Mark. Certainly, 1 quarter does not a trend make. We were -- and I remain optimistic in terms of, I think, the back -- I think as a whole, vaccination rollouts do provide a level of optimism, not only for public health, but for the economy. On the last quarter's call, we talked about the infrastructure bill. I know, there's headlines about that today, that it seems to be making some progress. I haven't seen any real changes in the underlying metrics. So certainly, there are things within that bill that we believe will be beneficial to AMERISAFE, $110 billion on roads and bridges, $65 billion on broadband. I think there's even maybe $17 billion or so on ports. All things that we think could fall within AMERISAFE will house in terms of industries that we ensure and could be beneficial to small to midsized employer. So that level of optimism really hasn't -- I don't feel like has shifted from first quarter to second quarters. Certainly, we, like everyone else in the country is concerned about the delta variant and the surge there, both from a public count standpoint. And what it could mean to the industry, I think the industry fared better than we hoped we would -- better-than-anticipated early on in the pandemic. So I think, we don't see the delta variant for at least from an industry-wide or from the business side of things, hopefully not being that impactful, but again, certainly health concerned. We are in the pipeline. I don't know that that deteriorated all that much from first quarter to second quarter, but we certainly were not able to grow policy count, which we were able to do in the first quarter. We did not do that in the second quarter. I don't know that there's a trend that I would point to there in terms of something that we saw a shift in the market, that wasn't the case. The level of competition has remained the same. We don't see -- I mean, anecdotally, we may see something that we think is irrational, but not throughout the marketplace, irrational pricing. So no, I don't view that as a trend. That's a very long answer to, I think, a simple question. I apologize.

No, that's very helpful. Talk about the 2019 accident year, was this the first quarter that you drew from 2019?

It is, it is. And I have those numbers here. So 2019 was $4.5 million, 2018 was $4 million, 2017 was $4.4 million, 2016 was $2.3 million and then prior to that was $2.7 million. But this was the first quarter that we drew from 2019. When I look at the industry-wide numbers that were published in May, I guess, by NCCI but even in that data, you saw deterioration from '19 to '20. So if you recall, there was -- the reported numbers showed deterioration calendar year and accident year deterioration from '18 to '19 and saw the same thing going from '19 to '20, both on a calendar year basis and an accident year basis. So the workers' compensation industry as a whole is showing some deterioration in that experience year-over-year, both calendar year and accident year. So -- and AMERISAFE -- we are going in the opposite direction of that. So...

You have -- by chance, do you have the -- when you first opened the 2018 accident year, I don't know if that was in 2Q of last year, but your first look at it, I think it was $4.5 million for the 2019 in a first go. I don't know if I'm trying to read too much into it but I'm just sort of curious when you first said that 2018, how did it look?

That's a great question. I don't have that off top of my head, I apologize.

Yes, that's all right. It's probably not really a good data. It's not -- probably not relevant, probably just too much volatility. And just to be clear, the 3 large claims over $1 million, that was year-to-date. I think, it was one in the first quarter.

That's correct, that's correct.

And then a final question. There's some discussion last quarter about the potential wage inflation maybe being helpful when you look at well, maybe I'll ask -- I'll combine this into 2 questions. When you look at renewal premium, how is that? Are you seeing any impact of potential wage inflation? And then secondly, you've talked about the next job being important for a lot of your, say, construction customers. How do you see that now?

Yes. So I'll speak to wage inflation first. So we did see a payroll increase of about 2.9% and it's sort of 80-20 in terms of 80% of that was wage inflation, 20% of that being new employees. And so we feel really confident in those numbers and it really much -- pretty much was across our industry groups with the exception of oil and gas, which I don't think surprises anyone, and that's a very small portion of our book. So that happened in the second -- we saw that in the second quarter. To your question about, will the next job be there? We are keeping a close eye on the supply chain, right? Because I do think there are capital expenditures that are ready to be funded, but there may be some delays in terms of the supply chain and everything that has to happen along the way. So we're keeping our eye on that. On the flip side of that, we ensure the lumber industry, and that was a good industry for us in the second quarter. So we saw increased flow from the lumber industry in the second quarter.

And Mark, on your question about renewal retention, our policy retention for the quarter was strong at 93.9% for those with the offered renewal, that compares to 93.7% last year in the same quarter. So it tends to be running fairly strong in that 93% to 94% pretty much for the last several years. People staying with us once they understand the value of AMERISAFE.

[Operator Instructions] We'll take our next question from Matt Carletti with JMP.

Mark sold most of my questions. He had some good ones. Just want to follow-up on kind of that last point payroll inflation. It was a topic I wanted to talk about. Can you just help us a little bit with the mechanics of kind of timing in terms of if you were to see it, right? And I'm thinking more actual wage inflation as opposed to number of jobs increasing. So just kind of what's been talked a lot in the market in terms of just wages going up. Have you seen much evidence of that? I think you kind of answered that already. And secondly, like would you really expect to yet, if it's happening or is that more of a function that will really get caught on the audit as the policies wrap up in the months following?

Yes. I think you're thinking about it the right way, Matt. I think, we -- the way we would see it coming through in the premium dollars for the -- obviously, for our renewal would be in the audit. Now, I guess, on a new business side, if they're estimating that their payrolls are going to be higher, that would come in, in terms of new business premium, whichever quarter we write it in. But certainly, for the larger portion of our book, you're absolutely right that would not really be reflected in premium dollars until that policy was audited at 18 months after the effective date.

Got it. Okay. Just want to make sure I understand that correctly. Great. That's all I got. I have missed ELCM as well for what it's worth, so thank you.

I said it's too early. People were still dialing in.

Ladies and gentlemen, this does conclude today's question-and-answer session. I would like to turn the conference back to Janelle Frost for any additional or closing remarks.

What a difference a few months can make. It has just been 3 short months ago, I spoke of the optimism for public health and the economy due to vaccination rollouts. And now we're facing another COVID surge and uncertainty is again at the forefront of economic news. I believe the industries and employers we insure fared well economically in 2020 and should continue to do so. In the meantime, please stay safe and well. Thank you for joining us today.

Ladies and gentlemen, this does conclude today's conference. We appreciate your participation. You may now disconnect.