Good day, and welcome to AMERISAFE 2021 Fourth Quarter and Full Year 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. Welcome to the AMERISAFE 2021 Fourth Quarter Investor Call. If you have not received the earnings release, it is available on our website at www.amerisafe.com. [Operator Instructions] 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 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 statements. I will now turn the call over to Janelle Frost, AMERISAFE's President and CEO.

Thank you, Kathryn, and good morning, everyone. I'm going to change the usual order of my comments and discuss losses incurred first. For our longtime listeners, you will appreciate my words when I say this is a lumpy business. In the fourth quarter, we had a catastrophic claim involving severe injuries to insured workers as a result of a single accident. Due to the nature of the injuries and information available, we have increased our current accident year loss ratios to 80.7% for the full year. As currently reserved, this claim impacts our catastrophe reinsurance layer. To recap our reinsurance. We are responsible for the first 2 million of each loss occurrence. We are then covered by reinsurers for the next 8 million up to 10 million in the working layer. Then we have catastrophe coverage for the next 60 million in excess of 10 million. The catastrophe coverage does have a $10 million maximum anyone live provision, meaning within the layer, the most reinsurers will cover per injured worker is $10 million. While the multi claimant aspect of this claim is unusual for us, dealing with severe injuries is not. This is what we do and have expertly been doing for 36 years. Each quarter we disclosed the number of severe claims in the context of those with case incurred losses in excess of a million dollars. In 2021, we had 19 severe claims, compared to 18 at year end 2020. We averaged 18 severe claims per year over the last five years. We provide severe claim counts as additional insight into our high hazard niche. And we do so without giving claims specific information. Out of respect for the injured workers and their families and to protect medical privacy we will not share specifics regarding this accident nor…

Thank you, Janelle. Good morning, everyone. For the fourth quarter of 2021 AMERISAFE reported net income of $3.5 million or $.0.18 per diluted share, compared with $28.5 million or $1.47 per diluted share in last year's fourth quarter. This result was heavily influenced by the catastrophic claim the company experienced in the fourth quarter as Janelle outlined which impacted the quarter by $0.98 per share. For the full year 2021 AMERISAFE produced net income of $65.8 million, or $3.39 per share compared with $86.6 million or $4.47 per share in 2020. Operating net income for the full year 2021 was $54.7 million or $2.82 per share. Revenues in the quarter were down 11.2% to $78.4 million compared with the fourth quarter of 2020. Net premiums earned decreased by 9.3% to $67.7 million when compared to last year's fourth quarter. For the full year, net premiums earned were also lower by 9.3%, totaling some $276 million. These premium trends were driven by the continued decline in workers compensation lost costs in 2020 and 2021. Turning to investments. We saw continuation of the impact of lower short term and long term yields with net investment income down 16% in the fourth quarter to $6.1 million compared with $7.2 million in the fourth quarter of 2020. Net investment income for the full year was down 13.4% to $25.4 million, compared with 429.4 million in 2020 due to the lower interest rate environment. The tax equivalent yield on our investment portfolio was 2.67% at year end, the pre-tax yields on the portfolio at year end was 2.37%. There were no significant credit losses on any of the securities held in the portfolio during the quarter, or for the full year of 2021. There were no significant realized gains or losses during the quarter or…

[Operator instructions] And we'll go ahead and take our first question from Matt Carletti with JMP. Please go ahead.

Thanks. Good morning.

Good morning Matt.

Let's see might start with Janelle, you made the comment I think about seeing payroll growth up about 4% in Q4, 70% of that wage growth 30% employee count. In that 70% if I got that right is that exposure in the sense that the same employees are working more hours? Or is that more kind of true wage inflation in the sense that they're getting paid more for the same amount of hours being worked?

Yes, great question. It really would be inclusive of both. It could be wage, it could be higher wages or more hours worked.

Is there any even a way to compare that? Is there a way from the exact math of it? Is there any way to kind of what you're seeing across your book more broadly? Is there any way for you to get a sense of kind of where the markets heading? Do you think there's just more, I'm just trying to get a feel for exposure going with that? Or if you're seeing true and wage inflation come through yet in your kind of specific areas of concentration?

No, I think if you look at economic data, I believe everyone's experiencing wage increase, wage pressures, certainly. So I don't think that would be any different in our industries or the book of business that we underwrite.

Okay, perfect. And then I apologize in advance for this question, I could not hear a thing, the first three minutes of the call that drop off and come back, you might have you probably addressed this, I'm sure it was on my end. So if you've already answered this, just say Matt go read the transcript.

That's rude.

But I'm hoping to get just a little digging a little deeper on kind of the nature of the one incident that was called out for the pumping of the accident year in the quarter. Just kind of how many parties involved the nature of the incident and just what kind of led to it seemed like knowing kind of the details of the [indiscernible], pretty big assumption kind of person potentially. And just wondering if that was -- these are very young people that you expect to live a very long time or more intense kind of medical assumption or just what kind of how just trying to kind of how you get to that kind of number.

Yes, great questions, Matt. Certainly, we're early on in this claim and I have to be very respectful of people's medical privacy and what happened with the accident. Obviously, there's a lot of things going on. There were several workers. You are correct in terms of thinking of the severity of the claim. The reason we've isolated it is because it is one claim and we wouldn't want anyone to draw conclusions that we believe the severity of our book has changed. The severity stands the catastrophic claim for 2021 was within our expectations. So one of the reasons we highlighted this particular claim “A” we'd really haven't had a claim like this in our 36 years history. So that is of note. And secondly, we do feel like it's the nature of what we underwrite, but at the same time we handle severe claims every single year. I don't want to say day in and day out, because that sounds ominous. But we continually report and have reported over time, the number of severe claims in million dollars excess as a way of giving perspective to the high hazard nature of our book. As far as the handling of this claims, our reserving philosophy is most likely outcome based on the information we have at the time. And we will handle this claim and take care of these injured workers just like we do our severe claims. I feel like our claim staff is expertly equipped for this type of incident. Just that it hasn't happened in our 36 year history is the best way I can say it happened. But we know we write hazardous business. And we know it's a low frequency high severity business.

Understood, that's helpful. And I guess any color you can give around like was this I know like motor vehicle accidents are a big driver of loss across your various exposures, like was this a multiple person motor vehicle accident or is this more like an industrial or construction site accident just trying to get a feel for the –

More severe injuries or burns, if that gives you any indication.

Perfect. That's that's plenty. Great. I'll leave it there and let others ask questions. Thank you.

Thank you, Matt.

[Operator Instructions] And we'll go ahead and move on to our next question from Mark Hughes with Truist. Please go ahead.

Yes, thank you. Good morning.

Good morning Mark.

Yes. Good morning. And just to clarify, so it sounds like multiple injured workers over that $10 million threshold. So the program is designed to get everybody up to 10. But now you've got an unusual circumstance, that you've got multiple injured workers meaningfully in excess of 10 million per event or per worker. Is that the right way to think about it?

Again, I'm trying, I want to be respectful of your question, but I am trying to be sure that we protect the medical information of these injured workers and their families. And at this point, I don't think we're prepared to share that level of information.

Given the magnitude of the loss, though, am I right in thinking it obviously, at least one person is over 10 million, and presumably multiple people would be over the $10 million threshold. I'm just trying to understand the nature of your reinsurance agreement. Theoretically, I'm not interested in the specifics of any case but I'm just trying to understand the case scenario that would lead to these this might include a lot -

All these scenarios that you're laying out, I think you're thinking about it correctly, mathematically. Within the catastrophe layer of our reinsurance any one life the reinsurer is responsible for $10 million anything above that $10 million would be net to AMERISAFE. So I think mathematically, you're thinking about that correctly.

Yes. And then is there anything about does this have you rethinking kind of your premiums, your coverage? Is there, given that this is unique? Is there something about the treatment profile maybe even the survivability of these kinds of injuries that is evolved so the expenses, I mean this is clearly pretty, pretty unusual?

Right. Yes. The unusual nature of it does, obviously, haven’t think about all those things. Let me sort of lay it out. As I was saying to Matt, first and foremost, severe claims is what we do. It's what we've been doing for 36 years from that aspect. And looking at our book of business and our high hazard focus. This was a longtime policyholder nothing about that causes me question to think is that an issue? Thinking about the reinsurance coverage I think our insurance -- when we purchase our reinsurance cover, we look at more as protecting us against frequency of severity. So I feel very, I feel comfortable in that regard. Again, it's easy for me to say right now with this unusual circumstance. As far as treatment and how we view reserving and how we think about life expectancies. I think we're way too early in this claim to start making those sorts of judgments as to what that ultimately can be certainly we will learn from this claim but at the same time and this' the first time this has happened in our 36 year history. So I think we're a little early and how these claim here, these severe claims develop over time. I think we're a little bit too early to be questioning how we would think about this on a long-term aspect of our particular book of business.

Hi Mark, this is Neal Fuller. Also a few if we go to the NCCI, they've done study on mega claims which are claims over than 10 million for the industry. And there is typically just a handful of these each year. And so this is a very rare occurrence from that standpoint.

Yes. And then, how do you think about your timing on reinsurance renewal, how do you think that'll impact your -- the cost of your reinsurance program. Any early thoughts on that?

Yes. So if you recall, Mark our catastrophe layers renew every year. So we were renewing at the end of the year, this claim was known by 12/31, so therefore the reinsurance were aware of that as well, so that's already factored in and keep in mind our catastrophe layer is a small portion of our reinsurance premium.

Okay. So, one with the in material with P&L?

Well, -- Yes. I think you could argue that, any, yes.

Okay. And then, you are the 19 -- the 19 severe claims. Was this claim actually in 2022 or is this in the fourth quarter?

2021.

What was the --.

Yes. I'm sorry if I wasn’t clear about that. Yes, it was a fourth quarter 2021 event?

And then, if it was 19 as of yearend, what was the total through three quarters?

Nine.

Okay, all right. The NCCI loss cost you saw in the past kind of commented on what you've been seeing as some of these state numbers come in. Any observations about how that's shaping up for 2022?

Yes, mid-single digit declines still declines.

Okay.

Sort of -- I guess really on par with what we saw in 2021.

Yes. And then this is early days but your appetite for you've obviously didn’t see any special dividends, does this influence your capital management, I mean essentially the dollar of earnings that you won't have. You kind of where do you sit from a capital adequacy and claims, what would we think about the potential impact on special dividend when the time rolls around again?

Yes. That's a good question, Mark. We have cash and liquid investments at the holding company yearend was a $108 million. We expect the dividend up $78 million additional, that's almost $10 per share right there if you add those two together. So we're not expecting that this will have any significant impact at this point-in-time in our capital management strategy. Our statutory surplus in the balance sheet continues to be very strong. Our BCAR ratio continues to be very strong. Our actual step surplus at yearend was $278 million. Obviously that includes this claim in terms of the current estimates. So no changes to our capital management strategy at this point-in-time.

Very good. And then, you kind of little more positive commentary about new business, new business in '22, I think you expect to be aided by the economy or at least what happens of COVID's we hope.

Yes. We're all everyone's hoping for that, right.

Yes. And then, you also cited distribution relationships. Maybe I'll weave in competitive dynamic with those factors plus your view of competition which if you could maybe share your view of the competitive environment now. What's your feeling about the top line in 2022 and since you mentioned that, I'll ask the question.

Yes. Certainly it's a competitive environment. As on the third quarter call we sort of mentioned that post the quarter we saw a competitor sort of pull out of to move our hazard classes and we were happy to see that, its first time we've seen that in a while. Unfortunately that didn’t start a trend, so it hasn’t really changed in a significant way. I still think it happens in very small pockets. I don’t see at this point again sitting here on February 23. I don’t see a large swing in the level of competition in 2022 in terms of it's getting more intense or even less intense which will be obviously be my preference. And so, I think that gives a little bit of colour around the competitive environment. Certainly our goal is to grow policy count, we're able to do that finally in 2021 not prior where we want to be and that is our continued focus into 2022. Obviously, a stronger economy helps that. And sure it's out there working as I would -- wage inflation we brought more new workers less so but in anything that increases payroll increases premium for us. So that's a positive something for us to look at the positive sign for 2022. As far as the distribution network, yes we're spending time and I believe I've mentioned this on the third quarter call as well. Well, we're spending time with our agents reiterating what the value proposition of working with AMERISAFE is from an agent's perspective and how they sell that to their clients. Our safety services, our claim service is how we take care of their injured workers, how we service their policies and then I think our retention rate really speaks to that. So I think those are all things that we can really drive home with our agents in trying to find the best solutions for their clients in 2022.

If you don’t mind, I'll ask a couple of more. The [associated] premiums were up just a little bit. Is there any P&L impacts from the large claim, any reversals of profit sharing commissions there, I think you have some ceding commission that worked to the P&L. Anything like that either on written or earned or the expense ratio related to the claim?

Well, no nothing from that standpoint other than there was a small reinstatement premium on the CAPS rating about $300,000 increase in ceded premiums but not really material to the overall level of premiums in the quarter.

Yes, okay. And then, Neal, anything on expenses in 2022 when we think about inflation, inflation within your own payroll – if you want to add anything?

Yes. It kind of have a good job of holding the line on expenses. The difficulty obviously is the decline in premium. So we do expect the expense ratio similar to last year to trend up a little bit from current levels based upon continued expected declines in net earned premium. At least, basically look at our renewal book of business and loss cost continuing to potentially go down mid-single digits. But we expect a little bit of pressure on the expense ratio.

Okay. Thank you for indulging me, I appreciate it.

We appreciate the questions, Mark.

Thanks, Mark.

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

When I was back at 2021, I am pleased with our ability to turn risk into opportunity. We continue to operate with an underwriting profit in a competitive environment. We have a strong balance sheet and we provided value to our shareholders and importantly through the performance and expertise of our employees, we served our policy holders and their workers with expert safety and claim services. Congratulations to the AMERISAFE employees on a job well done. One final note, we also issued a press release announcing the employment of Billy Greer to the AMERISAFE board. Billy's expertise in investment management, business development and asset administration make him a great addition to our board. And we're excited to have him join. Again, thank you for joining us today.

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