Good day and welcome to the AMERISAFE 2022 Second Quarter Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Mr. Vincent Gagliano, Chief Risk Officer. Please go ahead, sir.

Good morning. Welcome to the AMERISAFE 2022 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 the results 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. Inflation continues to dominate financial news. Before discussing the quarter’s results, I thought it would be helpful to discuss three ways inflation impacts workers’ compensation industry and AMERISAFE. First, premium revenue is based on payroll. Wage growth brought about by a labor shortage and inflationary pressures is a potential tailwind for revenue as insurers payrolls increase. AMERISAFE continues to see wage growth reported by our insurers in their monthly payroll reports, which ultimately leads to positive payroll audit premium. During the second quarter, payrolls grew 9.1% based on our analysis of those policies renewed during the quarter. Second, I believe workers’ compensation medical cost inflation will rise above recent trends as the health care industry passes increased labor costs to end consumers. Industry-wide, this could lead to increased loss ratios and unfavorable development on open claims. AMERISAFE uses long-term averages in our reserve practices, and we work diligently to close claims, therefore, limiting our exposure on open claims. Third, rising interest rates negatively impact fixed income portfolios of insurance carriers. The upside is that new investments can be made at much more attractive yields, growing investment income in future quarters. Neal will provide AMERISAFE specific metrics during his prepared remarks. To summarize, the impacts of inflation are far reaching, but the three impacts I name directly influenced key areas of AMERISAFE and our financial income – financial outcomes. In the quarter, gross premiums written grew 1% over the prior year quarter driven by robust audit and other premium adjustments. Higher-than-expected anticipated payroll led to positive audit premium for the policies written in the first quarter of 2021 and audited this quarter. Premiums for policies written this quarter was down 5.6%, principally driven by declines in loss costs. Our overall pricing for the quarter, as reflected by our ELCM, were 151, down from 152 in the second quarter of 2021. Despite competition remaining strong and pricing pressures continuing, we retained 93.7% of the policies we offered renewal to. Continuing with losses, frequency trends for the current accident year remained favorable with reported claim counts lower than prior accident years at 6 months. Coupled with severity within expectations, the loss ratio for the current accident year remained 71%. We had 10 claims with claims incurred above $1 million at the end of the quarter. This compares to 3 for the first 6 months of 2021 and 19 for the full year 2021. Our history has shown there is no seasonality as to which quarters large losses occur. Further, favorable case development reduced the quarter’s loss ratio by 13.6 percentage points. Accident year is primarily attributing to the $9.6 million of favorable development were 2017, 2018, 2019 and 2020. This is the first quarter that we’ve adjusted the ultimate loss ratio for accident year 2020. I will now turn the call over to Neal to discuss expenses, investments in capital management.

Thank you, Janelle and good morning everyone. For the second quarter of 2022, AMERISAFE reported net income of $6.1 million or $0.32 per diluted share compared with $23.8 million or $1.23 per diluted share in last year’s second quarter. The decline in net income was primarily driven by declines in our equity securities compared with gains in our equity securities in last year’s second quarter. Operating net income for the second quarter was $13.1 million or $0.68 per share, a decrease from $20.2 million or $1.04 per share in the second quarter of 2021. Revenues in the quarter were lower, impacted by this year’s $9.9 million decrease in unrealized gains on equity securities. Revenues came in at $68 million compared with $81.2 million last year. Net premiums earned increased 0.6% to $70.3 million compared with $69.9 million in last year’s second quarter and a significant improvement from the trend in recent quarters. Turning to our investment portfolio. Net investment income decreased 3.6% in the second quarter to $6.5 million compared with $6.7 million in the second quarter of 2021. The decrease was driven by the continued impact of lower interest rates on fixed income securities as they work their way through the year-over-year comparisons. On a positive note, net investment income for the third and fourth quarter is expected to grow as the yield on our portfolio continues to increase. During the first 6 months of the year, our yield on new investments was approximately 100 basis points higher than the securities maturing or sold out of the portfolio. During the month of July, this difference was over 200 basis points. The tax equivalent yield on our investment portfolio was 2.86% at the end of the second quarter, up 26 basis points from 1 year ago. The pretax yield on…

Thank you, sir. [Operator Instructions] We will now take our first question from Matt Carletti from JMP. Please go ahead.

Hey, thanks. Good morning.

Good morning, Matt.

Good morning, Matt.

Janelle, I appreciate your comments that they open about kind of the impacts of inflation on the industry and workers’ comp, particularly the comment about expectations for medical loss costs drive and some of the important differences between AMERISAFE and the industry. Can you – particularly on the claims tail point, can you expand on that a little bit? And just remind us how you view AMERISAFE’s claims tail versus what maybe we more commonly think of for workers’ comp as an industry?

Yes, certainly. So I will talk about it in two ways. One is just number of claims reported to us. We have talked about on several calls now that we have not bounced back to pre-pandemic levels and that still seems to be holding true. Our claim count – frequency count, the number of claims reported is still lower at 6 months compared to prior accident years. So, that’s certainly benefiting us. To your point about what happens should there be a recession or how inflation impacts that, historically, AMERISAFE has done pretty well. With our insured base – our insured performed pretty well during recessions in terms of whether that increases activity or decreases claim activity. We haven’t seen a large fluctuation in claim counts related to that in mild recession. Certainly, in the Great Recession, that was a different story. But when you think about it in terms of duration of claims, which is I think where you were headed with the question was, AMERISAFE’s average duration is somewhere less than 3 years. And I think that’s probably 1.5 years. I haven’t looked at the latest numbers on the industry-wide, but I would say that’s probably 1.5 years to 2 years less than industry-wide duration. So I think we are benefiting on the front end from just having fewer reported claims. And then to your point, on the duration side, we do a really good job of closing claims. Our open claim counts continue to drop. Our claim closure rates are very healthy. So we feel really good about that.

Great. That’s very helpful. And then kind of keeping on the inflation point on wage inflation, are you seeing any notable trends, particularly by different industry focuses, where you guys have some concentrations in particular industries? Do any stick out as seeing notable trends versus say the rest of the book?

Matt, the wage growth that we are seeing and I will kind of segregate that a little bit. But the way growth we are seeing is across the board in our industry groups. And it sort of follow – it sort of tracks with what we see in terms of – if you look at our mix of business, we are seeing it in construction and roofing, particularly trucking, particularly in lumber and logging. We have seen considerable wage growth. We try to give a better, a clearer picture of where that’s coming from versus new employees versus actual wage growth itself. And I think last quarter we were quite astonished and reported out that for policies that reported payrolls in that quarter, we saw actual wage growth of 7.3%. And we didn’t know if that was a blip or a trend and I am happy to say it was 6.1% in the second quarter of 2022. So, 7.3% last quarter, 6.1% this quarter in just wage growth. The other side of that is employee count. So, last quarter, that was 1.9%, this quarter, 2.9%. So still not large amounts of growth coming from new employees, which as you know, is our preference. And that again, to your question about industry-specific, that seems to be – it seems to be pretty consistent across our industry groups.

Great. That’s very helpful. Last one, just housekeeping, you always seem to tell it and I always seem to miss it. What was the LCM in the quarter?

151.

Awesome. Great. Thank you for all the answers. Appreciate it.

Thank you, Matt.

Thanks, Matt.

We will now take our next question from Mark Hughes from Truist. Please go ahead.

Yes, thank you. Good morning.

Good morning, Mark.

The NCCI loss cost number, if you put that in the release, I didn’t see it. Do you happen to have that kind of looking at your footprint generally speaking on how that’s trending?

Right. So for the second quarter, that was 10% decline. And I believe I don’t have the historical in front of me, 8.2%. Neal, is that correct for last quarter?

Yes. And the NCCI put out a projection in May at their annual insurance symposium did they expect – NCCI expects loss cost to be down 7.5% for 2022. So we are seeing similar trends in our book of business, although we are high hazard. It’s a slightly different book than all of the NCCI’s book.

So does the 10% represent where you got information in the second quarter or does that...

That’s a great question. So, the 10% represents of the loss cost declines that were effective in the quarter for all the states that had loss cost declines effective that quarter, the decline was 10%.

So that’s kind of a sample to do what maybe rolling four quarters to get at least the country as a whole. So, this is the latest information, but it maybe skewed.

Right. So why Neal was saying NCCI projects overall 7.5%.

Yes, yes. Okay. That’s still a pretty big number of the 10%.

It is.

Yes. Anything you can say about 2020, recognizing this is the first quarter you have taken a look at it. Do you look at the whole 2020 or just kind of the early 2020 policies at this point and then in either case, what do you see?

Yes. No, we look at the accident year as a whole for 2020. So if you are – short history of remembering, 2020 claim counts dropped for the industry as a whole, same for AMERISAFE. Severity was within expectations. As you know, we always try to measure. Given the severity of the claims that we have, we like to wait and let those age a little bit and get solid ground on where people are how we are feeling about medical outcomes and long-term outlooks for a particular claims, hence, this being the first quarter for us to adjust kind of consistent with our pattern.

Yes. And I think that 2020 is anomalous in terms of the claims count drop. Should we assume that it’s going to be pretty fruitful as you evaluate that accident year?

Time would tell. If you harken back to 2020, one of the concerns for the industry and AMERISAFE was the impact of COVID and not necessarily just the number of claims reported for COVID, but how that was going to impact medical outcomes even for non-COVID-related claims. I’m going knock on wood here and say so far, it doesn’t seem to be that impactful other than the stress that it put on the health care industry as a whole, which obviously everyone is feeling right now or beginning to feel right now. I think as far as COVID-specific claims, we had less than 40 reported to us. So from that aspect, we felt really good about 2020.

Yes. On the medical inflation, how much of that are you actually seeing in your book or you are just anticipating?

We are anticipating. We are anticipating. Certainly, we have talked about it on the last few calls what we are seeing and everyone is experiencing in terms of just nursing costs and home health, but no, I can’t – I don’t have any clear metrics in our book. It’s just something that we are anticipating trying to be in front of what we think will be a trend impacting a large liability on our balance sheet or the industry’s balance sheet. I think AMERISAFE feels better about it simply because we closed claims.

Yes. I guess it doesn’t help having the NCCI do the 10% decline in the rearview mirror. You are anticipating inflation.

I could not agree more, Mark.

Yes, yes. I guess if everybody wised up and competition eased up a bit, then that would be good, but it doesn’t sound like that’s the case either. Is that fair?

You know what, absolutely. I don’t know if you want to say wise up. I think NCCI is very data-driven. They are using what they are seeing in the data. I think people – carriers are more anticipating what’s to come. I mean, even if you look at the NCCI reports and you look at accident year 2021, the industry reported a combined ratio of 102. NCCI thinks ultimately that’s not going to be a 102, but I think that’s the difference between what carriers are experiencing and anticipating experiencing and reflecting in their pricing versus what’s actually shown up in the data thus far.

Yes, yes. How about the audit premium? I think you are taking into account what the first quarter of 2021 and the folks are still pretty conservative on their payrolls. Is that a dynamic that’s going to continue for the next several quarters? Is there some reason why it shouldn’t or what’s going on there?

Yes, I don’t have a crystal ball, but I would think we would continue to see positive payroll goes for the next few quarters going. If you think – just to your point, if you think about where we were, the economy was, where our insurers were first quarter 2021 and playing that forward, the economy was still pretty robust. Our insurers were working. I don’t think they anticipated the inflationary pressures that I believe both for us in terms of a tailwind in audit premium.

Yes. And that’s still – the predicate for that is still going through today that the inflation is coming in pretty hot to your point about the 6%, 7% growth and wage is probably more than what folks had anticipated just a few months ago. We will make that an editorial comment, but I presume you wouldn’t disagree with any of that.

I don’t. I don’t. I mean, I saw the headline today in the Wall Street Journal about a near record pace in terms of wage growth and benefit growth in the quarter.

Yes, yes. Well, the funny headline is the Fed doesn’t like that since people are making too much money, we better stop that. Okay, alright. I think I am good there. Appreciate all the answers.

Thank you, Mark. Appreciate it.

Thanks Mark.

It appears there are no further questions. At this time, I would like to turn the conference back to Janelle Frost for any additional or closing remarks.

Thank you for joining us today. I want to take this opportunity to congratulate the AMERISAFE team on being named to Ward’s Top 50 P&C carriers for the 14th consecutive year. Honors such as this only happened because of your dedication to serving our stakeholders. Thank you for joining us today.

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