Good day, and welcome to the AMERISAFE 2021 Third Quarter Earnings Conference Call. [Operator Instructions] 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 Third 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. We were pleased with this quarter's results, reporting a 71.5% combined ratio and an ROE of 16.1%. Competition was strong in the quarter.

We remained competitive by deploying our strategy of evaluating individual risk through safety services and underwriting, promoting safe workplaces and caring for injured workers.

These services performed by our expertise in workers' compensation benefited our policyholders and agents, created value for our shareholders and built a foundation on our strong balance sheet.

In the quarter, we maintained a strong retention rate of 93.5%, and we also found solid opportunities to buy new business, allowing us to grow policy count when compared to last year. The associated premium for voluntary policies written in the quarter was down 4.6%.

For perspective on the decrease, our average loss cost for policies renewed in the quarter were 7% lower than the prior policy period. Our overall pricing, as measured by our ELCM, was a 1.53. A headwind in the quarter was audit premium and other premium adjustments, decreasing written premiums by $2.1 million.

Audit premium in the quarter was slightly negative. This was not surprising given the policies audited in this quarter covered payrolls fully impacted by the pandemic and the resulting economic slowdown.

As for payrolls being reported now, which will impact future audit premium, we are seeing growth in payrolls driven mostly by wage growth and by a slight increase in the number of workers. In total, gross premiums written in the quarter was down 7.5% from the prior year quarter. Turning to losses.

We experienced favorable prior year case development in the quarter as our claims handling practices reach better-than-anticipated outcomes. Prior accident year favorable development reduced loss and loss adjustment expenses by $19 million in the quarter or 28.1 loss ratio points.

We are pleased that our experience and singular focus on workers' compensation enabled us to reach maximum medical improvement and return to work for injured workers, while also settling and closing claims. As for the current accident year, frequency of claims based on earned premium was up in the quarter, but has not returned to pre-pandemic levels.

Severity trends are within our expectations. Therefore, our loss ratio of 72% for the current accident year remained unchanged. We continue to monitor the potential impact of rising healthcare costs on the long-term medical cost inflation.

As an example, the nationwide demand for nurses and the wages healthcare systems are paying to attract and retain nurses will, I believe, impact medical cost inflation going forward. I raised this concern earlier in the pandemic, and we're seeing some slight increases in costs, particularly as we plan long-term care for injured workers.

I believe this is a trend to watch. I will now turn the call over to Neal to discuss investments, expenses and capital management..

Thank you, Janelle, and good morning, everyone. For the third quarter of 2021, AMERISAFE reported net income of $19.1 million or $0.99 per diluted share compared with $23.4 million or $1.21 per diluted share in last year's third quarter.

Operating net income for the third quarter was $19.8 million or $1.02 per share, a decrease of $0.14 from the third quarter of 2020. Revenues in the quarter decreased to $73 million compared with $83 million in the third quarter of 2020. Net premiums earned decreased 9.6% to $67.6 million when compared to last year's third quarter.

Turning to our investment portfolio, net investment income decreased 14.4% in the third quarter to $6 million compared with $7.1 million in the third quarter of 2020. The decrease continues to be driven by lower interest rates on fixed income securities as well as higher cash balances for special dividends.

The tax equivalent yield on our investment portfolio was 2.50% at the end of the third quarter. The pre-tax yield on the portfolio was 2.21% at the end of the quarter, down from 2.49% a year ago. There were no significant realized gains or losses in the quarter or in the year ago quarter.

The investment portfolio is high quality, carrying an average AA minus credit rating with a duration of 3.56 and with 61% in municipal bonds, which includes 14% in taxable munis, 15% in corporate bonds, 9% in U.S. treasuries and agencies, 5% in equity securities and 10% 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 $28.2 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 were $17.9 million in the quarter compared with $13.9 million in the third quarter of 2020. The increase was largely due to a $5.7 million benefit in last year's third quarter from the termination of an assessment related to a multiple injury fund.

Adjusted for the benefit, expenses were $1.7 million lower in the third quarter of 2021 compared to the third quarter of 2020. These lower expenses were due to a $1 million profit sharing accrual on a reinsurance treaty as well as lower compensation and commission expenses.

By category, the 2021 third quarter expenses included $6.2 million of salaries and benefits, $5.2 million in commissions and $6.5 million of underwriting and other costs. Our expense ratio for the quarter was 26.5% compared with an expense ratio of 26.2% in last year's third quarter, adjusted for last year's $5.7 million expense benefit.

Our effective tax rate for the quarter was 22.6% compared to 18.5% for the same period in 2020. This was due to a higher estimate of income from underwriting and taxable investment income compared to last year's third quarter. Return on equity for the third quarter of 2021 was 16.1% compared to 19.8% in the third quarter of 2020.

Operating ROE for the quarter was 17.2%. Now turning to capital management, and as announced in conjunction with our earnings release, the company's Board of Directors declared a special dividend of $4 per share for shareholders payable on November 17, 2021, to shareholders of record as of November 10, 2021.

This brings the total amount of special dividends paid out in the last nine years to $25.75 per share. In addition, the company's Board of Directors also declared a quarterly cash dividend of $0.29 per share payable on December 17, 2021, to shareholders of record as of December 3, 2021. And finally, just a few other items to note.

Book value per share at September 30, 2021, was $24.80, up 9.3% from $22.70 at year-end. Next, I wanted to let you know that the company recently published some additional sustainability disclosures for investors. These disclosures, which align with the SASB and TCFD standards can be found on our website under Sustainability.

And finally, we plan to file our Form 10-Q with the SEC tomorrow after market close. That concludes my remarks, and we would now like to open up the call for the question-and-answer session.

Operator?.

[Operator Instructions] And we'll go ahead and take our first question from Mark Hughes from Truist. Please go ahead..

Janelle, what did you say about audit premium? I didn't quite pick it up.

What was the driver in the quarter? And then does that mean anything on a go-forward basis?.

Yes. I said audit premium for the quarter was slightly negative, and that is in total. So we certainly had classes of business that still remained positive. For example, construction remained positive sans roofing. Roofing had slightly negative audit premium. Trucking was still positive.

Lumber, which has been responded for us quite well during the pandemic and even with the economic slowdown, was still positive. But oil and gas, for example, is negative. But in total, it was slightly negative for the quarter.

I also mentioned in my prepared remarks, if we're looking forward, based on the payroll that we're seeing right now, we are seeing wage growth. We're seeing a slight increase in the number of workers. So that kind of speaks to maybe future audit premiums when this policy period is audited..

[Operator Instructions] And we'll go ahead and recall Mark..

Yes. Thank you. If we think about the quarters that are -- or the policies that are going to be audited in the fourth quarter, going back to mid-late 2020, I guess I would assume maybe you see a similar dynamic? I would have thought the audit premium would have been positive. I'm just thinking from a macro perspective.

And I guess my question is, is the Q4 likely to see a similar impact? I hear what you're saying that the payrolls now look like they're better. But I wonder the trend over the intervening period, I don't know if I'm thinking about that properly, but when we think about Q4 or Q1, still maybe a little negative? Or....

I don't know that -- I don't know exactly how that's going to pan out, Mark. I'll say this. If you think about -- to your point, if you're thinking back to that time period, fourth quarter 2020, first quarter 2021, I do think the -- we were seeing some -- a little bit of boost in the economy from that aspect.

So -- but again, it was ever so slightly negative this quarter. So we're not -- that wasn't a big surprise to us and nor a major concern..

Yes. Yes. I guess you had the Delta variant in the interim that might have impacted the aggregate yield....

Perhaps. Yes, perhaps. Good point..

How about -- you mentioned frequency is up from last year but not returned to pre-pandemic levels, severities as expected.

Wouldn't that suggest that the current accident year ought to be a little bit lower?.

That's a great question. We have not seen the number of claims reported return to pre-pandemic levels. That has not happened.

One of the things we're -- as I mentioned in the prepared remarks, one of the things we're kind of watching is what happens on the severity side, and we talked about this early on in the pandemic, healthcare costs and the long-term component of our claims.

As you know, when we reserve, we reserve most likely outcome even for the most current accident year. We case those reserves out rather quickly. And so we're contemplating the going rate for what we're having to pay for some of these services.

Now I guess there's a national debate as to how long that lasts, and is it sustainable for the medical community, but it is our reality currently..

Yes.

And then the number of large losses in the quarter or year-to-date compared to last year?.

We had nine in the quarter -- or as of the end of the quarter, not in the quarter, as of the end of the quarter, nine..

And what was it last year, two through three quarters?.

Last year, at the same time, we had -- yes, two through three quarters, we had 11 last year..

Okay. So large losses, down even from a reduced level.

And then how about the competition, the behavior of your either bigger or regional competitors, any difference this quarter versus prior quarters?.

In the quarter itself, I would say competition remained strong, really didn't see a lot of changes in the quarter. Post quarter, I'll say we -- there have been some rumblings of some carriers backing away from certain hazardous classes, which, of course, we like to hear..

Right.

Is that in public commentary? Or you're just sort of seeing that on the ground?.

We're seeing that on the ground..

Yes. Is that -- are they having some bad results? Or....

I can't speak to what drives other companies' underwriting appetite. I don't -- I haven't seen -- I've heard -- I've seen -- I will say this. I think in the public, we've seen companies' current accident year loss ratio go up, right? So I don't know if you view that as adverse development, but yes, there's something to that.

But no, I haven't seen reporting of adverse development that I can think of off top of my head, but I can't speak to what we're seeing on the ground as certain carriers pulling out of classes of business..

Yes. I'll just ask one more. It seems like your written premium, you still had a little bit of a dip, but it was low end, what maybe ex audit premium down 3%, if I'm thinking about it properly, low single digit....

4.6% for voluntary during the quarter. Loss cost on average, 7%..

Yes. That's kind of the middle of recent claims. Okay. All right. Very good. Thank you..

Thank you, Mark..

[Operator Instructions] And we'll go ahead and move on to our next question from Matt Carletti from JMP. Please go ahead..

Thanks. Good Morning..

Good morning Matt..

A couple questions. Mark covered a couple of mine. But just following up on the frequency and severity discussion.

Would it be right to think that if those conditions hold, that frequency kind of stays at or below pre-pandemic norms and severities within expectations that as we think ahead to, say, next year that, that speaks to kind of a likely unchanged accident year loss ratio? Or are there other items, will there be continued loss cost pressure or otherwise that we need to think about in that equation?.

Matt, we -- right now, we're still seeing approved loss costs in that high to mid-single-digit decline. So obviously, that adds pressure. Like I said, my larger concern on the severity side is really what happens with medical cost inflation.

Obviously, you know medical costs are a huge component of what we do, particularly when we are looking for ultimate -- when we're trying to set reserves for ultimately what we think these claims are going to cost us. And so that -- from the severity side, that is a little bit more of our concern.

From the reported -- the actual reported number of claims, I will say this, we've seen wage growth, which we often say we like wage growth. Same workers, higher wages, higher premium. But we have seen a slight uptick in the number of employees. So let's play that out.

If the economy rebounds even further, and we have new employees entering these higher classes -- hazardous classes of business, that could drive frequency to some degree. You would think it may be baked into the loss cost, but frequency has been on the decline for so long.

It'd be an interesting balance to see how those new employees impact frequency relatively quickly..

Yes. That makes sense. And then just another question. You mentioned kind of along those lines, you're a little bit of concerned around, I think particularly you mentioned nursing wages and just that cost, that severity cost element on the medical side.

You've mentioned in recent quarters, kind of the pandemic, remote medicine, right, virtual medicine has needed to be used in some cases. Have you seen that persist? Do you think that, that's something that has some legs to it that once people kind of start using it -- and obviously, it only can be used in certain situations.

But do you see that as having some staying power and not that it offsets that severity stuff, but maybe helps a little bit?.

I do. I do think it will, in some instances, change how people access medical care. Certainly, severe injury, you've lost an arm, you're going to go to acute care. But I think on a long-term basis, I do think there's some impact there for all of us. If there's silver lining to the pandemic for the industry, that could be one of them..

Well. Thank you for the answers and congrats on a nice quarter..

Thank you, Matt..

And with that, that does conclude our question-and-answer session for today. And now I would like to turn the call back over to Janelle Frost for any additional or closing remarks. Thank you. I believe the $4 special dividend reflects our operational consistency and discipline over the long term.

In this season of giving thanks, it is imperative to recognize that the commitment to this discipline is rooted in the expert employees of AMERISAFE and what they do day in and day out. Thank you to the AMERISAFE team, and thank you for joining us today..

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