Good day, welcome to the AMERISAFE 2022 Q4 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Kathryn Shirley. Please go ahead.
Good morning. Welcome to the AMERISAFE 2022 Q4 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 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 statements. I will now turn the call over to Janelle Frost, AMERISAFE's President and CEO.
Thank you, Kathryn. Good morning, everyone. We are pleased to report continued strong results for the Q4 and the Full Year of 2022. For the year, we reported a combined ratio of 83.6%, gross premiums written decline of less than a point despite rate pressure as loss costs continue to trend down, and an operating ROE of 16.5%. Our balance sheet remains strong with roughly $1 billion in investments in cash, a strong reserve position and no outstanding debt. We continue to see strong retention in policies for which we offer renewal, with 94.6% retention in the Q4. Our overall pricing, as measured by our ELCM, was 151 for the Q4.
As we look ahead, competitive pressures and loss cost declines are expected to remain a headwind, though we expect wage growth to be a largely mitigating factor in the near term. Digging into wage growth a little further, when looking at this metric on a year-over-year basis, the results will be muted given the strong wage growth we saw in 2022. I'd like to note that payroll growth is primarily coming from existing employees. Moving to losses, the accident year loss ratio remains steady at 71% throughout the year. During the quarter, we experienced $10 million in favorable prior year development, primarily from accident years 2017 to 2020. For the Full Year, we released roughly $40 million in favorable development as active claims handling resulted in lower claims severities.
As outlined on our call a year ago, we focused on using the drop in reported claims to find avenues to resolve and close open claims. For 2022, we ended the year with 13 severe claims, compared to 19 at year-end 2021 and 18 at year-end 2020. In this instance, I define a severe claim as those with case reserves incurred in excess of $1 million. As it relates to loss trends, frequency and severity are both within our expectations. We expect medical inflation to begin to tick up on the back half of the year as our experience in certain pockets of the health market are exhibiting very early indicators.
Bringing all the pieces of the accident year loss ratio together and given the information we have now, we expect to hold our accident year loss ratio steady at 71% in the Q1 of 2023. Finally, as it relates to capital management, AMERISAFE's board of directors has approved a 9.7% increase in the regular quarterly dividend to $0.34. With our long tenure of experience in a high hazard niche, we are well positioned to retain our policyholders and compete for new business while delivering robust returns to our shareholders. With that, I'd like to turn the call over to Andy to discuss the financials.
Thank you, Janelle, good morning to everyone. For the Q4 of 2022, AMERISAFE reported net income of $20.8 million or $1.08 per diluted share, and net income of $16.1 million or $0.84 per diluted share. This compares favorably with Q4 2021 net income of three and a half million or $0.18 per diluted share and a net operating loss of $9,000, with the difference primarily driven by large claims in the prior year. For the Full Year, net income was $55.6 million, and net operating income was $59.3 million, compared with $65.8 million and $54.7 million in 2021, respectively. The decline in net income was driven by roughly $20.4 million move, sorry, in our unrealized equity securities position.
Gross written premiums were $55.6 million in the quarter and $276.1 million for the Full Year, both relatively flat on a year-over-year basis. During the quarter, voluntary premiums decreased 4.5%, which was largely offset by payroll audit and related premium adjustments of $2.3 million. For the Full Year, voluntary premiums declined by 5.9%, partially offset by audit and related premium adjustments of $14 million. Rates remain pressured as the industry continues to experience declines in approved loss costs.
The accident year loss ratio was 71% for both the Q4 and Full Year. The net loss ratio for the quarter was 55.3% and 66.1% for the Full Year, which reflects $10.4 million in favorable loss development in the quarter and $40.6 million for the Full Year. Our total underwriting and other expenses were $17.4 million in the quarter, resulting in an expense ratio of 26.4% compared with 24.7% in the Q4 of 2021. For the Full Year, underwriting and other expenses were $72 million, or 26.5% compared with 26.1% in the prior year. The increase in the expense ratio was largely due to lower earned premium, as underwriting and other expenses for the Full Year were largely unchanged.
Turning to our investment portfolio. The investment portfolio is high quality, carrying an average AA-minus credit rating with a duration of 4.2 years. The composition of the portfolio is 60% in municipal bonds, which includes 15% in taxable munis, 22% in corporate bonds, 3% in U.S. Treasuries and agencies, 7% in equity securities, and 7% in cash and other investments. Approximately 60% of our portfolio is comprised of held-to-maturity securities. In the Q4, net investment income increased 25.8% to $7.6 million from $6.1 million in the prior year quarter. The increase was driven by yields on money market funds and bank accounts, as well as higher reinvestment rates on fixed maturity securities.
For the Full Year, net investment income grew 7% to $27.2 million from $25.4 million in 2021. Yield on new investments increased approximately 291 basis points, driving our tax-equivalent book yield to 3.38% or 71 basis points higher than the previous year. Our capital position is strong with a high-quality balance sheet, solid loss reserve position, and conservative investment portfolio. In total, operating return on average equity was 16.5%. With that, I would like to open the call for the question-and-answer portion of the call. Operator.
Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, please press star one to ask a question. We'll pause for just a moment. We'll go to our first question from Mark Hughes with Truist.
Yeah, thank you. Good morning.
Good morning, Mark.
The your comment about inflation, Janelle, you say you're seeing it in certain pockets. Could you maybe amplify on that a little bit? Seems like the medical inflation, at least as of the last measure, was, you know, had decelerated a little bit, but you're clearly seeing something different. I wonder if you could talk a little more about that.
Certainly. If you think about the medical costs associated with our types of claims, severe injuries, obviously things such as durable medical equipment, DME, makes up you know, a significant portion of our costs, medical costs that we pay out. With supply chain issues and things happening post-pandemic health crisis, we've definitely seen an increase in those costs. Hopefully, with supply chain issues, that will tamper it down to some degree.
We've certainly seen inflation on durable medical equipment. Over the last couple of calls, I've just talked about the absolute cost of particular, what I would call home health, nursing, LPN, CNAs that we like to put in home environments to help with our injured workers that have a long-term health component. Obviously, I think we've all read about the wage pressure that the healthcare industry is experiencing in that regard. That's impactful to us. Maybe not medical inflation as a whole. Like, you know, we follow the same trends that the industry, you know, that everyone else is following. There are certainly pockets of those costs that we are keeping our eye on.
Understood. Then on loss costs, I think I've asked the question, last couple of quarters, you know, just the recent state-by-state trends. Anything new you're seeing there? Is it still as, you know, as negative as it had been?
Right. I think the last number coming out of NCCI was expected to be down, loss cost as a whole for the NCCI states being down 7.3% for 2023. You know, if I look at the latest chart that just shows the most recent rate filings by state, just to give you an order of magnitude, there are only two that are showing increases. That's Hawaii and Minnesota. The decreases range from 9.1% to 16.8%. That's a very wide swing. Granted, the 16.8% was D.C., but I'll use Georgia as an example, one of our larger states. Georgia was down 13.7% in their last rate filing or loss cost filing. I mean, those are significant drivers.
Yeah. Fair to say it's not getting any better, if you look at that, those numbers? Sounds it.
Yeah. If better means are we going to see. Are we seeing decreases? No. Are we seeing a slowing rate of decrease? Perhaps.
Yeah. Okay. You used the word muted in your script, and I did not pick up what that was referring to.
I mean, Paul, yeah, no problem. I was referring to wage growth. just tagging on to the conversation we just had about loss costs. We have this expectation that all other things being equal, we're going to be facing rate decreases in 2023. What we think will help mitigate that to some degree is the fact that we continue to see wage growth. that mitigates the, you know, I don't want to say it completely offsets. We'll see what happens in 2023. Certainly the fact that we've seen wage growth and it's been relatively strong, I think does mitigate that factor to some degree. I mean, that's what we've experienced the last two quarters. You know, even though we've been down slightly on a voluntary dec basis with payroll audits and audit premium, we've been relatively flat.
Yeah. anything you're seeing in, your end markets, construction activity, change in tone?
It's very interesting. You know, if I base it just off of the payrolls that are reported to us on a monthly basis, I would say, work activity is robust. We're seeing wage growth. We're seeing, you know, we say about 2% of that is probably coming from new employees. It hasn't, you know, the last few quarters have been very strong. If I look at just the data that I'm receiving, I would say all is well. I read the same headlines everybody else reads about, is there going to be a recession? There's a potential for a recession. I think there was a headline in The Wall Street Journal today about commercial rental properties. We just haven't really seen it, and I'm going to knock on wood here. We really just haven't seen it come across in our book of business as slowing down.
Yeah. I appreciate the sound effects there.
Thanks.
Maybe one more. Any development on that large Q4 claim? Did that help in the Q4?
No. You know.
Q4 2021.
You're right. If you're looking at the comparatives, Q4 of 2021 is when we reported the catastrophic claim. I can say, as I sit here today, I'm very comfortable with the reserves that we established at the end of the year in 2021. There's been no development in regards to those reserves.
Okay. Thank you very much.
Thank you. We will turn the call back over to management.
Thank you for joining us today. We are pleased with the outcome of 2022. We look forward to continued success in 2023. Happy Mardi Gras.
This does conclude today's conference call. You may now disconnect.