Employers - Q2 2023

Transcript

Operator (participant)

Hello, welcome to the Employers Holdings, Inc. Second Quarter 2023 Earnings Conference Call and Webcast. If anyone should require operator assistance, please press star zero on your telephone keypad. A question-and-answer session will follow the formal presentation. You may press star one at any time to be placed in the question queue. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to your host, Lori Brown, Executive Vice President, COO, General Counsel, and Secretary. Please go ahead, Lori.

Lori Brown (EVP, COO, General Counsel and Secretary)

Thank you, Kevin. Good morning, welcome everyone to the second quarter 2023 earnings call for Employers. Today's call is being recorded and webcast from the investor section of our website, where a replay will be available following the call. Presenting today on the call will be Kathy Antonello, our Chief Executive Officer, and Mike Paquette, our Chief Financial Officer. Statements made during this conference call that are not based on historical facts are considered forward-looking statements. These statements are made in reliance on the safe harbor provision of the Private Securities Litigation Reform Act of 1995. Although we believe the expectations expressed in our forward-looking statements are reasonable, risks and uncertainties could cause actual results to be materially different from our expectations, including the risks set forth in our filings with the Securities and Exchange Commission.

All remarks made during the call are current only at the time of the call and will not be updated to reflect subsequent developments. The company also uses its website as a means of disclosing material non-public information and for complying with disclosure obligations under SEC's Regulation FD. Such disclosures will be included in the Investors section of the company's website. Accordingly, investors should monitor that portion of the company's website in addition to following the company's press releases, SEC filings, public conference calls, and webcasts. In our earnings press release and in our remarks or responses to questions, we may use non-GAAP financial metrics. Reconciliations of these non-GAAP metrics to our GAAP results are included in our financial supplement as an attachment to our earnings press release, our investor presentation, and any other materials available in the Investors section on our website.

Now I'll turn the call over to Kathy.

Kathy Antonello (CEO)

Thank you, Lori. Good morning to everyone, and thanks for joining us today. To start this morning, I'll provide some highlights of our second quarter 2023 financial results, and then I'll hand it over to Mike for further details on our financials. Prior to Q&A, I'll touch on some of our recent accomplishments that I'm particularly proud of. Our second quarter results were excellent. Significant premium growth, strong net investment income, and net investment gains drove a 59% increase in revenue year-over-year. Our net written and earned premiums were up 10% and 7%, respectively. Wage increases, a strong labor market, our thoughtful appetite expansion program, and our new sales and underwriting operating model each contributed to this growth.

As a result of these efforts, we ended the quarter with yet another record number of policies in force, and just last week, we celebrated achieving over 125,000 policies in force. Our net investment income was up 34%. The sharp increase was primarily due to higher market interest rates impacting bond yields and higher invested balances of fixed maturity securities. We earned $27 million of net investment income during the quarter, an amount highly consistent with that of the last quarter, with each being meaningfully higher than any other quarter in our history as a publicly traded company. Our income statement further benefited from $11 million of net investment gains, a welcome swing from the $50 million in losses we experienced a year ago.

From an underwriting standpoint, our mid-year full reserve study led to the recognition of $20 million of net favorable prior year loss reserve development from our voluntary business. That action, coupled with our continual focus on commissions and other underwriting expenses, yielded a consolidated combined ratio of 92%, which is a terrific result. Lastly, we recently terminated the lease associated with our former corporate headquarters in Reno, Nevada, which Mike will speak to in more detail. This action will serve to continue our meaningful reduction in underwriting expenses. With that, I'll now turn the call over to Mike, and I'll return to provide my closing remarks. Mike?

Mike Paquette (CFO)

Thank you, Kathy. Gross premiums written were $198 million versus $179 million a year ago, an increase of 11%. The increase was primarily due to higher new and renewal business writings and an increase in final audit premiums. Net premiums earned were $177 million versus $165 million a year ago, an increase of 7%. Our losses and loss adjustment expenses were $91 million versus $93 million a year ago. The decrease was primarily the result of net favorable prior year loss reserve development recorded in connection with our mid-year reserve study. We recognized $20 million of net favorable development during the quarter versus recognizing $10 million of net favorable development a year ago.

Commission expenses were $24 million, which were largely consistent with our commission expenses of a year ago. As a result of the increase in our earned premium, our consolidated commission ratio was 13% this period, down from 14% a year ago. Underwriting and general administrative expenses were $46 million versus $39 million a year ago, an increase of 17%. The increase was primarily due to higher payroll-related expenses, as well as higher policyholder dividends and bad debt expense. As a result of the increases in these expenses, which were partially offset by the increase in our earned premium, our consolidated underwriting and general administrative expenses ratio was 26%, up 24% from a year ago.

During the quarter, we incurred a $9 million pretax nonrecurring charge in connection with the early termination of the lease associated with our former corporate headquarters in Reno, Nevada. This previously announced action was undertaken as part of our ongoing review of our facility needs and is a tribute to the success of our work-from-home model. From a reporting segment perspective, our employer segment had pretax income of $47 million versus a loss of $12 million a year ago, and its resulting calendar year combined ratios were 87% and 92%, respectively. Our Cerity segment had a pretax loss of $2 million for the quarter versus a loss of $3 million a year ago. Turning to investments. Our net investment income was $27 million for the quarter versus $20 million a year ago, an increase of 34%.

The increase was due to higher bond yields and a higher invested asset balance as measured by amortized cost. Our fixed maturities currently have a duration of 3.9% and an average credit quality of an A. Our weighted average book yield was 4.1% at quarter end, which is up sharply from 3.3% a year ago. Our new money rate today is north of 5%. Our net income this quarter was favorably impacted by $9 million of net after-tax unrealized gains from equity, securities, and other investments, which are reflected on our income statement. Our stockholders' equity was unfavorably impacted by $15 million of net after-tax unrealized losses from fixed maturity securities, which are reflected on our balance sheet.

Since the end of the first quarter, we had repurchased $36 million of our common stock at an average price of $37.89 per share, which served to exhaust our prior stock repurchase authorization. In response, our board authorized a new stock repurchase program yesterday to allow for repurchases of up to $50 million of our common stock from July 31st of this year through December 31st of 2024. Finally, yesterday, our board of directors declared a third quarter 2023 regular quarterly dividend of $0.28 per share. The dividend is payable on August 23rd to stockholders of record on August 9. With that, I'll turn the call back to Kathy.

Kathy Antonello (CEO)

Thank you, Mike. I'm pleased to say that with our current levels of written premium, our focus on expense management, and our prudent capital management, we've significantly improved our key operating metrics in recent quarters. Today, our premium-to-surplus ratio is 80% and climbing, up from just 55% when I took the helm in early 2021. Our consolidated underwriting and general and administrative expense ratio has been at a steady 26% or below, down from 30%. During my tenure as CEO, we've also lowered our current accident year loss and LAE ratio by 1 percentage point. In closing, as a unique specialist in small business workers' compensation, we've never been better positioned to further benefit from the favorable trends and opportunities that we're seeing, and we remain highly confident in our continued success. With that, operator, we will now take questions.

Operator (participant)

Certainly. We'll now be conducting a question-and-answer session. If you'd like to be placed in the question queue, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing star one. One moment, please, while we poll for questions. Our first question today is coming from Mark Hughes from Truist Securities. Your line is now live.

Mark Hughes (Equity Analyst)

Yeah, thank you. Good morning. Kathy, anything new or interesting when you looked at the did the midyear study? You obviously had a nice reserve gain. Anything you noticed about how losses are developing?

Kathy Antonello (CEO)

Yeah. Hi, Mark, thank you for the question. In terms of the favorable prior year loss development that we recognized this quarter, most of that development arose from accident years 2019 and prior. You know, we have a very conservative reserving philosophy, and our current provision does recognize the possibility of an increase in the implicit inflation that's built into our triangles. We've continued to hold that explicit inflation provision. We look at several scenarios and have reflected that in our booked reserves for over a year now. We complete another full loss reserve study at year-end. You know, we'll be taking a look then. Seeing how the losses emerge over the second half of the year.

Mark Hughes (Equity Analyst)

Anything on the economic front? I think your audit premiums continue to be pretty good. Are you seeing any sort of changes in payroll, any midterm adjustments, anything like that, that might bear on the economic health as we sit here today?

Kathy Antonello (CEO)

Yeah. You know, our audit premium pickup continues to be really healthy. We kept our audit accrual flat this quarter at around $39 million. We had almost $8 million in audit pickup, so that was really strong for the quarter, and we're continuing to see that into July of this year. We also recognized about $12 million in endorsements and another about $1.5 million in non-compliance premium. We're continuing to see some strong wage increases come through as a result of employment levels and especially in the leisure and hospitality industry. We do think we will continue to see these strong tailwinds in the future. The unemployment rate is, you know, hovering at about 3.6%, that's really positive for workers' compensation.

Yeah, I mean, I'm feeling pretty good about the next few quarters when it comes to the potential for audit pickup.

Mark Hughes (Equity Analyst)

Any observations on the competitive environment?

Kathy Antonello (CEO)

Well, in terms of pricing, the environment hasn't changed too terribly much. For the business sectors and the premium sizes that we write, I continue to characterize the environment as competitive and, especially for the smallest policy sizes. We are having more success binding policies that are slightly larger than our average policy size, which is still around $5,200. We're attributing that success to our new sales and underwriting operating model. The rate decreases that we're seeing, tend to be more moderate for the policy sizes over 10,000 right now. When we looked at our renewal book, we saw an average rate decrease of slightly below 2%. That was made up of a premium increase of about 7% and exposure of about 9%.

Mark Hughes (Equity Analyst)

Thank you for that. Then, on the expense front, any particular initiatives to bring that down? How should that trend over the next few quarters?

Kathy Antonello (CEO)

Yeah, we continue to work to bring our expense ratio down. I do feel like there's more we can do. You know, we announced this, this month, the reevaluation of our real estate footprint and the exit of our Reno, Nevada, headquarters. You know, that will be an improvement in our ratio going forward. At this point, there are a couple of things that need to happen, and that we're focused on, and that's increasing our premium without sacrificing profitability. Then, a lot of digital initiatives that we're working on that are going to allow for automation and scalability. Those two things together are what's going to drive our expense ratio improvement going forward.

Mark Hughes (Equity Analyst)

Thank you.

Kathy Antonello (CEO)

Mm-hmm.

Operator (participant)

Thank you. Next question today is coming from Matthew Carletti from JMP Securities. Your line is now live.

Speaker 6

Yes. Hi, good morning. This is Carl calling in for Matt. My first question is really just regarding the Cerity top line. Can you comment on the growth?

Kathy Antonello (CEO)

Yeah, sure. Cerity's chugging along, and at the end of the second quarter, premium had increased about 166% year-over-year, was up to $7.2 million. We are attributing that growth to our appetite expansion effort and Cerity's enhanced backing capabilities. They continue to generate increasing policy flows, and we're seeing significant interest from companies that are looking to collaborate with Cerity, like our recent Simply Business partnership that we announced.

Speaker 6

Perfect. To just go back briefly into the prior period development, I know it's multiple years, but is there a certain claim aspect that may be driving it? Is it a medical drive, or is it a indemnity drive that you're seeing?

Kathy Antonello (CEO)

Yeah, it's mostly being driven by lower medical development that is emerging. As I mentioned earlier, it's coming from accident years, 2019 and prior, and it's pretty widespread across those accident years. In regard to the more recent accident years, we have a sort of set it and forget it philosophy for a few years because of the long-tailed nature of workers' compensation, and we like to see those losses emerge for a little bit and settle in before, before we move the more recent years. Yeah, that's high level what we're seeing, and it is mostly coming from the medical side.

Speaker 6

Perfect. Thank you. That's all for me.

Kathy Antonello (CEO)

Thank you.

Operator (participant)

Thank you. As a reminder, that's star one to be placed in the question queue. Our next question is coming from Bob Farnham from Janney. Your line is now live.

Bob Farnham (Managing Director)

Yeah. Hi there, and good morning. On the expense side, you know, with your expenses for the headquarters down, I mean, you still need to have office space. I'm just curious how much of an impact that's gonna have on the underwriting expenses going forward. You know, obviously, with the $9+ million of savings in that side, but what should we expect next, for savings going forward?

Mike Paquette (CFO)

Bob, I'll take that. The, the exit of our Reno space, all in, is going to save us about $3 million per year from here on out. However, we plan to move into much smaller, platform in Reno in probably December of this year. That amount of space will be about a tenth of what we had previously and will cost about a tenth of what we had previously. I think going forward, starting in December, the run rate would be about $2.5 million-$2.7 million of annual savings associated with that real estate swap.

Bob Farnham (Managing Director)

Okay, great, great. While you're answering questions, I have another question for you. The net investment income, kind of, as you unwind your FHLB investment strategy and with the offset, with the new money you'll still... I'm just kind of curious what investment income is gonna look like over the next six months and one year.

Mike Paquette (CFO)

Right now, we're between $26 million and $27 million. I'd like to think we can try to get close to that next quarter, knowing that we have as much as $100 million of CLOs coming off of our books, winding down that Federal Home Loan Bank trade that we had. We are, again, seeing higher yields. We're looking to see if there's a way in which we can substitute and benefit from a future plan along the lines of what we did with the CLO program. I'm hoping that we can come in, you know, at or close to between $26 million and $27 million next quarter.

It's all going to depend on timing of the reinvestment of lower-yielding securities that are coming off and how quickly we take down the remaining CLOs associated with the Federal Home Loan Bank trade. I, I wish I could give you more information, but we'd very much like to maintain where we are right now. I don't think that we'll increase our net investment income next quarter.

Bob Farnham (Managing Director)

Right. Got it. You're basically thinking they should offset each other going forward. That's what the plan is. On Cerity, I know every quarter I ask about Cerity. You know, what lessons have you learned as Cerity gets up to speed? Or thinking it another way, what would you have done differently if you were creating Cerity today?

Kathy Antonello (CEO)

You know, I think looking at Cerity, where our focus is right now is in integrating a lot of the back-end capabilities on the employer, you know, with Employers, so that we can bring that expense ratio down for Cerity over, you know, the course of the next year or so. That's where our focus is now. I think in hindsight, looking at, you know, there was a concern about channel conflict. I think in hindsight, one of the lessons learned is that it's not as prevalent as we thought it would be. We could have integrated some of these back-end capabilities sooner.

Bob Farnham (Managing Director)

Interesting. Okay. Good for that. Last question for me is, I know it may be too soon to know, but your expansion classes of business, just kind of curious how they're performing relative to expectations. Are there loss ratios different from your established book? Is the competition different? Just kind of get a feel for what those expansion lines are, how they're performing.

Kathy Antonello (CEO)

It's a great question, you know, we do look at them separately. We are not seeing those classes emerge any differently from a loss ratio standpoint. They're highly consistent with our other classes that we've been in for, you know, for quite some time. We're, you know, still, as I've mentioned earlier, attributing a lot of our growth to those expanded classes. Right now, no concerns from a loss ratio standpoint on that business.

Bob Farnham (Managing Director)

Okay. The competition is basically from the same peers for these types of risks?

Kathy Antonello (CEO)

Yeah. Largely, I would agree with that. Mm-hmm.

Bob Farnham (Managing Director)

Okay, great. Thanks for the color.

Kathy Antonello (CEO)

Sure.

Operator (participant)

Thank you. We've reached the end of our question and answer session. I'd like to turn the floor back over to Kathy for any further closing comments.

Kathy Antonello (CEO)

Okay, thank you, Kevin, thank you all for joining us this morning. We look forward to meeting with you again in October.

Operator (participant)

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.