Employers Holdings - Earnings Call - Q4 2024

Executive Summary

• Q4 delivered solid underwriting profitability ex-LPT (combined ratio 95.5%) and stable investment income, but EPS declined year over year on lower prior-year reserve releases and fewer investment gains; quarter-over-quarter underwriting improved versus Q3’s 101.2% ex-LPT combined ratio.
• Top-line trends were mixed: net premiums earned grew 1% YoY to $190.2M while total revenues fell 4% YoY to $216.6M on lower realized/unrealized gains; gross written premiums were down 1% YoY as higher new/renewal writings were offset by lower final audit premiums/endorsements.
• Management does not give formal guidance, but indicated the 2025 accident-year loss and LAE ratio will be increased given the competitive rate environment and actuarial trend selections, with continued focus on expense ratio reductions to partially offset.
• Capital returns remain a support: $17.5M returned in Q4 (buybacks and dividend), $0.30/share Q1’25 dividend declared, and $18.7M repurchase authorization remaining; AM Best upgraded insurer FSRs to A (Excellent), reinforcing balance sheet strength.
• Estimates context: S&P Global consensus for Q4’24 EPS/revenue was unavailable due to system limit; result-level surprise versus Street cannot be assessed. Management’s directional 2025 loss pick increase and investment portfolio shift toward higher-yield RMBS are the key estimate revision drivers.

What Went Well and What Went Wrong

What Went Well

• Underwriting improved sequentially: ex-LPT combined ratio fell to 95.5% from 101.2% in Q3, aided by favorable reserve development and lower expense ratio (23.2% vs. 24.6% LY).
• Investment income steady with improving book yield: Q4 NII $26.7M (+2% YoY), with CFO highlighting December repositioning into ~6% RMBS expected to uplift 2025 NII; ending weighted average book yield rose to 4.5% from 4.3%.
• Balance sheet/ratings strength: AM Best upgraded insurer FSRs to A (Excellent), citing strongest balance sheet strength and improved margins; adjusted BVPS rose 9.8% in 2024 to $50.71 including dividends.
• CEO quote: “We closed the year with the highest levels of written and earned premium, ending in-force premium and policies and net investment income in the Company’s history.”.

What Went Wrong

• YoY EPS and combined ratio deterioration: Diluted EPS fell to $1.14 from $1.77 on lower prior-year reserve releases ($9.1M vs $24.9M) and fewer investment gains; GAAP combined ratio worsened to 95.5% vs 88.1%.
• Growth headwinds in audits/endorsements: Gross written premiums declined 1% as higher new/renewal writings were offset by lower final audit premiums and endorsements; management also noted decelerating wage growth reduced audit pickups.
• Industry/loss pick pressure: Management plans to increase the 2025 accident-year loss and LAE ratio (directional headwind), reflecting competitive pricing and higher actuarial trends, only partially offset by expense ratio improvements.

Transcript

Operator (participant)

Good day, and thank you for standing by. Welcome to the Fourth Quarter 2024 Employers Holdings Earnings Conference Call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there'll be a question-and-answer session. To ask a question during the session, you need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised today's conference is being recorded. I will now like to hand the conference over to your speaker today, Lori Brown. Please go ahead.

Lori Brown (EVP, Chief Legal Officer and General Counsel)

Thank you, Kevin. Good morning and welcome, everyone, to the Fourth Quarter 2024 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. 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 the SEC's Regulation FD. Such disclosures will be included in the Investor Section of our website. Accordingly, investors should monitor that portion of our website in addition to following our 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 measures. Reconciliations of these non-GAAP measures 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 Investor Section on our website. Now I'll turn the call over to our Chief Executive Officer, Kathy Antonello.

Kathy Antonello (CEO)

Thank you, Lori. Good morning, everyone, and thank you for joining us today. On the call with me is Mike Paquette, our retiring Chief Financial Officer, and I would like to welcome Mike Pedraja, our incoming Chief Financial Officer. During the call, we will follow our typical agenda, where I will deliver my opening comments and then hand it over to Mike to provide the details on our financials. I'll close with a few additional thoughts, and then we'll open it up for questions, comments, and discussion. The fourth quarter contributed nicely to a very successful year for Employers. We finished the year with the highest levels of written and earned premium, ending in force premium and policies, and net investment income in our history. We achieved solid growth in new and renewal premium throughout 2024, which was offset by lower final audit premiums and endorsements.

Our gross written premiums, excluding both final audit premiums and the change in audit accruals, increased 3% in the fourth quarter and 6% for the full year, with all major distribution channels contributing to the growth. Our investment performance was also a boost to our revenue throughout 2024, with strong net investment income and net unrealized gains from our common stocks and other investments. From an underwriting standpoint, our year-end full reserve study led to the recognition of $9 million of net favorable prior year loss reserve development from our voluntary business. That action, coupled with meaningfully lower underwriting expenses, yielded a combined ratio of 95.5%, excluding the LPT, for the fourth quarter. For the full year, we had a combined ratio of 98.6%, excluding the LPT, which represents our 10th straight year of achieving an underwriting profit in our long-tailed line of business.

I'm particularly pleased with the reductions we achieved throughout the year in our underwriting and general and administrative expense ratio. That ratio for the fourth quarter was 23.2% versus 24.6% a year ago, and was 23.5% for the full year versus 24.9% a year ago. The decreases were primarily the result of cost savings achieved through the Cerity integration plan that we executed in the fourth quarter of 2023, and we remain laser-focused on achieving further reductions to that ratio going forward. As you are aware, we do not provide specific guidance, but in light of the ongoing competitive rate environment for workers' compensation, we currently anticipate increasing our 2025 accident year loss and LAE ratio for voluntary business. The increase is consistent with both our prudent reserving philosophy and the current trend in the workers' compensation industry.

We expect this to mitigate the impact of our continued focus on reducing the expense ratio. Finally, I want to thank our talented and dedicated employees for all they achieved in 2024. They are our most valued asset and have successfully positioned the company for even better results in the coming years. With that, Mike will now provide a deeper dive into our 2024 financial results, and I'll return to provide my closing remarks. Mike.

Mike Paquette (CFO)

Thank you, Kathy. Gross premiums written were $176 million for the fourth quarter and $776 million for the full year, with both being highly consistent with the premium levels that we wrote a year ago. In each period, higher new and renewal premiums were offset by lower final audit premiums and endorsements. Net premiums earned were $190 million for the quarter and $750 million for the year, representing increases of 1% and 4%, respectively. Our fourth quarter and full year loss and LAE ratios, excluding the impact of the LPT, were 59.5% and 61.6%, respectively, versus 50.2% and 57.2%, respectively, a year ago. The increases in each period were the result of lower favorable prior year loss reserve development and a slightly higher current accident year loss and LAE estimate.

We recognize $9 million and $18 million of favorable prior year loss reserve development during the fourth quarter and full year on our voluntary business, respectively, versus $25 million and $45 million, respectively, a year ago. Throughout 2024, we continued to settle claims on an accelerated basis to both mitigate our overall tail risk and generate additional reserve salvage. As mentioned in our earnings release, within the 2024 periods presented, we refined our presentation of certain expenses associated with our involuntary premium. This revision, which was immaterial, had the effect of reducing both our fourth quarter and full year 2024 commission expense ratios by approximately 0.3 percentage points and increasing our respective underwriting and general administrative expense ratios by the same amount. This revision had no effect on our total underwriting expenses or net income.

Our fourth quarter and full year commission expense ratios were 12.8% and 13.5%, respectively, versus 14% and 13.9%, respectively, a year ago. The decrease in our commission expense ratio for the quarter was primarily due to a non-recurring adjustment to our commission expenses, which served to reduce this ratio by approximately 0.6 percentage points, as well as the previously mentioned involuntary premium refinement. Our commission expense ratio for the full year was highly consistent with that a year ago when considering the involuntary premium refinement. Our fourth quarter and full year underwriting and general administrative expense ratios were 23.2% and 23.5%, respectively, versus 24.6% and 24.9%, respectively, a year ago.

The decreases in each period were primarily related to lower professional fees and information technology expenses resulting from our Cerity integration plan that we executed in the fourth quarter of last year, partially offset by higher bad debt expense and the involuntary premium refinement. Net investment income for the fourth quarter was $27 million versus $26 million a year ago. The increase was due to higher bond yields, partially offset by a lower average investment balance as measured by amortized cost. Our net investment income for the full year was $107 million, which was highly consistent with that of a year ago. Note that the net investment income in 2023 benefited from our former Federal Home Loan Bank leverage investment strategy, which we unwound in the fourth quarter of last year. Our fixed maturities currently have a duration of 4.5 and an average credit quality of A+.

Our weighted average ending book yield was 4.5%, which is up from 4.3% a year ago. Net realized and unrealized losses on investments through the income statement were less than $1 million for the quarter versus net gains of $12 million a year ago. For the full year, our net realized and unrealized gains were $24 million versus $23 million experienced a year ago. Our interest and financing expenses were both down sharply in the fourth quarter and the full year versus those of a year ago. The decreases in each period were due to the repayment of our Federal Home Loan Bank advances during the fourth quarter of 2023, as previously mentioned. Income tax for the quarter was $6 million at an 18% effective tax rate versus $13 million, or a 22% effective tax rate a year ago.

The effective tax rates in each period reflect applicable income tax benefits and exclusions associated with tax-advantaged investment income, LPT adjustments, pre-privatization loss and LAE reserve adjustments, and deferred gain amortization. Our income tax expense for the full year was $28 million, a 19% effective tax rate, versus $30 million, or an effective tax rate of 20% a year ago. Our book value per share, including the deferred gain of $47.35, increased by 10.6% during 2024, and our adjusted book value per share of $50.71, increased by 9.8% during 2024, each including dividends declared. These measures were favorably impacted by $24 million of net after-tax unrealized gains arising from our equity securities and other investments.

During the fourth quarter, we repurchased $10 million of our common stock at an average price of $51.20 per share, and since year-end, we've bought a further $11 million of our stock at an average price of $49.38 per share. Our remaining share repurchase authorization currently stands at $18.7 million. Earlier this week, our board of directors declared a first quarter 2025 regular quarterly dividend of $0.30 per share. This dividend is payable on March 19th to shareholders of record as of March 5th. And now I'll turn the call back to Kathy.

Kathy Antonello (CEO)

Thank you, Mike. We met our capital management objectives in 2024 by returning $72 million to our stockholders through share repurchases and regular quarterly dividends. Our success in opportunistically repurchasing our shares throughout 2024 allowed us to meet these objectives in the best possible way, thereby improving several of our current and future key metrics without the need to declare any special dividends. Beyond our financial results, we recently announced that AM Best upgraded the financial strength ratings of each of our insurance companies to A. This upgrade reinforces our ability to provide reliable, trusted, high-quality coverage to small businesses across the nation.

Looking ahead to the remainder of 2025, we will continue to vigorously pursue profitable growth opportunities by focusing on disciplined underwriting and claims management, cultivating and maintaining strong long-term relationships with both traditional and specialty insurance agencies, thoughtfully expanding our appetite to new risk segments, further developing important alternative distribution channels, and offering insurance solutions directly to customers. We are confident that our strong capital position will support both our growth and innovation initiatives, and we look forward to the year ahead. And with that, Kevin, we will now take questions.

Operator (participant)

Thank you, ladies and gentlemen. If you have a question or a comment at this time, please press star one one on your telephone. If your question has been answered and you wish to move yourself from the queue, please press star one one again. We'll pause for a moment while we compile our Q&A roster. Our first question comes from Mark Hughes with Truist. Your line is open.

Mark Hughes (Analyst)

Yeah, thank you. Good morning.

Kathy Antonello (CEO)

Good morning, Mark.

Mark Hughes (Analyst)

Kathy, can you give a sense of the magnitude of the change in the loss pick for a current accident year? And then you've been holding steady at 64 for a while, and a lot of the same dynamics seemingly have been at play: the lower loss costs, the medical inflation, etc. Why now? What do you see in the marketplace that motivates you to increase the loss pick?

Kathy Antonello (CEO)

Yeah. So, Mark, our current accident year loss and LAE ratio is determined annually by our actuaries, and they consider the pricing environment of each of our states and the growth prospects that we have in those states. They also look at the trends and frequency and severity and any initiatives that we might be implementing within the year that we feel could impact our results. I would say that our philosophy or our approach has not changed. We generally like to choose a ratio at the beginning of the year, and that's based on the current environment, and we like to leave it there until there's a compelling reason to change it. As you said, our prudent reserving philosophy and the continued competitive rate environment led us to select a 2024 accident year loss and LAE ratio of 64%.

That was slightly higher than what we chose for 2023, which was 63.3%, and that has been consistent for a while. We had the same loss pick in 2022. When I mentioned that we do expect to increase our accident year loss and LAE ratio in 2025, the primary drivers there are some higher actuarial trend selections and, as I mentioned, the ongoing competitive rate environment. What I would say is we do see also improvement in our expense ratio, but that will be mitigated to some extent by the change in the loss and LAE ratio that we're expecting. I'd just also add that the change that we are expecting will be directionally consistent with the work comp industry, which has been increasing the current accident year loss pick for several years, and we've been coming in below that.

Mark Hughes (Analyst)

Understood. Is it safe to think the 70 basis points uptick in 2024? Is that a good starting point to think about 2025?

Kathy Antonello (CEO)

Because we don't give guidance, I can't give you any indication at this point as to how high it will be, except for the fact that we do expect our decrease in the expense ratio to be an offset and a mitigating impact.

Mark Hughes (Analyst)

Will it fully offset, do you think, or just partially offset or no specifics at this point?

Kathy Antonello (CEO)

No specifics at this point, but we expect the offset to be meaningful.

Mark Hughes (Analyst)

Yeah, and then you said the higher actuarial trend selection. That phrase carries a lot of weight. Can you maybe say what trends are driving that? Frequency, severity, medical mix?

Kathy Antonello (CEO)

Yeah. Yeah. So when we look at frequency, and we always do that based on our on-level premium, our lifetime claim frequency has continued to trend downward over the last several years. We do not expect that trend to change. When we adjust for the change in wages, our overall claim severity values have really held fairly steady in the most recent years, and they remain, generally speaking, below the pre-pandemic levels, and that's been driven by lower medical severity. Indemnity severity, I would say, is trending about the same as wage inflation. And up to this point, medical inflation and the economic data has remained relatively mild, especially when you look at it in relation to other sectors like energy or housing or food. So that's good news. So the pressure is really just coming from a little bit more conservatism and what we're seeing broadly in the industry.

I will add that the accident year loss and LAE ratio pick for 2023 that we saw coming out of last year's State of the Line was a 69%. I'm not suggesting that that's what we are selecting in any way, shape, or form, but I'm just saying that we have been well below the industry for many, many years.

Mark Hughes (Analyst)

The wage inflation that you might have seen in earlier years, I think, ended up being beneficial since medical inflation was benign. It was essentially a kind of a, I won't say hidden, but an extra amount of premium that might have offset any kind of inflation in any trends around severity. I guess maybe the fact that you're not seeing as much wage inflation, does that then put a little more pressure on the current accident year? Does that make sense, or is it off base?

Kathy Antonello (CEO)

No. I mean, that does make sense. I'll tell you, when I look at the BLS numbers, as of December, the annual change in employment and hourly wages was 5.3% for all sectors and 5.5% for leisure and hospitality, which is where we have a big concentration. Those numbers compared to 6.1% and 8.1% a year ago. So it's that reduction in the acceleration of employment and wages that's impacting our book of business, and it's impacting it by decreasing the audit pickups and the audit accrual that we have, and that's putting a bit of pressure on our net written premium. So you're spot on that some of the. It's really the reduction in the acceleration of employment and wages that we're seeing that's putting pressure on the net written premium. There's still very strong increases, but not to the extent that we saw coming out of COVID.

Mark Hughes (Analyst)

Yeah. And then maybe just one final question. You've been talking about expansion in your appetite. That's helped drive the top line. How should we think about that going into 2025?

Kathy Antonello (CEO)

Yeah. We are going to continue to expand our appetite, and we're actually accelerating our effort there because it has been a very successful program for us. That segment of business is operating at a loss and LAE ratio that's very similar, if not slightly better, than our traditional target classes. It's really contributing to our overall growth. In the fourth quarter, just to give you some numbers, the appetite expansion class has generated $35 million, or 20% of our new and renewal premium. The other area that we're focused on is what I've mentioned in the past, is this continued shift towards API utilization for submissions, quotes, and binds. That's coming through digital agents and digital marketplaces. So we're focusing our efforts on increasing those digital partnerships. So we'll see quite a bit of that going on in 2025 too.

Mark Hughes (Analyst)

Thank you very much.

Kathy Antonello (CEO)

Thank you, Mark.

Operator (participant)

One moment for our next question. Our next question comes from Bob Farnam with Janney Montgomery Scott. Your line is open.

Bob Farnam (Managing Director and Equity Research Analyst)

Yes. Hi there. Good morning. Mike, a question for you. It looks like you maybe transitioned a bunch of your investments into mortgage-backed securities during the quarter, and just kind of wanted to know what your thought process was there.

Mike Paquette (CFO)

Sure. What you'll see when we file our 10-K is that we increased our letter of credit issued by about $100 million through the Federal Home Loan Bank, and we used that to satisfy deposit requirements in California, which permitted us to liberate some of the lower-yielding assets that we had on deposit with California, and we sold those in the quarter and recognized a small realized loss on those of just over $2 million, but what that allowed us to do is to go long with residential mortgage-backed securities that were yielding near 6%, a pretty big increase over what we were getting with these deposits. With the Federal Home Loan Bank, we only have to pay a 15 basis point letter of credit fee, so that will have a little bit of an uplift in our net investment income for next year.

Those trades were accomplished in December, so you're not seeing that in the net investment income that we printed for the quarter and the year.

Bob Farnam (Managing Director and Equity Research Analyst)

So it sounds like the differential between kind of your book yield and your new money yield has expanded, or it should expand next year. Is that right? What do you think about that?

Mike Paquette (CFO)

Well, we show that the ending, the 4.5 is the ending as of December 31st, but some of that increase from the prior period is a result of that trade.

Bob Farnam (Managing Director and Equity Research Analyst)

Okay. All right. And my second question, I'm not sure if you're going to have the data available, but I wanted to talk about kind of the increase in the higher hazard groups, the kind of percentage of in-force. Now, for years, that was kind of low single digits. I think in 2022, it went to the higher single digits. In 2023, it may have been in the mid-teens. And I just kind of want to have an idea of where you see that maybe in 2024. I know that probably will come in the 10-K, but I didn't know if you wanted to talk about that right now. And my feeling is, what are the claims trends for the higher hazard business? Is it a longer tail? Is it - just kind of maybe describe what types of risks you're taking on the books there and how that might impact profitability?

Kathy Antonello (CEO)

Yeah. So our shift into some of the higher hazard groups has been, that is all tied, well, not all, but some of that has been tied to the appetite expansion effort. That's been a very thoughtful expansion, and we have intentionally moved into some of those higher hazard groups. While the class codes that we are writing may be in the higher hazard groups, we're selecting risks that are in the lower hazard range of those hazard groups. Another cause of that shift was from a change that NCCI made about three or four years ago now that remapped hazard groups. So it's the combination of those two things that's caused that shift over time.

I can't tell you exactly what numbers, where we'll land on the percentage in all of the hazard groups or where we're ultimately headed, except that we are being very cautious when we expand into those, and we're looking to cherry-pick the best risks and not change who we are as a carrier in terms of our risk appetite.

Bob Farnam (Managing Director and Equity Research Analyst)

Yeah, and that was kind of just the question because I know you've always been known as kind of the low-hazard workers' comp writer. So as you continue to write more in the higher hazard groups, it might change, you thought it might change your actual kind of company identity there, but it doesn't sound like it's still a huge portion of your overall target profile.

Kathy Antonello (CEO)

No. Not a huge portion.

Mike Paquette (CFO)

So Bob, what I can add is in the last couple of quarters, we've been hovering between kind of 91% to 92% in categories A through E, and that's been pretty consistent for the last couple of quarters.

Bob Farnam (Managing Director and Equity Research Analyst)

Okay. All right. Thanks. That's good color. One last question for you. Just the $9 million or so of favorable development, was that related to any particular accident years, or is it old stuff, or is it new stuff, or what?

Mike Paquette (CFO)

It was predominantly in accident years 2020 and prior, and you'll see that when the 10-K comes out and we file our statutory. So you will see a little bit of strengthening in 2023 and 2021, but we'll address that in the K. And it's some large losses that we experienced in those years, but you'll see it all very soon, and happy to have a conversation with you once that's published.

Bob Farnam (Managing Director and Equity Research Analyst)

Okay. Very good. Thanks for the answers.

Kathy Antonello (CEO)

Thank you.

Operator (participant)

Again, ladies and gentlemen, if you have a question or a comment at this time, please press star one one when on your telephone. I'm not showing any further questions at this time. I'd like to turn the call back over to Kathy Antonello for any closing remarks.

Kathy Antonello (CEO)

Okay. Thank you, Kevin. And thank you all for joining us this morning. I look forward to meeting with you again in April.

Operator (participant)

Thank you, ladies and gentlemen. This does conclude today's presentation.