Employers Holdings Inc

Ladies and gentlemen, thank you for standing by, and welcome to the Q4 2020 Employers Holdings Incorporated Earnings Conference Call. At this time, all participants are in the listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during this session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any assistance, please press star 0. Thank you. And without further ado, I'd like to hand the conference over to your host today, Ms. Lori Brown. Thank you. Please go ahead.

Thank you, Operator. Good morning and welcome, everyone, to the 2020 fourth quarter and year-end earnings call for employers. Today's call is being recorded in 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 Actuary, Mike Paquette, our Chief Financial Officer, Steve Festa, our Chief Operating Officer, and Doug Dirks, our Chief Executive 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 investor 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 investor section of our website. Now I will turn the call over to Kathy. Thank you.

Thank you, Lori, and welcome, everyone. It's a pleasure to be with you today. 2020 was an exceptional year for employers in that we achieved record levels for the number of policies in force, stockholders' equity, statutory surplus, and book value per share. We also generated more submissions, quotes, and binds than at any time in the history of the company. We accomplished these speeds during a pandemic while working from home and supporting agents, small businesses, and their injured workers. Our fourth quarter and full year results were very strong, especially considering the challenging macroeconomic environment. Our record number of policies in force at year end demonstrates that our policyholders are enduring the pandemic with reduced payrolls, which directly impact workers' compensation premium. We remain optimistic that as more vaccines are delivered and state restrictions are lifted, we will be able to begin replacing the premium we lost in 2020. In support of this anticipated recovery, we have continued to pursue and advance the significant investments we have made in delivering a superior customer experience for our agents and insureds. As expected, the challenging pandemic environment confirmed that ease of doing business is the critical element in producing and servicing small account business. Prior to the COVID-19 pandemic, we experienced strong new business opportunities, as evidenced by record levels of submissions, quotes, and binds. But the levels began to decrease as the pandemic progressed, particularly in certain states. Later in the year, as many businesses began to reopen and resume more fulsome operations, we began to experience year-over-year increases in new business submissions and new policies bound in nearly all of the states in which we operate, with the notable exception of California. Unfortunately, even with the increase in new business policies that we experienced outside of California in 2020, our new business premium has fallen, driven primarily by significant declines in payrolls and declines in the number of policies with annual premiums greater than $25,000. In regard to losses, we experienced a significant decline in the frequency of compensable indemnity claims in 2020, despite government mandates and legislative changes related to the COVID-19 pandemic, including the presumption of COVID-19 compensability for all or certain occupational groups in many states. We experienced this decline in nearly all states, including California. As a result, we reduced our current accident year loss in LAE ratio to 64.3% during the fourth quarter from the 65.5% maintained throughout the prior 21 months. We also reduced our prior accident year loss in LAE reserves by nearly $40 million during the quarter, which related to nearly every prior accident year. Our underwriting expenses for the quarter and the year were each down, and we have recently taken actions that will further reduce our underwriting expenses in 2021. Our plan is to achieve our targeted expense ratios as quickly as possible, despite the meaningful reductions in earned premium we're currently experiencing. My primary goal as the new CEO will be to fully capitalize on the post-COVID economic lift on the horizon while continuing to maintain discipline, both in terms of our underwriting and our underwriting expenses. With that, Mike will now provide a further discussion of our financial results. Steve will then discuss some of the current trends, and then Doug will provide his closing remarks. Mike?

Thank you, Kathy. For the year, we delivered a 7.6% return on adjusted equity and increased our book value per share, including the deferred gain, by more than 15%. These results are impressive in just about any operating environment and particularly during a pandemic. Our fourth quarter results contributed nicely to these financial successes in 2020. Our in-force policy count ended the year at an all-time high, We experienced reductions in our current accident year loss in LAE and underwriting expense ratios, and we recognized a significant amount of favorable prior year loss reserve development, all despite the significant declines we experienced in our premiums written and earned. Our net premiums earned were $152 million, a decrease of 11% year over year. Since premiums earned are primarily a function of the amount and the timing of the associated premiums written, I'll let Steve describe that increase in his remarks. Our loss and loss adjustment expenses were $48 million, a decrease of 51% year over year due to the current and prior year favorable loss reserve development that Kathy spoke to previously, as well as the decrease in earned premiums. Commission expenses were $19 million for the quarter, a decrease of 7% year over year. The decrease was largely the result of a decrease in earned premium, partially offset by a higher concentration of alternative distribution business, which is subject to a higher commission rate. Underwriting and general administrative expenses were $43 million for the quarter, a decrease of 15% year over year. The decrease was largely the result of reductions in employee benefit costs, professional fees, and travel expenses. From a segment reporting perspective, our employer segment had underwriting income of $45 million for the quarter versus $8 million a year ago, and its combined ratios were 70% and 96% respectively. Our Serity segment had an underwriting loss of $5 million for the quarter versus consistent with its underwriting loss of a year ago. Turning to investments, net investment income was $18 million for the quarter, down 20%. The decrease was primarily due to lower bond yields. At quarter end, our fixed maturities had a duration of 3.2 and an average credit quality of A+, and our equity securities and other investments represented 8% of the total investment portfolio. We were favorably impacted by $5 million of after-tax unrealized gains from fixed maturity securities, which are reflected on our balance sheet, and $15 million of net after-tax unrealized gains from equity securities and other investments, which are reflected on our income statement. These net unrealized investment gains contributed to our nearly 6% increase in our book value per share, including the deferred gain this quarter. During the quarter, we repurchased $17 million of our common stock at an average price of $32.50 per share, and we have repurchased an additional $10 million of our common stock thus far in 2021 at an average price per share of $32.19. Our remaining share repurchase authority currently stands at $19 million. Yesterday, the Board of Directors declared a first quarter 2021 dividend of $0.25 per share which is payable on March 17th to stockholders of record as of March 3rd. And now I'll turn the call over to Steve.

Thank you, Mike, and good morning. Net written premiums for the year of $575 million were down $117 million, or 16.9% from the prior year. The primary drivers for this decrease are new business written and final audit pickup. With respect to the decrease in final audit pickup, we continue to see the impact of declining payrolls due to the pandemic and resulting shutdowns as discussed on previous calls. New business premium decreased 33.3% despite increases in submissions, quotes, and bound policies. Submissions were up 3.7% year-over-year, Quotes were up 7.4%, and bound policies were at 0.2% growth. On a year-over-year basis, our in-force policy count increased by 4.8%. A recent workers' compensation industry report that was released with information from the Valen Data Consortium reflected decreased new business opportunity trends. New business submissions were down 10% from the comparable periods in 2019 and were down as much as 23% in some industries. The authors of the report suggested that the owners of these businesses were likely preoccupied with other matters and did not take time to shop for insurance. Despite our increase in submissions over the prior year, This is in line with some of our observations and feedback from our distribution partners relative to the pandemic's impact starting in the second quarter of 2020. We continue to experience high unit retention rates. However, renewal premium for the year decreased 3.6%. The decrease in renewal premium was driven primarily by decreased payroll related to the pandemic. and continued declining rates in the majority of states in which we do business. In addition, we non-renewed some middle market accounts that underperformed our profitability expectations. I will be retiring in March, so this will be my last earnings call. I would like to thank you all for your support throughout the years, and I am proud to have played a role in the success of employers during my tenure. With that, I'll turn the call over to Doug.

Thank you, Steve. Good morning, everyone. It's been my pleasure to lead employers for over 27 years, and I believe that the company is in the strongest financial position in its 108-year history. I will soon be handing control of the company over to Kathy. whose background and experience are ideal to move employers forward into the future. I'm very excited for Kathy and her team and for the future of the company. In closing, I want to express my gratitude to all of you for giving me the opportunity to be the CEO of this remarkable organization. I'm very proud of what we have achieved, and it's been a privilege to serve you. And with that, operator, we'll turn the call over to questions.

As a reminder, ladies and gentlemen, if you have a question, please press star then one on your telephone keypad. Again, that's star one on your telephone keypad. If your question has been answered and you wish to remove yourself from the queue, please press the pound key. Please stand by while we check for questions. Our first question is from Mark Hughes with Truist. Your line is open.

Yeah, thank you. Good morning. Good morning. Doug and Steve, hate to see you go. It's too bad for us, but congratulations. And, Kathy, welcome. Did have a few questions. Kathy, the frequency and severity, when you think about 2020 and just how unusual this is, period was, how do you get a good grip on what 2021 is going to look like?

Yeah, good morning, Mark. So we saw frequency declines in 2020. across the board, whether you measure it in terms of just purely the number of claims that came in the door or as a percentage of payroll or premium. They were all down double digits. And then from a severity standpoint, the severity had a very what I would call moderate increase. And so you're absolutely correct. It is very difficult to project future frequency declines or changes in severity in an extremely uncertain environment such as this. I can tell you we look at it on a monthly basis, and we're tracking it very closely. I would not expect these frequency trends to continue into the future. It's a different environment, and I would expect a lot of this is coming, of course, from the impact of the pandemic. So it does make it difficult to project it forward, but we are watching it very closely.

Understood. Steve, submissions, I think you said, were up 3.7% for the year, I assume. Can you give us a sense of the fourth quarter and also any early thoughts about how Q1 is shaping up, January renewals, just any sense of that would be great.

Sure. In the fourth quarter, the submissions were up. for the quarter as well. But, and, you know, there's still the shutdowns, though, that we're seeing in the larger states that we do business in, such as California, Illinois, New York in particular. And so the decline in bound policies occurred in the fourth quarter because because of the shutdowns that we're seeing. We saw that continuing into January as well. It's too early to forecast what may happen now, although a lot of those states that I referenced are starting to reopen, and we're optimistic about those reopenings and their impact on us.

How about the competitive situation in California? I know you were early and active in adjusting your pricing for what you thought was the lost trend. How do you sit now relative to your competition?

Yeah, Mark, so California is about 45% of our book currently, and we have been watching California very closely. And we're satisfied that some of the concerns that were raised back in July of 2019 that led to our rate increases at that point in time aren't materializing to the same extent that we thought at that point in time. Our current indications are more favorable, and so that has led us to reduce rates in California, effective February 1st, and we've also lowered our minimum premiums in California, which could be, you know, impactful for some of the small businesses as they open up.

Understood. The Mike, the premium in force, I think you had suggested it would be in the K. Are you able to share it in this venue on the call?

Sure. Just give me one second, Mark. The in-force premium for the year at December 31st was $578 million.

Okay. Thank you very much. And, again, congratulations to everybody. Appreciate it.

Thanks, Mark.

Again, ladies and gentlemen, if you have a question at this time, please press star, then the number one on your telephone. We have a follow-up from Mr. Mark Hughes with Truist. Your line is open.

All right. Very good. Kathy, you had mentioned expenses, making sure that they were hitting the targets. Can you share what the expense ratio target might be for the company?

So, Mark, I'll take that. So, you know, as you know, with the reduction in premium this year, our expense ratio has grown. You can see by the progress that we made, and particularly in the fourth quarter, not only were the expenses down year over year significantly, but also our expense ratio in the quarter increased. was down as well. So, you know, we've been chasing the decrease in premium, which, you know, has been abrupt largely because of reductions in audit premium, and we had told you all along that we'd reduce our expenses accordingly, and it's now starting to catch up. So we're going to take those expense savings into 2021 with the hope that we can offset that premium. So right now, initially, our target savings is to kind of get back to an expense ratio that's consistent with the amounts before we lost the premium to COVID. And then once we achieve that, we'll try to improve it even more.

Understood. Mike, what did you say the share repurchase was so far in 2021?

We're at just under $10 million, and we have $19 million remaining on the current authorizations.

And this is just curious to hear your explanation. When you think about net premiums earned, the three key was $144 million, bumped up to $152 million. Refresh me on, was the audit premium impact, what was the driver of the sequential uptick in earned?

I'm sorry, Mark, you're We're a little confused by your question. Could you do that again? Maybe we just misheard you.

Yeah, no, I'm sure it was poorly phrased. In the third quarter, your earned premium was $144 million. In the fourth quarter, it was $152 million. So that uptick of $7 or $8 million, what was the main component of that? What was the drivers there?

Yeah, I'll take that, Mark. So we did reduce our audit accrual in the third quarter pretty significantly. We brought it down to zero, and so we had no further reduction in the fourth quarter. So I think it's the reduction in the audit accrual that you saw coming through the third quarter that then had no impact in the fourth quarter is why you're seeing an uptick in earned premium.

Right. And I guess the And thinking about that, your Q2 earned was 152, Q4 was the same. Are we at a run rate here on earned? Is that one way to interpret that?

I would say absent a change in our premium accruals, which, as you know, they're at zero right now, I'd say it's a fair run rate at least for the short term.

Okay. And did you give me the premium in force? I did.

I've got to flip through it again. I got lucky the first time, opened right up to it. $578. Okay.

Yeah, there it is. Wrote it down right there. Maybe I need to retire, too. Okay. And then the national pricing environment question. You know, there's been some discussion of pricing flattening out, maybe moving up in some markets, but obviously you had a noteworthy year from a declining frequency standpoint, which doesn't necessarily point to, you know, put upward pressure on pricing. So I'm just sort of curious where you think we sit in the cycle, so to speak, from a national perspective around comp pricing.

So Bureau loss cost decreases have moderated a bit throughout 2020. The bureaus aren't filing quite as many double-digit decreases as they did in the past. And some have even filed increases, you know, which has led me to believe that any – Huge excesses that might be in Bureau-filed loss costs, those have been removed. But the environment really continues to be pretty competitive. But I would say year-over-year rate reductions have moderated. Our average rate at renewal across the book in 2020 was down 6%. That's compared to a decrease in 2019 that we saw, more like 12%. But, you know, continued rate reductions in an environment like this with record low new money yields can't be sustainable in the long run. So, you know, we're going to continue to focus on strict underwriting discipline until the market improves. But that's kind of what we're seeing right now. Mark?

And then just a final question. Kathy, given your background, I'm sort of curious. This idea that the Do you think those lost cost numbers, do you think the NCCI will be able to pick up a transition if it comes? How much should we think of those as predictive versus just kind of reflective of transition? History? Is it rearview mirror? How predictive can they be? Yeah, go ahead.

Yeah, I have full faith and confidence in NCCI that they will pick up on the trends appropriately. Yeah, I know they are watching it very closely, so I'm sure they'll do the right thing.

Very good. Thank you.

Once again, ladies and gentlemen, if you have a question, please press star, then 1 on your telephone. Our next question is from Bob Farnam of Boning and Scattergood. Your line is open.

Yeah, hi there, and good morning. And I just wanted to reiterate Mark's comments and say I congratulate and best wishes to Doug and Steve. You've had a pretty good run there, so sad to see you go. Two questions. One... Can you give us an update on kind of COVID-related claims in California? It sounded like there was some rumblings of an increased uptick in claims in California. So I'm just kind of curious what you're seeing in terms of COVID claims.

Good morning, Bob. This is Steve. I'll answer that question. We did see, and I don't know if your question is broader than California, but like California, we did see an uptick at the end of the fourth quarter in COVID claims. But I'd like you to keep in mind that and recall that in the fall of 2020, that the which requires, and there's penalties involved if the reports aren't made, requires businesses to report any COVID diagnosis within their employee ranks. And that lends itself to the presumption of compensability, depending upon how many of the employees within a particular business are are diagnosed with COVID. So that's led to an uptick, obviously, for us in the industry in terms of the number of claims reported. I will tell you that overall that about, and we're trending very closely to the data that I've seen in the industry, about 25% of our overall claims that we've received across the country are compensable. and the remainder obviously have not met the presumptive burden. And then the average cost or the average severity on those claims, whether they're lost time claims or medical-only claims, are much less severe than we typically see in our typical lost time and or medical-only claims. And those trends are very much in line with the data that we're seeing for the industry as a whole. So that gives you a little bit of insight into just overall claims from COVID standpoint, and then a little more detail on California.

Yeah, that's good. So it sounds like you're seeing a lot of claims, but it was kind of a higher proportion than I thought that you find to be not compensable. So are you surprised by that, the fact that these aren't coming underneath the definitions?

I don't know that I'm surprised. As you well know, Bob, a lot of states, as COVID started, you know, lowered the threshold from a presumption standpoint, in particular some of the larger states. But obviously the majority of the claims that we've received and the industries received have not met that burden. So I don't know that I'm surprised, but it's clearly the trend has been very similar since COVID started.

Right. Okay. And the last question I had was, Kathy, kind of going back to what Mark was asking, I'm looking at the accident-year loss ratio. Obviously, you had set it at 66.5 for quite a while. Then it came down this fourth quarter down to 64.3. So I think we're all trying to figure out what happens next year. Is this going to go back up to – you know, 65 or 65 and a half just to be on the conservative side if the frequency comes back? Or are we thinking 64 might be where you are?

Yeah, so for the full year of 2020, actually for the prior 21 months up until the fourth quarter, We held the accident-year loss ratio at 65-5, and then we did lower it at year-end. We were conservative, you know, throughout the year. There were so many uncertainties surrounding COVID, and we wanted to be cautious and be not lower it until we were comfortable to do so. And, you know, as we got towards year end and started looking at the loss results, felt it was appropriate to lower it. We'll take a similar stance in 2021 to, you know, looking at the claims as they come in and, you know, determine what we should book our loss ratio at at the end of the quarter. Mike, do you have anything to add on that?

No, I think that's appropriate. I mean, I would hope we'd be able to keep to that level or improve it in 2021. But, you know, we haven't – it's too early to even see any of the loss activity and where COVID is going to take this. So we remain hopeful, but we don't have enough data to go by at this stage.

Right. And I'd assume that the 64.3 you have for the year end 20 is still – you know, you're still making some sort of conservatism there that hopefully will develop favorably over time?

Yeah. So we believe that, you know, our reserves that we have booked right now are adequate. But, you know, we're carefully watching for, you know, any latent claims activity that might arise, you know, from the prior accident years as a result of, you The recession, you know, that's a trend that we saw in the industry coming out of the Great Recession, and we want to be prepared if that occurs again. So if that's what you're referring to, then, yes, we're still taking that stance.

Yeah, I meant to imply that you're not taking a bare-bones approach for your 2020 view, assuming that, yeah, there could be some late initiatives that are still coming that could creep through. Okay. Correct. No, that's it for me. Great. Thank you.

Once again, ladies and gentlemen, if you have a question, please press star 1 at this time. Our next question is from Matt Carletti with JMP. Your line is open.

Hey, thanks. Good morning. Just a high-level question. I was hoping you might be able to provide us an update on – you know, Serity's progress, just as we think longer term about both where employers is headed as well as the kind of small workers' comp business as well?

Yeah, so Serity is beginning to gain some traction. You know, we feel like the platform is solid. So, you know, what we're now focused on is experimenting with the appetite and fine-tuning our digital marketing strategy. so that we can better understand the types of customers that are shopping for workers' compensation online. We continue to feel that this is an important distribution channel that deserves attention. One of the key ingredients for success is going to be reducing the cost of lead generation going forward. But, you know, we feel like Serity's had, during the fourth quarter, they began to gain some traction, like I said. So, yeah.

Great. Thank you. And, Kathy, welcome. Look forward to working together. And, Doug and Steve, congrats. It's been nothing but enjoyable working with you over the years, and best of luck.

Thank you.

Thank you, Matt.

I am showing no further questions at this time. I will now like to turn the conference back to Mr. Doug Dirks.

Thank you, and thank you, everyone, for joining us today. Again, my personal thanks to all of you. I believe the company is very well positioned for what I think is going to be a strong finish this year. I'm very optimistic about that, and I think you all should be as well. So thank you all very much. Appreciate it. And Mike and Kathy will be back in a couple of months to report on the first quarter results. So thank you all, and have a great day.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect. Have a great day and stay safe.