Employers Holdings Inc

Good afternoon, ladies and gentlemen, and welcome to the Q1 2021 Employers Holdings, Inc. conference call. At this time, all participants are on a listen-only mode. Later, we will conduct a question and answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star then zero on your touchtone telephone. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Lori Brown. Please go ahead.

Thank you, Angela. Good morning and welcome, everyone, to the first quarter 2021 earnings call for employers. Today's call is being recorded in webcast from the investors 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 nonpublic information and for complying with disclosure obligation under the 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 on our website. Now I will turn the call over to Kathy.

Thank you, Lori, and thanks to everyone for joining us today. On today's call, Mike and I will outline our financial results for the first quarter of 2021 and discuss our observations of the current workers' compensation market. Employers has performed well throughout the COVID-19 pandemic, and the first quarter of 2021 was no exception. While our top line was adversely impacted early in the first quarter by a meaningful year-over-year decrease in new business premium, we are very encouraged by the strength of our writings in March and April, including those of Serity. The recent improvement in submissions, quotes, and binds is directly correlated with increased hiring and expanded reopenings across most states. With respect to our renewal book, our policy retention rate remained very strong at 94% for the quarter. This was offset to some degree by lower average policy sizes and modest rate decreases. And overall, our renewal premium was down 11% on a year-over-year basis. We closed the quarter with another record number of policies in force, which demonstrates that our policyholders are enduring the pandemic and small businesses are shopping for workers' compensation coverage. As widespread vaccination continues and the labor market improves, we are optimistic that rising payrolls will serve to increase premium. In support of this anticipated recovery, we have continued to pursue and advance the significant investments we've made in delivering a superior customer experience for our agents. Due to declines in both frequency and severity for lost time claims, we've lowered our current accident year loss and LAE ratio on voluntary business to 63.6%, down from 65.5% a year ago and 64.3% at year end. In addition, we continue to experience favorable loss reserve development in nearly every prior accident year. Regarding our expenses, several first quarter events are worth noting. We underwent a reduction in force, which impacted approximately 7% of our workforce. We also said fond farewells to a few of our executives, including our former CEO, and subsequently realigned the organization to increase efficiency and generate cost savings. As a result, our first quarter underwriting and general administrative expenses of 46.6 million will be the high watermark for 2021, and you will see immediate and significant expense reductions for the remainder of the year. With that, Mike will now provide a further discussion of our financial results, and then I will return to provide my closing remarks. Mike.

Thank you, Kathy. During the quarter, we delivered a 4.8% annualized return on adjusted equity and a combined ratio of 93.9% within our largest operating segment employers. However, these favorable operating results were somewhat muted by our lower top line and net unrealized investment losses on our fixed maturity investments. Our net premiums earned were $134 million and a decrease of 20% year over year. The decrease was due to lower written premiums, as Kathy mentioned, as well as a reduction in our estimated final audit accruals to reflect the premium that we expect to return to our policyholders as a result of lower payrolls. Our losses and loss adjustment expenses were $70 million, a decrease of 33%. The company recognized $13 million of favorable prior year loss reserve development on its voluntary business during the quarter, which related primarily to accident years 2017 and prior, versus $3 million of favorable prior year loss reserve development a year ago. Commission expenses were $17 million, a decrease of 21%. That decrease was primarily due to lower earned premiums. Underwriting and general and administrative expenses were $47 million, largely unchanged from a year ago. During the first quarter, we recognized a one-time $2.3 million acceleration in share-based compensation in connection with the retirement of our former CEO, Doug Dirks. Also, as Kathy mentioned previously, future quarters will reflect an immediate reduction in expenses from actions taken and completed during the first quarter. Our other expenses were $2.9 million representing employee severance costs associated with our first quarter 2021 reduction in force. This action was taken to better align our expenses with our current levels of revenue. From a reporting segment perspective, our employers segment had underwriting income of $8 million for the quarter versus $1 million a year ago, and its combined ratios were 93.9% and 99.5% respectively. Our Serity segment had an underwriting loss of $4 million for the quarter, consistent with its underwriting loss a year ago. However, Serity's premium writings have increased in recent months, which Kathy will address in her final remarks. Turning to investments, our net investment income was $18 million for the quarter, down 8%. The decrease was primarily due to lower interest rates year over year, which impacted bond yields. At quarter end, our fixed maturities had a duration of 3.8 and an average credit quality of A+. and our equity, securities, and other investments represented 10% of our total investment portfolio. Our net income this quarter was favorably impacted by $8 million of after-tax unrealized gains from equity, securities, and other investments, which are reflected on our income statement. Conversely, our shareholders' equity and book value per share this quarter were each unfavorably impacted by $36 million of after-tax unrealized losses from fixed maturity securities, which are reflected on our balance sheet. And finally, during the quarter, we repurchased $10 million of our common stock at an average price of $32.21 per share, and our remaining share repurchase authority currently stands at just under $19 million. And now I'll turn the call back to Kathy.

Thank you, Mike. As Mike mentioned, our Serity operating segment, which offers digital workers' compensation insurance solutions directly to consumers, is gaining traction and has written a half million dollars in premium thus far in 2021. While the low-to-medium hazard direct-to-consumer market is relatively immature, and Serity is an early entrant in this space, We believe that its technological and intellectual capabilities will support our future growth initiatives and provide immediate access to workers' compensation insurance for those customers seeking an online experience. I am excited and proud to lead this remarkable organization, and my primary goal for the company in 2021 remains unchanged. As we prepare to fully capitalize on the upcoming labor market improvement, we will continue to maintain underwriting discipline and actively manage our expenses. Our balance sheet and capital position are very strong and are highly supportive of these initiatives. Employers is in a unique spot. As a monoline workers' compensation rider specializing in America's small businesses, we can react to these trends appropriately and efficiently and are confident that we are well positioned for continued success. And with that, operator, we will now take questions.

Ladies and gentlemen, if you have a question at this time, please press the star and the number one key on your test tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Our first question is from the line of Mark Hughes with Truist. Please go ahead.

Yeah, thank you. Good morning. The improvement in new business through the quarter, January and February, saw the recovery in March and April. It seems like there's been opening, but... but I'm not sure how dramatic it's been. Do you feel like there's some other factors that are contributing to the strength you've seen here lately?

Yeah. Good morning. I would say another factor that might be contributing to that is the rate decrease that we took in California in February. California is about 45% of our book currently, so that's remained flat since year end. We reduced rates, as I said, effective February 1st, and we also lowered our minimum premiums. And I think the combination of lower rates and also less restrictions on businesses in California, that's beginning to have an impact. Like you said, we did have a tough January, but then a milder February in California. But year over year, new submissions, quotes, and binds were all up in March. with policies bound up around 35%, and new business premium was up over 40% for the month of March. So that was definitely another contributor.

Right. And then has that continued into April?

That has continued into April, yes.

Okay. Pricing overall... putting your kind of price actions in California off to the side. I think the last year, if I'm understanding it properly, your renewal pricing was down about mid-single digits. I think Q1, similar. It seems like some folks are suggesting pricing in workers' comp is flat or maybe up slightly, but I'm just sort of curious how you see it overall?

Yeah. So, Mark, from our vantage point, the environment remains pretty competitive. The pricing that we're seeing countrywide continues to be pretty soft for both small and middle market accounts. And we really haven't observed any material signs of market hardening, you know, as a result of the pandemic yet. and feel that both national and regional competitors are fairly aggressive in pursuing new business. I've seen what you're seeing. I've also seen some data from some of the rating surveys that show that work comp rates are increasing. ever so slightly. But our average pricing across our renewal book showed an overall price decrease, like you were saying, into the first quarter, into the lower, you know, the single digits versus the rate level that we had in effect for the same business as a year earlier. But we are watching closely for any signals of hardening market. but have really yet to see anything in comp that's even remotely comparable to what we're seeing, to what others are seeing in other lines and what they're experiencing there.

Yeah. How do you think the loss costs will come out for 2021? The NCCI has been down high single digits these last few years. How do you think it will look for this year?

Yeah, it's hard to say. You know, what we're seeing so far for the filings that were effective, you know, early this year, they are still negative, filing for reduced loss costs, but not to the same degree that they were filing in the past. So, you know, it's possible that those will continue to moderate, but it's hard to tell at this point.

Yeah. Then one final question. Mike, on the audit premium, any thoughts about the 2Q? I think you point out that the folks who had not done midterm endorsements are, you know, looking at the audit premium and they're getting refunds. Is that phenomenon going to continue into 2Q? I'm just trying to think the timing of when those policies expire and when you have kind of exposure to that phenomenon. Is it into 2Q mid-year?

Well, Mark, we are in a negative position right now to the tune of about $2.7 million. I don't think it's unreasonable to expect that to occur for the next – for the next quarter or so to some extent, but we won't know until we get into the audit premiums that will occur, which is what we'll base our estimate on. So we have very little information for the second quarter thus far in terms of the premium audit, but the 2.7 that we have at March 31st is designed to take into account the audit premium return we're expecting for those for those policies that have earned through that date. So a little too early to tell, but you'll have to stay tuned.

And does that say that's sort of an accrual for all that you expect? Because I assume, you know, other policies will be expiring incrementally, you know, over the next few months, and they might have the same phenomenon. Do you... Like I said, do you accrue for that, or do you just wait and see what happens?

Well, it's not so much a forward-looking accrual. It's really designed to detect what the pickup or the amounts owed would be for the premium that has earned through the balance sheet.

Okay. All right. Very good. Thank you.

And once again, if you would like to ask your audio question, please press star 1 on your touchtone telephone. Our next question is from the line of Bob Farnan with Boning Scattergo. Please go ahead.

Hi there, and good morning. So a couple questions. One is on the accident-year loss ratio. Now, it sounds like you saw a continuation of favorable claims trends in the first quarter last My thought is, as businesses start to open and the economy expands, what's going to happen to claims trends going forward and that loss ratio likely to tick up over time?

Yeah, good morning, Bob. Yeah, you're absolutely right. I mean, that would not be any different from what we've seen in prior recessions, you know, when frequency has dropped, you know, during that period. And then as things start to pick up again, there is a chance that, well, I mean, it's likely that frequency will return back to normal levels, which were normal levels were decreases in frequency. on a year-over-year basis. But I would not expect that the levels of decrease that we're seeing now will continue into the future.

How would you characterize the severity trend these days? And is the opening of the economy impact severity, or is that just more of a frequency issue?

Yeah, that's a good question and there's a lot of uncertainty around that right now. So the severity itself we did see this quarter, severity was negative just like frequency. But you would expect that to perhaps turn around just like the frequency when things start to open up again. I think the major uncertainty there is whether or not employees will continue to work from home or whether they'll be coming back into the office. Will they be driving as much in the past? There's so much uncertainty there that it's hard to predict. but I can assure you that it will be different from what it is right now.

Okay. Yeah, I agree with you there. So in terms of your policy size is declining, does that make more business be flowing through the alternative distribution channels rather than the traditional? I don't know. Like what, and my question is basically regarding the commission rate there, because they have a higher commission rate in the alternative distribution channel. So do you see that continuing to grow because of the smaller policy size? Does that have an impact?

I'm sorry, do you want to take that? Yeah, you were breaking up there a little bit. I think the question was, do you think we're going to continue to grow in the alternative distribution space? Was that the question, Bob?

Yeah, and it was in light of the fact that your policies are smaller, and I wasn't quite sure if the alternative distribution channel was more directed towards the smaller risks, or is that not true? No.

Yeah, generally speaking, I would say that that is true. And that business is growing, and, you know, we are seeing some business that was an alternative distribution before moving into that space. So, yeah, I would expect that channel to grow in the future. Okay.

And, again, so if that channel grows, your commission rates for the alternatives are slightly higher than your core book, so you'd think that the commission rate would go up a bit.

It could. It could slightly, yes.

Okay. And last question from you. It sounds like you non-renewed an account in this quarter. Just can you give us some details as to what was going on there? Sure.

Yeah, so we did have one account. It was an account that was underperforming, you know, all written through the same group, and we've decided to non-renew that because they were underperforming. We were on that account for about three years and decided that that was in our best interest.

Was it underperforming last year and the year before, too, or is that something that's just come around this year?

It was underperforming, yeah, for several years, and increases in pricing had not improved that situation, so we have non-renewed that.

Okay, great. Thank you.

Uh-huh. Again, ladies and gentlemen, if you have a question at this time, please press the star, then the number one key on your touchtone telephone. And we have a question from the line of Mark Hughes with Truist. Please go ahead.

Yeah, thank you. I wonder if you could just expand a little bit more on what you're seeing at Serity. I think you described having a bit more success. The premium levels are still pretty modest. I wonder if you could talk about any observations you might have on the marketing, the paid search, that sort of thing, where you might be seeing some movement there.

Yeah, Mark, so CRD does continue to gain some traction, as we said. This year we're going to be focused on expanding our underwriting market into some more classes and enhancing the back-end capabilities so that we can handle increasing policy flows at CRD. And then we're going to continue to experiment with our digital marketing. You know, most of the competitors in this space quickly pivoted to utilize an agent distribution channel to increase their revenue, but CRT has really stayed true. to its original vision, and it's remained a pure direct-to-consumer platform. So a lot of testing, a lot of experimenting in the marketing there. We're going to refine our marketing with an eye towards reducing the cost of lead generation, which is the key in this space, and hope that we can continue to see improvement there. I can share that one of the areas where they've seen success is in the janitorial space. So, you know, we're going to continue to try to find markets that are quickly growing and emerging, and they are, you know, kind of focusing in on a micro level on their marketing.

Yeah. Any other classes? You say you're expanding into more classes. Any others that you would mention? How meaningful do you think that will be?

Well, what I can say is when I say they're expanding their underwriting appetite, it's to broaden. They went out with a pretty narrow underwriting appetite, and when they broaden it, it's to be more like the employer's segment appetite. So they will remain focused on hazard groups A through D. likely not getting into a lot of riskier class codes yet, which is quite frankly where a lot of online shoppers are looking to find coverage is in contracting and some of the heavier classes. But right now they are still focused on the lower hazard classes.

Thank you very much.

Thank you. And once again, if you would like to ask a question, please press star 1. We have a question from the line of Bob Farnan with Loaning Scattergo. Please go ahead.

Yeah, just one question on the share repurchases, because I know the stock has appreciated quite a bit over the quarter, and it looks like you didn't really repurchase shares during the quarter. I know you had some at the beginning of the quarter, but not towards the end. So I'm just kind of curious what your thoughts are on the share purchase going forward.

Sure, Bob, I'll take that. So, you know, we did have a pretty dramatic increase in our stock price in the last quarter. And we did have a 10B5 out there to buy back some shares, but we underestimated how much the stock would appreciate, so that did not perform. We still view share repurchases as attractive. We do think that it's in our best interest to manage our capital base. And we do expect to continue to buy back shares, although not at the pace that you saw for last year. Last year we spent about $100 million. You won't see that for this year, but I am definitely interested in continuing the share repurchase plan throughout the year. Okay, very good. Thanks.

And I'm showing no further questions at this time. I would like to turn the call back to Kathy. Okay.

Thank you, Angela, and thank you, everyone, for joining us this morning. We look forward to speaking with you again next quarter.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation, and have a wonderful day. You may all disconnect.