Employers Holdings Inc

Good day. Thank you for standing by. Welcome to Q3 2021 Employers Holdings Incorporated Earnings Conference Call. At this time, all participants' lines are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the 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 further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Ms. Lori Brown. Thank you. Please go ahead.

Thank you, Buena. Good morning and welcome, everyone, to the third quarter 2021 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 for 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 filing 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 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 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 third quarter of 2021 and discuss our observations of the current workers' compensation market. Despite the economic challenges presented by the pandemic, employers continue to perform well, and we are encouraged by the rebound we've experienced since May of 2021. As businesses have reopened and restrictions have been lifted and our appetite has expanded, we've seen year-over-year increases in new business submissions, quotes, and binds, and we once again closed the period with a record number of policies in force. During the quarter, net written premiums increased 16% year over year, and our new business average policy size was up 15% over the same period. In an effort to further diversify our risk exposure and capitalize on new market opportunities post-COVID, we launched an appetite expansion initiative in July, and early indications are that the initiative is having a positive impact on new business. More so than ever, we remain confident that new business opportunities and rising payrolls, driven by increases in both wages and employment, will bring further growth to our top line. While our year-over-year new business premium for the first nine months of 2021 was limited by pandemic-related shutdowns in January and February, in total, the past two quarters were up 27% relative to 2020. Gradual improvement in wages and employment contributed to the increase. The policy retention rate on our renewal book remains very strong at 94% year-to-date, although this strength was offset to some degree by lower average policy sizes and modest rate decreases at renewals. Overall, our year-over-year renewal premium was down 7% for the first nine months of 2021 and down 1% for the third quarter. We continue to see declines in frequency for lost-time claims and have maintained our current accident-year loss and LAE ratio on voluntary business at 63.6%, down from 65.5% a year ago and 64.3% at year-end. As part of our continued technology and process improvement initiatives, we implemented a new comprehensive claims system during the quarter, which we believe will enhance and streamline our claims handling. In connection with this implementation, we undertook several process changes, and as a result, we chose not to recognize any prior year loss reserve development during the quarter. In line with our expectations, targeted expense savings and employee reductions and departures decreased third quarter expenses by a meaningful 19% year over year. With that, Mike will now provide a further discussion of our financial results, and then I'll return to provide my closing remarks. Mike?

Thank you, Kathy. During the third quarter, we delivered a 3.8% annualized return on adjusted equity. and a combined ratio of 98.1% within our largest operating segment, employers. For the quarter, our net premiums earned were $147 million, a 2% increase year over year. While our written premiums for the first nine months were down 2%, our third quarter premium writings were up 16%, which demonstrates that small businesses are beginning to thrive and are actively shopping for workers' compensation coverage. Also, in recognition of the positive shift we are experiencing in our final audit process, we increased our final audit accruals by just under $5 million during the quarter. Our losses and loss adjustment expenses were $91 million, an increase of 18%. As Kathy previously mentioned, we did not recognize any prior year loss reserve development on voluntary business during the current period, whereas we recognized $15 million of favorable loss reserve development a year ago. Commission expenses were $20 million, an increase of 3%. The increase was primarily the result of increased commissions on new business writings. Underwriting and general administrative expenses were $37 million, a decrease of 19% year over year. The decrease resulted from targeted expense savings and employee reductions and departures, which reduced our fixed expenses such as compensation and professional fees, as well as a reduction in bad debt expenses. From a reporting segment perspective, our employer segment had underwriting income of $3 million for the quarter versus $7 million a year ago, and its combined ratios were 98.1%, and 95.2% respectively. Our Serity segment had an underwriting loss of $3.3 million for the quarter, down from its underwriting loss of $3.9 million a year ago. We are enthusiastic about Serity's premium writings, which have consistently increased over the past several months. Turning to investments, our net investment income was $18 million for the quarter, consistent with that of the third quarter of last year. Our average book yield was 3% at quarter end. At quarter end, our fixed maturities had a duration of 3.5 and an average credit quality of A+, and our equity, securities, and other investments represented 13% of the total investment portfolio. Our net income this quarter was favorably impacted by a million dollars of net after-tax unrealized gains from equity, securities, and other investments, which are reflected on the income statement, And our stockholders' equity and book value per share this quarter were each unfavorably impacted by $9 million of after-tax unrealized losses from fixed maturity securities, which are reflected on our balance sheet. And finally, during the quarter, we repurchased $13.2 million of our common stock at an average price of $40.54 per share, and our remaining share repurchase authority currently stands at $36.7 million. And with that, I'll turn the call back to Kathy.

Thanks, Mike. Leveraging our deep expertise in workers' compensation, we built and launched our own full-stack direct-to-consumer insure tech known as Serity. We continue to view Serity as a unique asset for employers, one that is positioned as an enabler to provide new and exciting solutions and experiences to our industry. We believe that Serity's technological and intellectual capabilities will support and enhance our future growth initiatives while providing direct access to workers' compensation insurance for businesses seeking an online experience. For the remainder of the year, we'll be diligently focused on further improving our economies of scale by capitalizing on emerging labor market improvements, while continuing to maintain underwriting discipline and actively managing our expenses. Our balance sheet and capital position are very strong and are highly supportive of these key initiatives. As a specialist in small business workers' compensation, we are well positioned to react to the favorable trends we're seeing and remain confident in our continued success. And with that, operator, we will now take questions.

As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pad key. And please stand by while we compile the Q&A roster. Your first question is from Mark Hughes of Truist Securities. Your line is open.

Yeah, thanks. Good morning.

Good morning, Mark.

Kathy, how much did the expanded appetite contribute to the premium growth in the quarter- And can you talk about what you're doing to make sure that those new class codes, that you've got a good line of sight on loss trends?

Yep. So thanks, Mark, for the question. We're ramping it up slowly for exactly the reason that you just mentioned. As I've said before in other calls, my focus for 2021 has been to position the company to capture the post-COVID economic lift. including some opportunistic expansion in our appetite into areas that we feel like have some significant potential for growth in the post-COVID world. So, for example, speaking to areas like landscaping and janitorial, the small business landscaping market for work comp, and when I say small business, I'm talking about companies that have less than 500 employees. is about a billion dollars, and we're seeing that payroll is projected to grow more than 20% over the next four years. So we feel like there's a big opportunity there for us to enter the market. But as I mentioned, we're doing it carefully and diligently on the underwriting side. It wasn't a huge part of our third quarter project, increase, but we do expect it to continue to increase as we go into 2021, and we'll continue to look at other opportunities where we can grow profitably.

Understood. Mike, on the expense side, you've done very well bringing those down. When we think about the fourth quarter expense level relative to the third quarter, I'm just thinking kind of the sequential progression on expenses. And looking back historically, sometimes they go up, sometimes they go down sequentially. Just how should we think about 4Q and then next year the expense level? Any of you can share about how that might play out in 2022? Sure.

Sure, Mark. So the thing I want to be careful about is some of our expenses are variable, and that's going to vary with our level of premium. And then others are fixed. I think from a fixed standpoint, you'll see a consistent number from what you've seen in the last two quarters, which, again, are down sharply from a year ago and down sharply from that of the first quarter. In terms of expenses for next year, we'll have a better sense very soon. We're in the process of planning right now, and we are looking everywhere to try to be as nimble, as efficient as possible. And we are extensively going through everybody's plan for next year to make sure that we have expenses in check. But again, we just have to be careful that some of our expenses vary with premiums, such as premium taxes, assessments, policyholder dividends. So just be mindful of that in terms of your projections. But we expect a consistent fourth quarter absent that, and we'll get back to you soon as to what our outlook is for 2022.

And then refresh me on, of the underwriting and other operating costs, how much of that is fixed versus variable?

On average, about five points of the underwriting

underwriting and general and administrative expenses are variable so um not five percent of that number but five points of that ratio yeah okay um and then from a competitive standpoint i i wonder uh there's been a lot of talk on pricing maybe flattening maybe going up uh Gallagher had some notable comments about workers' comp, more constructive around pricing and competition on their call last night. I'm sort of curious whether you feel like there's any difference here. Clearly, your top line is looking better, and how much of that might be competitive issues?

Yeah, Mark, so I'll take that. You know, we would continue to characterize the environment as competitive, even with some, I would say, irrational competitive behavior from a few actors. I've seen the same reports that you have, and some of the market surveys that came out are reporting that Q2 had very modest pricing increases emerge in workers' comp. And when I say very modest, I'm saying like less than 1%. But our average pricing across our renewal book has showed an overall rate decrease of somewhere between 4% and 5%. for the three months ended September 30th, and that's versus the rate level that was in effect on the same businesses a year earlier. It is a favorable trend, even though it's a decrease. And just to give you some context, I would say a year ago, third quarter rates had decreased 5.8%, and then two years ago it was 8.5%. So less of a decrease. The rate is slowing, and that's a good sign. But I don't think I would characterize workers' compensation as being a hard market yet.

And then I'll slip in for one more if I can. The new systems implementation, as a result of that, took no development in the quarter. Did you notice any difference in the claims?

No.

Emergence or loss emergence, anything you might say about frequency or severity, either in the back book or, you know, currently would be helpful as well.

Yeah. So, yeah, we chose not to recognize any development this quarter for a couple of reasons. You know, the first is because we don't do a full analysis either at the end of the first quarter or the third quarter for reserves. And the second was because, as we mentioned earlier, we implemented a new claim system in the third quarter, and that brought with it a lot of new processes that we think are going to improve our claims handling, but we want to appropriately contemplate those in our reserve selections. So we thought it would be prudent to do that at our next full analysis, which will be our year-end analysis. We do think our reserves are solid, but we're carefully watching for any latent claims activity that might arise in the prior accident years as a result of the recession, similar to what we saw after the Great Recession. We haven't seen any increase in cumulative trauma or post-term claims, so that's a good sign. We are still holding on to some reserves to cover any post-recessionary impacts, should those occur. But rather than getting into any specifics, I'd say the indications for this quarter were consistent with the trends that we've seen in prior quarters. In regards to frequency and severity, Frequency relative to both payroll and premium has decreased in action year 2021 relative to the same period. In 2019, we've started not looking at frequency and severity relative to 2020 because 2020 was such an anomaly. So we are still seeing decreases in frequency, and last time severity is up, I would just say, moderately over the same period. So nothing really new on the frequency or the severity side.

Thank you for all that. Appreciate it.

Once again, to ask a question, please press star 1 on your telephone. Your next question is from Sam Hoffman of Lincoln Square. The line is now open.

Good morning. Thanks for taking my question. Can you give a bit more detail on what the claims technology process improvement initiative is intended to accomplish in terms of either improving claims expense ratios or or operating expenses going forward?

Yeah, sure. Good morning, Sam. So the new claims system that we implemented really focuses on taking a lot of the administrative tasks out of the claims adjuster's hands and automating a lot of those. So those are the types of process improvements that we're talking about. It's automation of a lot of the work that has been done manually in the past. There are a lot of forms that need to be completed and so forth with workers' compensation claims handling that are regulatory in nature. So a lot of that is now automated. So more automated workflows and so forth. And we think that will have an impact on our efficiency and and expenses going forward.

Okay. So it's more of an LIE type of expense management. Okay. So next question is, given the improvement in written premiums in the quarter, what is your outlook in terms of, you know, you had talked about an objective for 2022 to at least get back to the gross written premium writings. that you have in 2019. Do you think that's still feasible given, I mean, obviously you're entering some new classes, but pricing continues to be negative?

Yeah, I would say the trends that we're seeing are very favorable. As Mike mentioned earlier, we are in the process of trying to put our projections together for 2022. We have not completed that analysis yet, but I would say – Quarter, you know, quarter two we started to see improvement. Quarter three was even better. And we've started quarter four. Things are looking very favorable. So, you know, while we don't have that analysis complete right now, I would say the environment is certainly a lot better than what we were seeing a year ago. Okay.

And the last question is, I noticed that your expenses for SARA, they have declined significantly from a $16 million run rate last year down to this quarter below $12 million in terms of the loss. So, what are your objectives for SARA over the next year in terms of revenue and expense management?

Yeah, so Sam, from an expense management standpoint, we have been doing the same thing at charity that we've been looking at at employers, which is, okay, how can we streamline our efforts? What can we combine across the companies to try to reduce our expenses? So we've taken a hard look at that this year, and we are picking up some of the The work at employers that was previously done at Serity, and that is bringing a lot of efficiency in that area and helping to reduce the cost there. The trends for Serity premium are very good, and just like employers, we're putting our projections together for those right now, and we'll have more on that in the next quarter.

Thank you.

Once again, to ask a question, please press star 1 on your telephone. No questions at this time, and I would like to turn back the conference to Kathy for further comments.

Okay, well, thank you all for joining us this morning. Enjoy your weekend, and I look forward to meeting with you again next quarter.

This concludes today's conference call. Thank you for participating. You may now disconnect.