Employers Holdings Inc

Good day, thank you for standing by and welcome to today's Q1 2022 Employers Holdings, Inc. Earnings Conference Call. At this time, all participants 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 keypad. If you require any further assistance, please press star 0. Please be advised that today's call is being recorded. Thank you. I would now like to hand the conference over to your speaker today, Ms. Lori Brown, General Counsel. The floor is yours.

Thank you, Alex. Good morning and welcome everyone to the first quarter 2022 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 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 development. The company also uses its website as a means of disclosing material nonpublic 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 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 2022 and discuss our observations of the current workers' compensation market. We are executing well on our business plan, which calls for us to remain laser-focused on capitalizing on the recent labor market improvement while continuing to maintain underwriting discipline and actively manage our expenses. Our gross premiums written during the first quarter were up 16% versus those of a year ago. Within our employer segment, the strong rebound primarily resulted from solid new business writings, especially within alternative distribution channels, and was further impacted by an increase in audit premium recognition. We can also attribute growth to CRD's strong new business writings. One of the key drivers of our growth was our appetite expansion into new markets within our targeted low-hazard groups, including landscaping, residential janitorial, and several artisan contracting classes. We ended the quarter with yet another record number of policies in force. The significant growth in policy count positions us well for premium growth as wages rise and employment levels improve. The leverage associated with these dual forces is expected to further increase our top line. We recorded our current accident year loss and LAE ratio on voluntary business at 64%, largely consistent with the 63.5% we recorded throughout 2021. Our first quarter limited review of our prior accident year loss reserves was consistent with our expectations, so we did not adjust our reserves. We plan to evaluate our prior year loss reserves in more detail at mid-year when we perform our semiannual full reserve study. Our underwriting and general and administrative expenses of $39 million were consistent with those of the fourth quarter and were down 16% year over year. You may recall that we stated a year ago that our first quarter 2021 expense ratio would be the high watermark and that firmly remains the case. While we're committed to diligently managing our expenses, we continue to make investments in technology to deliver a seamless customer experience to our agents and policyholders. 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. Gross premiums written were $172 million, an increase of 16%. The increase was primarily due to higher new business writings and further increases in final audit premiums. Net premiums earned were $150 million, an increase of 12%. Our losses and loss adjustment expenses were $94 million versus $70 million a year ago. The increase was primarily due to higher earned premium and because we did not adjust our prior year loss reserves this period. During the first quarter of 2021, we recognized $14 million of net favorable prior year loss reserve development. Commission expenses were $21 million versus $17 million a year ago. The increase was due to higher earned premium, a higher concentration of partnership and alliance business, which is subject to a higher commission rate, and an increase in commission rates on new business writings, as well as a reversal of commissions relating to noncompliant and uncollectible premium recorded in the first quarter of 2021. Underwriting and general administrative expenses were $39 million versus $47 million a year ago. The decrease resulted primarily from continued targeted expense savings and employee reductions and departures that occurred in 2021. From a reporting segment perspective, employers had break-even underwriting results this quarter versus underwriting income of $8 million a year ago, and its resulting combined ratios were 100% and 94%, respectively. Our Serity segment had an underwriting loss of $3 million for the quarter, down from an underwriting loss of $4 million a year ago. We remain very enthusiastic about Serity's premium writings, which have consistently increased over the past several months. Turning to investments, our net investment income was $19 million for the quarter versus $18 million a year ago. The increase was primarily due to higher bond yields. Our average ending book yield was just over 3% at quarter end. Our fixed maturities currently have a duration of 3.8 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 unfavorably impacted by $13 million of net after-tax unrealized losses from our equity securities and other investments, which are reflected on our income statement. And our stockholders' equity and book value per share this quarter were each unfavorably impacted by $88 million of after-tax unrealized losses from our fixed maturity securities, which are reflected on our balance sheet. And finally, during the quarter, we repurchased $6.7 million of our common stock at an average price of $38.77 per share. And our current share repurchase authority is $71 million. And now I'll turn it back to Kathy.

Thanks, Mike. As previously mentioned, our CRD operating segment, which offers digital workers' compensation insurance solutions directly to consumers, contributed nicely to our premium growth this quarter. CRD's recently announced collaborations with both Intuit and the California Restaurant Association are confirmation of the importance of giving small businesses an array of purchasing options. These types of strategic opportunities will support our future growth initiatives by attracting an untapped segment of our target market. In regard to capital management, yesterday we declared a $1 per share special dividend. We also declared a regular dividend of 26 cents per share for the second quarter, which is an increase of 4% from the previous quarterly dividend. And finally, we increased our existing share repurchase authorization by $50 million. Each of these actions reflect our strong capital position and our confidence in the company's future operations. As a specialist in small business workers' compensation, we are well positioned to react to the favorable trends, initiatives, and opportunities that we're seeing, and we remain highly 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 keypad. Again, that is star 1 on your telephone keypad. To withdraw your question, please press the pound key. You have your first question coming from the line of Mark Hughes from Truist. Your line is now open.

Yeah, thanks. Good morning.

Good morning, Mark.

Good morning. Could you talk about the growth outlook you said with the increase in policy count that positions you for future growth? I'm sort of curious when we think about the Expansion, appetite, how much more momentum there is related to that. Also think about the competitive environment. You've got some tougher year-over-year growth comps coming up. Just interested to get your top-line thoughts.

Yeah, so our enforced policy count, as we mentioned, grew nicely. It grew by more than 9% year over year, about 9,700 countrywide, and we really saw that growth across most policy size bands, and that has led to an increase in our new business average policy size of a little more than 5%. I can tell you the growth was spread across most states, and we saw the largest growth in Florida, California, Louisiana, New York. We feel that as the environment continues to improve, you probably saw the headlines this morning, unemployment is at a low. and wages are increasing, that, you know, our growth in enforced policy count will lead to favorable growth in our top line. So we don't typically give guidance, but I can tell you that I am bullish about the growth this year.

When it comes to the combined ratio, you mentioned, I just mentioned or Mike mentioned that, you know, you had 100 combined this quarter. What should the combined ratio be for this business? You know, what is the target? Is 100 adequate or should it be running at a lower number? And if so, you know, how do you get there?

Well, I can tell you, Mark, one of the areas where we're focusing, and we're running down a lot of parallel paths, but one that I will speak to is our expense ratio, where we've continued to see improvement. We have reduced our fixed expenses, and we've increased our premium, and that's been an effort that we've undertaken over the last year. And so, you know, as you saw in the announcement, our underwriting and general and administrative expenses decreased about 16% year over year. You know, so we'll just continue to be diligent in that area and identifying areas of expense savings. We do feel like we can get more economies of scale as our premium increases and that that expense ratio will continue to come down, and that's where it's going to be important for us to drive the future expense ratio improvement. And that's where we're focusing our efforts for the remainder of the year and into next year. So that's one area where we feel like we can improve our combined ratio.

I'll maybe ask the question again. You know, is there a target? Where should the business be running?

Again, we don't typically give guidance as to where we think we are headed. We would like to see an improvement in the combined ratio on an accident year and a calendar year basis. Didn't take any reserve development this quarter. So that's impacting our calendar year combined ratio year to date. But we do feel like we will get further improvement in the accident year combined ratio as we can bring those expenses down. So, again, it should be lower than 100. We will get it there, and that's where our efforts are right now.

Thank you for that. And then with Serity, any other partnership opportunities that you're working on or that could emerge over time?

Yes, absolutely. We are continuing to look for other partnership opportunities. The two that we announced this quarter are very much in their infancy, so we're still working on working on those, but I can tell you, yes, that there are other opportunities that we're looking into and are hopeful that in future quarters we can make more announcements like the ones we did this quarter.

Thank you very much. Sure.

Your next question is from Bob from Booning and Scattergood. Please go ahead.

Thanks, and good morning. Just to continue with that question, Sarity, I know they're very immature, but I'm just trying to get an idea of the magnitude of the opportunity that you might be able to get from the relationships with the California Restaurant Association and whatnot. Yeah, it's real.

Yeah, thanks for the question, Bob. It's very, very difficult to tell because they're in their infancy, a matter of weeks. But we are monitoring those on a daily basis, and we're hopeful that these types of partnerships are going to add some significant value to the top line, but we do not have an estimate that we can share with you at this point in time.

You already have a relationship. I mean, employers already has a relationship with the California Restaurant Association. Can you give us an idea of how much volume comes from that partnership?

Oh, I do not. We can get back to you on that. I do not have that number in front of me right now, Bob, though.

Okay. All right. So the reserve review is, you know, It sounds like you're maybe taking a little different philosophy of how you're going to be dealing with the favorable or adverse reserve development, just reserve development in general. So can you just maybe go through what are the differences between the reserve studies at mid-year and year-end versus the first and third quarters and kind of why you're more looking to do more in-depth analysis at the semi-annually?

Sure. So the timing of our analyses has not changed. So recall that last quarter, fourth quarter of 2021, you know, we recognized over $24 million of favorable development. And that takedown was mostly attributable to accident years 2018 and prior. And we did a full analysis at year end. For the first and the third quarters, our actuaries complete an actual to expected analysis. And they don't reselect the development factors. At the second and fourth quarter analyses, we do a full analysis and we reselect development factors. So that was one of the reasons we did not take any action this quarter and felt comfortable waiting until we saw the full analysis at second quarter for the potential to take anything. You know, we've always been very conservative and prudent in our reserve position, and I would tell you nothing has changed in regards to our philosophy. It's just a timing issue, and we are just going to wait until the second quarter until we have the full analysis.

Okay. I think just to paraphrase, it sounds like the first and third quarter, you actually will take a look at the reserves, but you don't actually change your ultimate estimates for the reserves. That only happens in the second and fourth quarters. So that's why, you know, you didn't really change your ultimates, so you're not really changing your opinion on it.

Well, we didn't change our development factors or any of the selections of the factors that go into it. So we just looked at what – What would the last quarter's development factors, what should have emerged given those prior picks, and then what is the actual that came through? So it's a more simplistic analysis. It's typical, and it's not a change in what we've done in the past. We just decided not to respond.

Okay. And Probably the last question is for me. So you have the $60 million FHLB loan. What are you planning to use that for?

Yeah, Mike, you want to take that?

I'll take that, Bob. So as a member of the Federal Home Loan Bank, we have the ability to borrow. We don't even have to put up any more collateral because we're already collateralized with the Federal Home Loan Bank. And we can actually borrow at quite attractive short-term rates. So given the spike in certain asset classes, we have invested actually more than that in collateralized loan obligations and have used that borrowing. as kind of leverage to gain the spread. So it's a bit of an anomaly in today's world. It's our ability to borrow at low rates. And because each are both variable rate instruments, that arbitrage is pretty safe and should be largely there for some time. We could also take the trade off tomorrow if we didn't see the spread recurring. So we're really just taking advantage of the current interest rate arbitrage between those two measures. Okay. And with the kind of increase in the authorization for share repurchases, how much holding company cash do you have at this point? Well, we are flush with cash at the parent company as a result of a distribution we were able to affect in the first quarter from one of our more heavily capitalized insurance companies. So today at the parent company, we probably have, you know, no less than $100 million available, and that is why we took the action yesterday along with the board to both increase the regular dividend, increase the share repurchase authorization to the extent we have attractive opportunities and have volume available there, and that's why we affected the special dividend as well. Great. Thanks for the answers.

Again, to ask a question, please press star 1 on your telephone keypad. You don't have any questions on the phone line at this time. That ends our question and answer session. I'll turn the call back over to Cathy Antonello for closing remarks.

Okay, thank you, Alex, and thank you all for joining us this morning. I look forward to our next discussion in July.

That concludes this conference call. Thank you all for participating. You may now disconnect.