Employers Holdings Inc

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 that session, you will need to press star 1-1 on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Ms. Lori Brown, General Counsel. Please go ahead.

Thank you, Carmen. Good morning and welcome everyone to the second quarter 2022 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 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. On today's call, Mike and I will outline our financial results for the second quarter of 2022 and discuss our observations of the current workers' compensation market. We are executing extremely well on our business plan. Consistent with the momentum we have experienced in recent prior quarters, our written and earned premiums increased significantly year over year. This growth resulted from strong new and renewal business writings within our employers segment, strong new business writings within our serity segment, and further audit premium recognition. As a result, our gross premiums written during the quarter and first half are up 22% and 19%, respectively, versus those of a year ago. Our appetite expansion into new markets such as landscaping, residential janitorial, and several artisan contracting classes was a solid driver to this growth. Serity's in-force premium at quarter end was $2.7 million, which represents an increase of 250% over the last four quarters, and was supported by its recent collaboration with Intuit's QuickBooks. Serity continues to develop additional strategic opportunities, which will support our growth initiatives by attracting an untapped segment of our target market. We once again ended the quarter with a record number of policies in force. Our consistent growth in policy count has positioned us well and will continue to generate premium growth as wages rise. Since the pandemic, lower wage workers, especially in our focus industry of leisure and hospitality, have seen the sharpest increase in wages, up 15% for the first quarter of 2022 relative to the prior year. and that has led to robust audit premium recognition. With payroll as the exposure base and indemnity benefits automatically linked to state average weekly wages, the workers' compensation line of business adjusts nicely to changes in wage inflation. We maintained our current accident-year loss and LAE ratio on voluntary business at 64%, largely consistent with the 63.5% we recorded throughout 2021. We also performed our routine mid-year full reserve study and recognized $10 million of net favorable prior year loss reserve development from our voluntary business. We'll complete our next full reserve study at year end. Our underwriting and general and administrative expenses of $39 million were $2 million higher than a year ago. The increase can be attributed to premium taxes, assessments, and a provision for bad debt, each of which vary with our earned premium. Our fixed expenses, those that are within our control and do not tend to vary with our earned premium, were down $1 million from a year ago. The combined impact of lower fixed expenses and higher earned premiums led to a consolidated underwriting and general and administrative expense ratio of 23.8% this quarter, a year-over-year reduction of 320 basis points. This is the lowest consolidated underwriting and G&A expense ratio in 14 quarters and is a direct result of our focus on productivity and efficiency as we grow our top line. While we continue to diligently manage our expenses, we are also committed to technology and digital investments that improve both our customer and workforce experience and position us to scale the business. 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 $179 million versus $147 million a year ago, an increase of 22%. That increase was primarily due to higher new and renewal premiums and higher final audit premiums. Net premiums earned were $165 million versus $137 million a year ago, an increase of 21%. Our losses and loss adjustment expenses were $93 million versus $84 million a year ago. The increase was due to higher earned premiums, partially offset by an increase in net favorable prior accident year loss reserve development. We recognized $10 million of favorable development during the quarter versus just $2 million of favorable development a year ago. Commission expenses were $24 million versus $18 million a year ago. The increase was primarily due to higher earned premiums and higher agency incentives. Our current commission ratio of 14% within our employer segment is expected to decrease during the second half of 2022 as a result of a reduction in certain renewal commissions that went into effect on July 1st. Underwriting and general administrative expenses were $39 million versus $37 million a year ago. As Kathy mentioned, the increase resulted from higher variable expenses, namely premium taxes, assessments, and bad debt provisions. From a reporting segment perspective, our employer segment had an underwriting income of $13 million versus $2 million a year ago, and its resulting calendar year combined ratios were 92% and 99% respectively. Our Serity segment had an underwriting loss of $3 million for the quarter, consistent with its underwriting loss of a year ago. We remain very enthusiastic about Serity's premium writings, which have significantly increased over the past several quarters. Turning to investments, our net investment income was $20 million for the quarter versus $18 million a year ago. The sizable increase was due to higher bond yields and a higher invested asset balance, resulting from our federal home loan bank leveraged investment strategy. Pursuant to this strategy, our insurance subsidiaries have received advances of $126 million from the federal home loan bank through June 30th, and the proceeds of these advances were used to purchase an equivalent amount of high-quality collateralized loan obligation securities. Our fixed maturities currently have a duration of 4.1 and an average credit quality of A+, and our equity securities and other investments represent 13% of our total investment portfolio. Our weighted average ending book yield was 3.3% at quarter end. Our net income this quarter was unfavorably impacted by $33 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 $74 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 $15 million of our common stock at an average price of $39.81 per share, and we have repurchased a further $4 million of our common stock at an average price of $40.89 since quarter end. Our remaining share repurchase authority stands at $53 million. And with that, I'll turn the call back to Kathy.

Thank you, Mike. And reemphasizing where you left off, during the quarter, in total, we returned $50 million of capital to our shareholders. comprised of the $15 million of share repurchases that Mike just mentioned, an additional $35 million in dividends. I also want to reiterate that the sharp increases in market interest rates occurring throughout the first six months of 2022 have benefited our net investment income, which increased 7% year-to-date versus a year ago. While those same market interest rates generated unrealized investment losses on our fixed maturity portfolio, our adjusted book value per share dropped by only 2%, a direct result of unrealized losses from our equities and other investments which flow through our income statement. Our balance sheet and underwriting capital remain very strong and are highly supportive of our continued growth and success. 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.

Thank you. And as a reminder, ladies and gentlemen, to ask a question, you will need to press Start11 on your telephone. Please stand by while we compile the Q&A roster. One moment for our first question, please. Our first question comes from Mark Hughes with Truist. Your line is open. Please go ahead.

Yeah, thank you very much. Good morning.

Good morning, Mark.

Kathy, could you talk about what's going on in California just in terms of pricing? The Rating Bureau had suggested an increase in the pure premium rate, I think, but it's not clear how much the market is going to follow that. Just kind of a sense of the pricing and competitive dynamic in the states.

Sure. So California remains at about 45% of our total book. It's been a little over a year since we adjusted our pricing in California and sort of changed our strategy there. The combination of lower rates and appetite expansion and the improved economy has has increased in California our submissions, quotes, and binds. And that's led to about a 13% increase in the second quarter of 2022, California new business premium relative to what we saw in the second quarter of 2021. To your point about rates, the WCIRB recently filed for a pure premium increase. of about, I think it was around 7.5%, 7.6%. But Commissioner Lara adopted no change in the advisory benchmark rates. Having said that, in the announcement, they noted that the average industry filed rates are currently about 18% higher than the commissioner's advisory rates. So the point being there is that, you know, companies have the flexibility that they need to reflect the risk, whatever risk they're taking in California. And we're in the process of analyzing our own data in that regard and deciding how we will respond to the recent filing from the WCIRB. And yeah, so that's just high level what we're seeing in California. Overall, the market, I would say countrywide, still remains competitive. Not seeing too much of a change there. It's still a soft market in comp, but rates are decreasing at a slower pace than we've seen in the past.

Okay, thank you. And then you mentioned the 15% increase in wages in the first quarter. I think you were talking in broad aggregates and leisure. Is there a number you can share for your book, kind of what you're seeing on renewals, what kind of wage gains or payroll gains?

Yeah, so we've seen on our renewal book, we're seeing very slight decreases in the renewal rates there. And, you know, most of that is attributed to even though loss costs are decreasing, like I said a minute ago, that's being more than offset by wage and payroll increases. So we're seeing, you know, overall, you know, increases in our renewal book year over year.

Okay. But it sounds like it's –

wages mostly offsetting declining lost costs is that that's fair yeah both wages and just increases in hiring and employment levels yeah and then the uh are more than offsetting the i'm sorry are more than offsetting the decreases that we're seeing in rates okay and then the audit premiums

Is it fair to think that'll continue if we're dealing with policyholders that had underestimated their payrolls, and as you were auditing those from last year, would this continue to be a tailwind, do you think?

It wouldn't surprise me if it continues to be a tailwind for several quarters. You know, our audit premium, the increase that we saw this quarter, there were a couple of things going on. For the second quarter, we did increase our audit accrual. It was $13.3 million at the end of Q1, and we increased it to $18.8 million, so that flowed through. And then audit pickups were also really strong this quarter. It totaled about $7.7 million. And I can tell you we're continuing to see that trend into July. You know, it's been an amazing turnaround in that space. For the first six months of 21, we returned about $9 million of audit premiums. and in contrast for the first six months of 2022, we've picked up about $12 million. So that's all going back to what I was saying before. The wage increases, the strong employment, especially in some of our target industries, that's had a really positive impact on these numbers.

And a final question for me, the inflation in medical costs, Any commentary there?

We're not seeing any impact on our book of business from medical inflation. We, you know, medical inflation has been relatively tame relative to a lot of the other sectors. And, you know, I do think comp has done a nice job over the last decade of implementing a lot of medical cost containment measures and that going forward, even if inflation starts to tick up in the medical sector of the market, that those containment measures will serve to sort of mitigate the potential impact of medical inflation. You know, of course, the best hedge against inflation on the medical side is just solid reserving, a solid reserving philosophy, you know, along with prudent claims settlement practices, and I feel like we have both of these in place. So, yeah, short answer is we're not seeing an impact of medical inflation. It doesn't mean it won't come through, but it's certainly lagging right now.

Thank you very much.

Mm-hmm. Thank you. And as a reminder, to ask a question, simply press star 11 on your telephone. One moment for our next question, please. We have a question from Paul Newsome with Piper Sandler. Please go ahead.

Just a quick follow-up call on the medical cost inflation. Hartford was talking this morning about kind of a 5% medical cost inflation over the long term. Is that consistent with how you think of it as well, or do you peg it higher or lower than what they are thinking about?

Well, let me just talk a little bit about how we are reflecting the potential for medical inflation in our reserves. So, you know, we've always included a provision for inflation in our reserves, and it's, as I said earlier, primarily medical inflation that can impact your reserves. And our current provision recognizes the possibility of an increase in the implicit inflation that's buried in our reserve triangles. So rather than pick one point for where we think inflation is going to go, we look at several scenarios and increase that implicit inflation over sort of a defined number of years, and that's reflected in our booked reserves. So that's how we try to reflect it, and I would say the number that you're stating is not too different from some of the scenarios that we have reflected.

Right, thank you. That's very helpful. Thank you.

One moment for our next question. And we have a follow-up from Mark Hughes with Truist. Please go ahead.

Yeah, Mike, I was just going to ask around the expenses, the fixed expenses down a million year over year. Is there any plan to bring those down further or alternatively, to the extent that you maintain more top line growth, how much of an increase should you see in those expenses? How sensitive may they be to inflation or just trying to get a sense of what you might anticipate?

Sure thing, Mark. So Kathy and I are pretty dedicated to trying to hold our fixed expenses as flat as possible. The one thing that's very difficult for us to control in that regard right now is salaries and wages, which we try to build something in there and try to save expenses elsewhere to offset that. On the variable expense side, there's not much we can do. Premium taxes are that, dividends you know, assessments, those are largely outside of our control. So, despite the fact that we've been growing premium quite a bit, we've been able to hold, if not reduce slightly, our fixed expenses, and that's going to be a little bit of a challenge going forward, and we're going to try to hold that as best as we can.

Understood. And then we think about some of the impact of the steps you've taken. You mentioned California increased appetite, better economy, price adjustment. Is there a point at which you laugh at some of those things and growth becomes more challenging, or would you anticipate that those factors continue to impact the business? I'm just trying to understand whether A lot of these things were implemented at a specific point in time, and so therefore you comp against that, and it's not as much of a tailwind.

So, Mark, maybe I can add a little bit of color around where we're seeing some of our larger growth. One of the areas that we haven't talked about yet is our digital distribution area that uses APIs to take in our submissions, quotes, and binds on small business. And that's really taken off over the last couple of years. We have over 40 digital API integrations, and they have produced a year-over-year increase in new business policies. Just for this quarter, it increased about 76% of policies and premium increased about 64%. And year-to-date, we've written about $22 million of new and renewal business in that digital space. So that's up 90% year-over-year. Now, some of that, yes, is coming from the appetite expansion that we've talked about. And the appetite expansion alone, in the first year we've written about $27 million of new business in our expansion classes. So, you know, we're just going to continue to look at new ways to – to increase our market opportunity. So, you know, whether it's, like I said, in digital or appetite expansion or through partnerships with SARITY, you know, we're pretty bullish that we can continue to increase the top line to some extent for a period of time.

Very good. Thank you.

Thank you. And I'm not showing any further questions in the queue. turn the call back to Kathy Antonello for her final thoughts.

Okay. Thank you, Carmen, and thank you all for joining us this morning, and we look forward to meeting with you again in October.

Thank you, and this concludes today's conference call. Thank you for participating, and you may now disconnect. The conference will begin shortly. To raise your hand during Q&A, you can dial star 1 1.