Employers Holdings Inc

Thank you for standing by, and welcome to the Employers' Holdings Fourth Quarter 2022 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1-1 on your telephone. If your question has been answered and you'd like to remove yourself from the queue, simply press star 1-1 again. As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Lori Brown, Executive Vice President, General Counsel. Please go ahead.

Thank you, Jonathan. Good morning and welcome, everyone, to the fourth quarter 2022 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, 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. Good morning to everyone, and thank you for joining us today. To start the discussion, I'll provide some insights of our fourth quarter and full year 2022 financial results, and then I'll hand it over to Mike for more details on our financials. Prior to the Q&A, I'll share some insights into the current workers' compensation market and then talk a little about our focus for 2023. I am really pleased with what we achieved in 2022. We closed the year with strong revenue growth driven by sharp increases in both premium writings and net investment income. Our written premiums were up 22% for the quarter and 21% for the year. The strong growth was the result of higher new, renewal, and final audit premiums. Our thoughtful and disciplined expansion within the low to medium hazard group classes increased submissions, quotes, and binds across most of the states where we operate and was the primary driver of new business premium growth. We also increased our final audit premium accruals and recognized strong audit premium pickup as our payroll exposure grew with the strong labor market and rising wages. Finally, our renewal premium benefited from continued solid retention rates throughout the year. We wrote $707 million of net written premium in 2022, higher than any other year since 2018 and the third highest in our history as a publicly traded company. Our net investment income was up 53% for the quarter and 24% for the year. The sharp increase was primarily due to higher market interest rates impacting bond yields and higher invested balances of fixed maturity securities. We earned $90 million of net investment income in 2022, higher than any other year since 2009, and the second highest in our history as a publicly traded company. With respect to losses, employers and CRT each maintained a current accident-year loss and LAE ratio on voluntary business of 64% versus the 63.5% recorded throughout 2021. During the quarter, employers in CRD each recognized net favorable prior year loss reserve development, which amounted to $23 million in the aggregate. Diligent fixed expense management helped to lower our consolidated underwriting and general and administrative expense ratio to 24.7% for the year, which was far lower than any other year since 2018. Serity, which we launched in 2019, increased its premium writings by 350% this year, from $1.5 million a year ago to $6.7 million. Serity continues to develop additional partnership opportunities to attract small business customers seeking an online experience when purchasing workers' compensation. Finally, I want to thank our dedicated employees for an outstanding 2022. The unwavering service you provide our agents, our policyholders, and their injured workers drive our continued success. 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. Gross premiums written were $174 million versus $142 million a year ago, an increase of 22%. The increase was due to higher new and renewal premiums and higher final audit premiums. Net premiums earned were $181 million versus $156 million a year ago, an increase of 16%. Our losses and loss adjustment expenses were $91 million versus $71 million a year ago. The increase was due to our higher earned premium and lower favorable prior year loss reserve development. We recognized $23 million of favorable prior year loss reserve development during the current quarter, predominantly related to accident years 2017 and prior, versus $24 million a year ago. Commission expenses were $26 million versus $21 million a year ago. The increase was primarily due to higher earned premiums, higher 2022 agency incentive accruals, and an increase in new business writings, which are generally subject to higher commission rates. Underwriting and general administrative expenses were $47 million versus $39 million a year ago. The increase was primarily due to higher premium taxes, assessments, and bad debt expense, each of which vary with our earned premium. Income tax expense was $9 million, a 16% effective rate, versus $14 million a year ago or a 20% effective rate. The effective rates in each of those periods included tax benefits and exclusions associated with our tax-advantaged investment income and LPT deferred gain amortization. The effective rate in the current quarter further benefited from pre-privatization favorable prior year loss reserve development and a non-recurring tax benefit attributable to the repeal of IRC Code Section 847. From a reporting segment perspective, our employer segment had underwriting income of $24 million versus underwriting income of $28 million a year ago, and its resulting calendar year combined ratios were 87% and 82%, respectively. Our Saturday segment had an underwriting loss of $3 million for the quarter consistent with its underwriting loss of a year ago. As Kathy mentioned, 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 $27 million for the quarter versus $18 million a year ago, an increase of more than 50%. The increase was due to higher bond yields and higher invested asset balances, as measured by amortized costs, largely resulting from our federal home loan bank leveraged investment strategy. Pursuant to this strategy, our insurance and subsidiaries have received advances of $183 million from the federal home loan bank, and the proceeds from those advances were used to purchase a similar amount of high-quality, collateralized loan obligation securities. Our fixed maturities currently have a duration of 3.9 and an average credit quality of A. Our weighted average ending book yield was 3.9% at year end, which is up sharply from the 3% a year ago, and our new money rate today is near 6%. Our net income this quarter was favorably impacted by $11 million of net after-tax unrealized gains from equity securities and other investments. Those are reflected on our income statement. And our stockholders' equity and book value per share further benefited by $20 million of net after-tax unrealized gains from fixed maturity securities, which are reflected on our balance sheet. And finally, during the quarter, we repurchased $1.7 million of our common stock at an average price of $42.15 per share. And since year-end, we have bought a further $4.2 million of our stock at an average price of $42.75 per share. Our remaining share repurchase authority currently stands at $43.2 million. And now I'll turn the call back to Kathy.

Thanks, Mike. We expanded our capital management strategy in 2022 to include the proactive return of excess capital to our shareholders via special dividends. During 2022, we returned over $120 million of capital to our shareholders. comprised of $30 million of share repurchases, $29 million of regular quarterly dividends, and $62 million of special dividends. As a unique specialist in small business workers' compensation, we are both well positioned and well capitalized to further react to the favorable trends and opportunities that we're seeing. While workers' compensation pricing remains competitive, the line also remains profitable. Tailwinds from increasing hiring and wages, especially in the leisure and hospitality industry, where we've always had a strong presence, are benefiting workers' comp, and medical inflation has remained moderate relative to other categories. Throughout 2023, our focus will be on continuing to identify new and profitable segments of the workers' compensation market to grow our top line while maintaining our fixed expense structure. We're investing in improvements to both our workforce and customer experience, which will yield efficiencies and delight our growing customer base. We remain highly confident in our continued success. And with that, operator, we will now take questions.

Certainly. Ladies and gentlemen, if you have a question at this time, please press star 1-1 on your telephone. One moment for our first question. And our first question comes from the line of Mark Hughes from Truist. Your question, please.

Yeah, thank you. Good morning.

Good morning, Mark.

Kathy, the capital situation as it stands today, your top line opportunities seem to be pretty good. So you've got something to do with your capital, but presumably your leverage is still moderate. How do you see that? Is there still opportunity for capital return with what you've got in front of you?

Yes, I do believe so. I will let Mike discuss more of the details, you know, but I just say that we've always been and will continue to be committed to managing our capital. in a way that's in the best interest of the company and its shareholders. And to do that, we're going to use every tool in our toolbox, which is what we did in 2022. You know, we do feel the company's in a very strong capital position, and, you know, it's highly supportive of our growth and the technology initiatives that I mentioned earlier, and we do not see that changing. And, yes, I do feel like we have more potential going forward, but I will let Mike give you some more details on that.

Great question, Mark. And one of the reasons why we were able to effect $62 million of special dividends this year is we did extract in a special distribution $120 million from one of our larger insurance companies. That still leaves about $100 million at the parent today, which is in a good place. But the result of that special dividend was very helpful to us because it helped serve to increase our premium to surplus ratio from about 54% at the end of 2021 to 75% where we stand today. And that's a function both of reducing the underwriting capital and the premium growth that we saw this year. I think Kathy and I would both like to see that number even higher than the 75% it's at right now, perhaps to the low to mid-90s. So we're on our way towards more efficiency in that regard. With respect to further special dividends, you know, we'll make a determination in the second half of this year as to whether that's appropriate for 2023 or not. We'll make that determination based on where our capital at the insurance company stands, what our capital position at the holding company looks like, and what our opportunities for 2024 look like. There's no guarantees, but, you know, we won't be able to make that determination until that time. But it is important for you to understand that we are comfortable in making special dividends when they're appropriate.

Yeah, appreciate those details. Serity really had a good fourth quarter for written premium. Is anything in particular going on there? Is there some seasonal component to it? Is this a new run rate that you'll look to build on?

Yeah, you know, I do think that Serity will continue to grow at a strong clip. For the fourth quarter, Serity increased its premium year over year by about 275%. You know, I'd like to see a continued growth of that size, somewhere between 200% and 300% in the future. You know, we're pretty cautious with, you know, the direct-to-consumer space and don't want to grow too fast. We're obviously very not focused on profitability also and always have been, and that's why we've been cautious in that area. The appetite expansion has helped CRD and enhancing some of their back-end capabilities and some of the partnerships that we announced. in 2022 are also adding to that growth. And we fully expect more partnerships in the future.

And then your broader push to expand, I think you talked about low to mid hazard, medium hazard classes, driving submissions, et cetera. How much more is there to go, would you say? How far along in that process are you?

Well, it's an ongoing process. I don't know that we will be done anytime soon. What I can tell you is we... From the onset of our appetite expansion, which has been a little over 18 months now, we've written about $50 million of premium in those expanded class codes. And we're continuing to, you know, that group is continuing to function and look for opportunities where we see that there's profitable growth there. So having shut down that expansion, we'll continue into the future to find growth where we can. There's plenty of opportunity there.

Yeah. If I could just slip in a couple more. Current accident year outlook, any reason for that to be higher or lower in 2023?

I don't expect a material change in the current accident year. You know, we're 45 days in, but we didn't see anything that would cause alarm when we were looking at 2023 and trying to project what that might be. So I think it will be very similar to what you've seen in the prior two accident years.

And then finally, I wonder, Kathy, would you have any broad comments about the potential for reserve development? You know, just based on the magnitude of the reserve, the, you know, how much you've got in some of these accident years that has been more productive on that front. I think the, I don't know that you've dipped into 2020 or 2021, but, you know, maybe just some High-level thoughts about this has obviously been a great run for you. What could one anticipate? You know, how is it looking as we go forward?

Yeah, so as you know, about a year ago, we decided to do full studies of reserves twice a year, and so that will continue into 2023. You know, the one area where we've spent a lot of time looking at our reserves is in regard to inflation. And our reserves have always included a provision for inflation, but our current booked reserves recognize the possibility of an increase over the implicit inflation that has always been buried in our reserve triangles. So we did do a deep dive where we looked at several scenarios and increased our booking to reflect something over and above the implicit inflation. And so, you know, I feel like we're in a good spot. There's nothing that I'm seeing that is concerning about our reserves. As you know, we recognize $23 million of favorable prior year reserve development. That came predominantly from accident years 2017 and prior. Our reserve philosophy tends to hold on the more current accident years until there's a compelling reason to adjust those. And at the moment, we have not felt that there was a need to do that.

Thank you for all the answers.

Thanks, Mark.

Thank you. Once again, ladies and gentlemen, if you have a question at this time, please press star 1-1 on your telephone.

One moment for our next question.

Our next question comes from the line of Paul Newsome from AOL.com. Your question, please.

It's from . Thanks for the call. I didn't hear anything about – I'd like to have some more details just about the competitive environment in general. Any signs that things are shifting from a competitive perspective?

Yeah. Not in a significant way. You know, for the business sectors and the premium sizes that we are writing, I would continue to characterize the environment as competitive. You know, there have been pockets that I've heard chatter about where the insure techs are either pulling out or kind of tightening their pricing to achieve some profitability. That could be opening up some opportunities for us to participate in areas where we felt like pricing was somewhat inadequate before. You know, for our renewal book, when we adjust for changes and exposure, I can tell you that our Q4 2022 average pricing did show the smallest year-over-year rate decrease that we've seen in many, many years. It's almost approaching flat. But I would say, you know, kind of in a nutshell, it's still not a hard market, but there could be some fundamental changes going on.

So, what might be the drivers of that? Is it just simply less frequency benefit or is there something else that you think is maybe helping us out a little bit on the margin?

I don't think it's anything going on with frequency. I can talk about that for a second. You know, when we look at frequency, we're currently comparing our current accident year, which I'm still referring to accident year 2022. If we compare that to accident year 2019 to remove sort of any interim distortions from the pandemic, so far our accident year 2022 frequency, and this is based on on-level premium, is really emerging well below the accident year 2019 frequency. um level um so pretty significant decreases in frequency still coming through um on the severity side um you know i think we'll have to keep an eye on that i i don't think medical inflation is causing any kind of problem right now um but you know we're seeing a tiny uptick in severity but it's still too early i would say and for accident year 2022 to really know where that's going to land Nothing concerning that I'm seeing thus far.

Great. Well, thank you for the answers. Really appreciate it.

Thank you, Paul.

Thank you. One moment for our next question. And our next question is a follow-up from the line of Mark Hughes from Truist.

Yeah, Kathy, I just wanted to clarify when you said the frequency is down, did you say on a premium basis, so not necessarily on a closure, but relative to premium?

Yeah, we like to look at frequency relative to on-leveled premium, which puts all of the years on the same premium level, so that you're truly just measuring the pure frequency decline. And we are continuing to see pretty significant decreases in frequency in our comp book. And I don't think that's any.

Go ahead.

No, I'm sorry. I cut you off. But I was going to say that in terms of exposures.

Yeah, we're seeing it decrease across the line, whether you look at it on an exposure basis, on a not on-level premium basis, or on an on-level premium basis. So, yeah, versus payroll or premium, it's decreasing.

Yeah. What's the latest you're seeing if you look at the state data on, like, NCCI loss costs? Is there a particular trend in what they're? putting out in the market?

Loss costs are continuing to decline in most of the NCCI states. In California, the WCIRB filed for a pure premium increase of 7.6% last fall, but the commissioner approved no change. You know, I guess I would say I'm a little surprised at some of the sizable decreases that are being filed. But, you know, these are just the lost costs and every carrier can file what is appropriate for them. And it's good that carriers have that flexibility. You know, I have a lot of faith in our team of actuaries and feel like they're best in class, and we always complete our own analysis and make filings that represent what we feel is appropriate rate adequacy for both employers and CRD. But, yeah, that's kind of the overall trend I'm seeing is WCIRB tends to be seeing some upward pressure in California. NCCI states are still drifting down for the most part.

Mike, the federal home loan bank strategy you've used has been seemingly very successful. When does that taper? What's the impact of potential movement in that over the next six, 12 months?

So that trade's probably going to end in the third quarter. maybe fourth quarter of this year. And the reason for that is that the CLOs track LIBOR today. That will change when LIBOR goes away July 1st and the federal home loan bank borrowings are done at SOFR. And it's the difference between those two rates that's helping us with the arbitrage today. So again, that's going to erase as the year goes. To put it into perspective with respect to our Our activities in 2022, we had about a $6.3 million net investment impact increase as a result of that trade. And that is just the yield on the additional CLOs. But also going the other way was $3 million worth of interest. So that trade had a $3.3 million increase. pre-tax benefit to us in 2022. And we'll have to wait to see what that effect is going to be into 2023, but we'll continue to have some, you know, some benefit from that, but it will be dwindling as the year goes by.

Okay. That's a pretty modest number. Um, I would, I would think, um, and then on the expense ratio, anything, uh, Commissions are up a little bit, but your growth has been pretty strong, so that all makes sense. Expense ratio overall, though, any thoughts about 2023?

So keep in mind that the fourth quarter expense ratio is up a little bit, and that's largely because of the success we had with net investment income and the development that we took. So that meant that we had to adjust some compensation accruals. and that adjustment related to the entire year. So fourth quarter is a little bit of an anomaly based on the additional revenue that we saw. Going into next year, Cathy and I are doing everything that we can to hold the line on our fixed expenses. As you know, the variable expenses are largely outside of our control because those vary with our premium and can't be avoided. There's probably not – we can't make the significant splash in a reduction to the fixed expenses as we have been able to accomplish since the first quarter of 2021, but the continued premium growth and the catching up of the earned to where the written is will continue to benefit that ratio to the extent that we're successful in holding to our fixed expenses.

Can you say roughly what the comp – expense the accrual catch-up was, what that impact was in the fourth quarter?

It's tough for me to say. We're talking short-term, long-term, this, that, but, you know, it was a few million dollars. Let's say three.

Okay. That sort of makes sense compared to your recent trend. Okay. All right. Thanks for your patience with all my questions.

Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to Kathy Antonello for any further remarks.

Thank you all for joining us this morning. I look forward to meeting with you again in April, and thank you, Jonathan. Have a great weekend.

Thank you, and thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.

The conference will begin shortly. To raise and lower your hand during Q&A, you can dial star 1 1. you Thank you. Thank you. Bye.

Thank you for standing by and welcome to the Employers Holdings Fourth Quarter 2022 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1-1 on your telephone. If your question has been answered and you'd like to remove yourself from the queue, simply press star 1-1 again. As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Lori Brown, Executive Vice President, General Counsel. Please go ahead.

Thank you, Jonathan. Good morning and welcome everyone to the fourth quarter 2022 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 at 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. Good morning to everyone, and thank you for joining us today. To start the discussion, I'll provide some insights of our fourth quarter and full year 2022 financial results, and then I'll hand it over to Mike for more details on our financials. Prior to the Q&A, I'll share some insights into the current workers' compensation market and then talk a little about our focus for 2023. I am really pleased with what we achieved in 2022. We closed the year with strong revenue growth driven by sharp increases in both premium writings and net investment income. Our written premiums were up 22% for the quarter and 21% for the year. The strong growth was the result of higher new, renewal, and final audit premiums. Our thoughtful and disciplined expansion within the low to medium hazard group classes increased submissions, quotes, and binds across most of the states where we operate and was the primary driver of new business premium growth. We also increased our final audit premium accruals and recognized strong audit premium pickup as our payroll exposure grew with the strong labor market and rising wages. Finally, our renewal premium benefited from continued solid retention rates throughout the year. We wrote $707 million of net written premium in 2022, higher than any other year since 2018 and the third highest in our history as a publicly traded company. Our net investment income was up 53% for the quarter and 24% for the year. The sharp increase was primarily due to higher market interest rates impacting bond yields and higher invested balances of fixed maturity securities. We earned $90 million of net investment income in 2022, higher than any other year since 2009 and the second highest in our history as a publicly traded company. With respect to losses, employers and CERTI each maintained a current accident year loss and LAE ratio on voluntary business of 64% versus the 63.5% recorded throughout 2021. During the quarter, employers in CRD each recognized net favorable prior year loss reserve development, which amounted to $23 million in the aggregate. Diligent fixed expense management helped to lower our consolidated underwriting and general and administrative expense ratio to 24.7% for the year, which was far lower than any other year since 2018. Serity, which we launched in 2019, increased its premium writings by 350% this year, from $1.5 million a year ago to $6.7 million. Serity continues to develop additional partnership opportunities to attract small business customers seeking an online experience when purchasing workers' compensation. Finally, I want to thank our dedicated employees for an outstanding 2022. The unwavering service you provide our agents, our policyholders, and their injured workers drive our continued success. 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. Gross premiums written were $174 million versus $142 million a year ago, an increase of 22%. The increase was due to higher new and renewal premiums and higher final audit premiums. Net premiums earned were $181 million versus $156 million a year ago, an increase of 16%. Our losses and loss adjustment expenses were $91 million versus $71 million a year ago. The increase was due to our higher earned premium and lower favorable prior year loss reserve development. We recognized $23 million of favorable prior year loss reserve development during the current quarter, predominantly related to accident years 2017 and prior, versus $24 million a year ago. Commission expenses were $26 million versus $21 million a year ago. The increase was primarily due to higher earned premiums, higher 2022 agency incentive accruals, and an increase in new business writings which are generally subject to higher commission rates. Underwriting and general administrative expenses were $47 million versus $39 million a year ago. The increase was primarily due to higher premium taxes, assessments, and bad debt expense, each of which vary with our earned premium. Income tax expense was $9 million, a 16% effective rate, versus $14 million a year ago or a 20% effective rate. The effective rates in each of those periods included tax benefits and exclusions associated with our tax-advantaged investment income and LPT deferred gain amortization. The effective rate in the current quarter further benefited from pre-privatization favorable prior year loss reserve development and a non-recurring tax benefit attributable to the repeal of IRC Code Section 847. From a reporting segment perspective, our employer segment had underwriting income of $24 million versus underwriting income of $28 million a year ago, and its resulting calendar year combined ratios were 87% and 82%, respectively. Our Saturday segment had an underwriting loss of $3 million for the quarter consistent with its underwriting loss of a year ago. As Kathy mentioned, 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 $27 million for the quarter versus $18 million a year ago, an increase of more than 50%. The increase was due to higher bond yields and higher invested asset balances, as measured by amortized costs, largely resulting from our federal home loan bank leveraged investment strategy. Pursuant to this strategy, our insurance and subsidiaries have received advances of $183 million from the federal home loan bank, and the proceeds from those advances were used to purchase a similar amount of high-quality collateralized loan obligation securities. Our fixed maturities currently have a duration of 3.9 and an average credit quality of A. Our weighted average ending book yield was 3.9% at year end, which is up sharply from the 3% a year ago, and our new money rate today is near 6%. Our net income this quarter was favorably impacted by $11 million of net after-tax unrealized gains from equity securities and other investments. Those are reflected on our income statement. And our stockholders' equity and book value per share further benefited by $20 million of net after-tax unrealized gains from fixed maturity securities, which are reflected on our balance sheet. And finally, during the quarter, we repurchased $1.7 million of our common stock at an average price of $42.15 per share. And since year-end, we have bought a further $4.2 million of our stock at an average price of $42.75 per share. Our remaining share repurchase authority currently stands at $43.2 million. And now I'll turn the call back to Kathy.

Thanks, Mike. We expanded our capital management strategy in 2022 to include the proactive return of excess capital to our shareholders via special dividends. During 2022, we returned over $120 million of capital to our shareholders. comprised of $30 million of share repurchases, $29 million of regular quarterly dividends, and $62 million of special dividends. As a unique specialist in small business workers' compensation, we are both well positioned and well capitalized to further react to the favorable trends and opportunities that we're seeing. While workers' compensation pricing remains competitive, the line also remains profitable. Tailwinds from increasing hiring and wages, especially in the leisure and hospitality industry, where we've always had a strong presence, are benefiting workers' comp, and medical inflation has remained moderate relative to other categories. Throughout 2023, our focus will be on continuing to identify new and profitable segments of the workers' compensation market to grow our top line while maintaining our fixed expense structure. We're investing in improvements to both our workforce and customer experience, which will yield efficiencies and delight our growing customer base. We remain highly confident in our continued success. And with that, operator, we will now take questions.

Ladies and gentlemen, if you have a question at this time, please press star 1-1 on your telephone. One moment for our first question. And our first question comes from the line of Mark Hughes from Truist. Your question, please.

Yeah, thank you. Good morning.

Good morning, Mark.

Kathy, the capital situation as it stands today, your top line opportunities seem to be pretty good. So you've got something to do with your capital, but presumably your leverage is still moderate. How do you see that? Is there still opportunity for capital return with what you've got in front of you?

Yes, I do believe so. I will let Mike discuss more of the details, you know, but I just say that we've always been and will continue to be committed to managing our capital and in a way that's in the best interest of the company and its shareholders. And to do that, we're going to use every tool in our toolbox, which is what we did in 2022. You know, we do feel the company's in a very strong capital position, and, you know, it's highly supportive of our growth and the technology initiatives that I mentioned earlier, and we do not see that changing. Yes, I do feel like we have more potential going forward, but I will let Mike give you some more details on that.

Great question, Mark. One of the reasons why we were able to effect $62 million of special dividends this year is we did extract in a special distribution $120 million from one of our larger insurance companies. That still leaves, you know, about $100 million at the parent today, which is in a good place. But the result of that special dividend was very helpful to us because it helped serve to increase our premium to surplus ratio from about 54% at the end of 2021 to 75% where we stand today. And that's a function both of reducing the underwriting capital and the premium growth that we saw this year. I think Kathy and I would both like to see that number even higher than the 75% it's at right now, perhaps to the low to mid-90s. So we're on our way towards more efficiency in that regard. With respect to further special dividends, you know, we'll make a determination in the second half of this year as to whether that's appropriate for 2023 or not. We'll make that determination based on where our capital at the insurance company stands, what our capital position at the holding company looks like, and what our opportunities for 2024 look like. There's no guarantees, but, you know, we won't be able to make that determination until that time. But it is important for you to understand that we are comfortable in making special dividends when they're appropriate.

Yeah, appreciate those details. Serity really had a good fourth quarter for written premium. Is anything in particular going on there? Is there some seasonal component to it? Is this a new run rate that you'll look to build on?

Yeah, you know, I do think that Serity will continue to grow at a strong clip. For the fourth quarter, Serity increased its premium year over year by about 275%. You know, I'd like to see a continued growth of that size somewhere between 200% and 300% in the future. You know, we're pretty cautious with, you know, the direct-to-consumer space and don't want to grow too fast. We're obviously very not focused on profitability also and always have been, and that's why we've been cautious in that area. The appetite expansion has helped CRD and enhancing some of their back-end capabilities and some of the partnerships that we announced. in 2022 are also adding to that growth. And we fully expect more partnerships in the future.

And then your broader push to expand, I think you talked about low to mid hazard, medium hazard classes, driving submissions, et cetera. How much more is there to go, would you say? How far along in that process are you?

Well, it's an ongoing process. I don't know that we will be done anytime soon. What I can tell you is we... From the onset of our appetite expansion, which has been a little over 18 months now, we've written about $50 million of premium in those expanded class codes. And we're continuing to, you know, that group is continuing to function and look for opportunities where we see that there's profitable growth there. So having shut down that expansion, we'll continue into the future to find growth where we can. There's plenty of opportunity there.

Yeah. If I could just slip in a couple more. Current accident year outlook, any reason for that to be higher or lower in 2023?

I don't expect a material change in the current accident year. You know, we're 45 days in, but we didn't see anything that would cause alarm when we were looking at 2023 and trying to project what that might be. So I think it will be very similar to what you've seen in the prior two accident years.

And then finally, I wonder, Kathy, whether you have any broad comments about the potential for reserve development, you know, just based on the magnitude of the reserve, the, you know, how much you've got in some of these accident years that have been more productive on that front. I think, I don't know that you've dipped into 2020 or 2021, but, you know, maybe just some High-level thoughts about this has obviously been a great run for you. What could one anticipate? How is it looking as we go forward?

Yeah, so as you know, about a year ago, we decided to do full studies of reserves twice a year, and so that will continue into 2023. You know, the one area where we've spent a lot of time looking at our reserves is in regard to inflation. And our reserves have always included a provision for inflation, but our current booked reserves recognize the possibility of an increase over the implicit inflation that has always been buried in our reserve triangles. So we did do a deep dive where we looked at several scenarios and increased our booking to reflect something over and above the implicit inflation. And so, you know, I feel like we're in a good spot. There's nothing that I'm seeing that is concerning about our reserves. As you know, we recognize $23 million of favorable prior year reserve development That came predominantly from accident years 2017 and prior. Our reserve philosophy tends to hold on the more current accident years until there's a compelling reason to adjust those. And at the moment, we have not felt that there was a need to do that.

Thank you for all the answers.

Thanks, Mark.

Thank you. Once again, ladies and gentlemen, if you have a question at this time, please press star 1-1 on your telephone.

One moment for our next question.

Our next question comes from the line of Paul Newsome from AOL.com. Your question, please.

It's from . Thanks for the call. I didn't hear anything about, I'd like to have some more details just about the competitive environment in general. Any signs that things are shifting from a competitive perspective?

Not in a significant way. You know, for the business sectors and the premium sizes that we are writing, I would continue to characterize the environment as competitive. You know, there have been pockets that I've heard chatter about where the insure techs are either pulling out or kind of tightening their pricing to achieve some profitability. That could be opening up some opportunities for us to participate in areas where we felt like pricing was somewhat inadequate before. You know, for our renewal book, when we adjust for changes and exposure, I can tell you that our Q4 2022 average pricing did show the smallest year-over-year rate decrease that we've seen in many, many years. It's almost approaching flat. But I would say, you know, kind of in a nutshell, it's still not a hard market, but there could be some fundamental changes going on.

So, what might be the drivers of that? Is it just simply less frequency benefit or is there something else that you think is maybe helping us out a little bit on the margin?

I don't think it's anything going on with frequency. I can talk about that for a second. You know, when we look at frequency, we're currently comparing our current accident year, which I'm still referring to accident year 2022. If we compare that to accident year 2019 to remove sort of any interim distortions from the pandemic, so far our accident year 2022 frequency, and this is based on on-level premium, is really emerging well below the accident year 2019 frequency. um level um so pretty significant decreases in frequency still coming through um on the severity side um you know i think we'll have to keep an eye on that i i don't think medical inflation is causing any kind of problem right now um but you know we're seeing a tiny uptick in severity but it's still too early i would say and for accident year 2022 to really know where that's going to land Nothing concerning that I'm seeing thus far.

Great. Well, thank you for the answers. Really appreciate it.

Thank you, Paul.

Thank you. One moment for our next question. And our next question is a follow-up from the line of Mark Hughes from Truist.

Hey, Kathy, I just wanted to clarify when you said the frequency is down, did you say on a premium basis, so not necessarily on a closure, but relative to premium?

Yeah, we like to look at frequency relative to on-leveled premium, which puts all of the years on the same premium level, so that you're truly just measuring the pure frequency decline. And we are continuing to see pretty significant decreases in frequency in our comp book. And I don't think that's any. Go ahead.

No, I'm sorry. I cut you off. But I was going to say that in terms of exposures.

Yep, we're seeing a decrease across the line, whether you look at it on an exposure basis, on a not on-level premium basis, or on an on-level premium basis. So, yep, versus payroll or premium, it's decreasing.

Yeah. What's the latest you're seeing if you look at the state data on, like, NCCI loss costs? Is there a particular trend in what they're? putting out in the market?

Loss costs are continuing to decline in most of the NCCI states. In California, the WCIRB filed for a pure premium increase of 7.6% last fall, but the commissioner approved no change. You know, I guess I would say I'm a little surprised at some of the sizable decreases that are being filed. But, you know, these are just the lost costs and every carrier can file what is appropriate for them. And it's good that carriers have that flexibility. You know, I have a lot of faith in our team of actuaries and feel like they're best in class, and we always complete our own analysis and make filings that represent what we feel is appropriate rate adequacy for both employers and CRD. But, yeah, that's kind of the overall trend I'm seeing is WCIRB tends to be seeing some upward pressure in California. NCCI states are still drifting down for the most part.

Mike, the federal home loan bank strategy you've used has been seemingly very successful. When does that taper? What's the impact of potential movement in that over the next six, 12 months?

So that trade's probably going to end in the third quarter. maybe fourth quarter of this year. And the reason for that is that the CLOs track LIBOR today. That will change when LIBOR goes away July 1st and the federal home loan bank borrowings are done at SOFR. And it's the difference between those two rates that's helping us with the arbitrage today. So again, that's going to erase as the year goes. To put it into perspective with respect to our Our activities in 2022, we had about a $6.3 million net investment impact increase as a result of that trade, and that is just the yield on the additional CLOs. But also going the other way was $3 million worth of interest. So that trade had a $3.3 million increase. pre-tax benefit to us in 2022. And we'll have to wait to see what that effect is going to be into 2023, but we'll continue to have some, you know, some benefit from that, but it will be dwindling as the year goes by.

Okay. That's a pretty modest number. Um, I would, I would think, um, and then on the expense ratio, anything, uh, Commissions are up a little bit, but your growth has been pretty strong, so that all makes sense. Expense ratio overall, though, any thoughts about 2023?

So keep in mind that the fourth quarter expense ratio is up a little bit, and that's largely because of the success we had with net investment income and the development that we took. So that meant that we had to adjust some compensation accruals. and that adjustment related to the entire year. So fourth quarter is a little bit of an anomaly based on the additional revenue that we saw. Going into next year, Cathy and I are doing everything that we can to hold the line on our fixed expenses. As you know, the variable expenses are largely outside of our control because those vary with our premium and can't be avoided. There's probably not – we can't make the significant splash in a reduction to the fixed expenses as we have been able to accomplish since the first quarter of 2021, but the continued premium growth and the catching up of the earned to where the written is will continue to benefit that ratio to the extent that we're successful in holding to our fixed expenses.

Can you say roughly what the comp – expense the accrual catch-up was, what that impact was in the fourth quarter?

It's tough for me to say. We're talking short-term, long-term, this, that, but, you know, it was a few million dollars. Let's say three.

Okay. That sort of makes sense compared to your recent trend. Okay. All right. Thanks for your patience with all my questions.

Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to Kathy Antonello for any further remarks.

Thank you all for joining us this morning. I look forward to meeting with you again in April. And thank you, Jonathan. Have a great weekend.

Thank you. And thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.