Employers Holdings Inc

Thank you for standing by and welcome to the Employers Holdings first quarter 2023 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 this session, you'll need to press star 1-1 on your telephone. If 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 first quarter 2023 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 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 on 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 thanks for joining us today. To start this morning, I'll provide some highlights of our first quarter 2023 financial results Then I'll hand it over to Mike for further details on our financials. And prior to Q&A, I'll touch on a few of our digital initiatives that we plan to complete in 2023. I'm very pleased with our first quarter results. Continued premium growth, significantly higher net investment income, and a return to net investment gains drove a 36% increase in revenue year over year. Our written and earned premiums in the quarter were up 13% and 15%, respectively. The strong increase arose from higher new, renewal, and final audit premiums, and two recent initiatives also contributed to the growth. The first is our thoughtful and disciplined expansion within the low-to-medium hazard group classes, and the second was the successful implementation of Phase 1 of our new sales and underwriting operating models. which was designed to create efficiency and optimize our agent engagement in our core business segment. As a result of these efforts, we ended the quarter with yet another record number of policies in force. Our net investment income was up 45% for the quarter. The sharp increase was primarily due to higher market interest rates impacting bond yields and higher invested balances of fixed maturity securities. We earned $28 million of net investment income during the quarter, which is significantly higher than any other quarter in our history as a publicly traded company. Our income statement further benefited from $8 million of net investment gains, a markedly different result than the $17 million of net investment losses we experienced a year ago. From an underwriting standpoint, we set our current accident year loss and LAE ratio at on voluntary business at 63.3% versus 64% recorded throughout 2022. We did not recognize any prior year loss reserve development this quarter because a full actuarial study was not performed and the indications were consistent with our expectations. We will evaluate our prior year reserves in more detail at mid-year when we routinely perform a full reserve study. Despite an increase in our year over year commission expense, our commission expense ratio improved by 0.4 percentage points to 13.5% when considering the corresponding increase in net earned premium. The same was the case with our consolidated underwriting and G&A expense ratio, which also improved by 0.4 percentage points to 25.7%. 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 $195 million versus $172 million a year ago, an increase of 13%. As Kathy mentioned, the increase was due to higher new, renewal, and final audit premiums. Net premiums earned were $173 million versus $150 million a year ago, an increase of 15%. Our Serity operating segment, which offers digital workers' compensation insurance solutions directly to consumers, contribute nicely to our growth in earned premium this quarter. Our loss and loss adjustment expenses were $107 million versus $94 million a year ago, an increase of 14%. The increase is due to our higher earned premium, partially offset by a lower current accident year loss in LAE provisions. Commission expenses were $23 million versus $21 million a year ago, an increase of 12%. The increase was primarily due to our higher earned premiums. As Kathy mentioned, our commission expense ratio for the quarter was down by 0.4 percentage points from that of a year ago. Underwriting and general and administrative expenses were $44 million versus $39 million a year ago, an increase of 13%. The increase was primarily due to higher compensation-related expenses, as well as higher policyholder dividends and bad debt expenses resulting from the increase in earned premium. As was the case with our commission expense ratio, our consolidated underwriting and general and administrative expense ratio was also down 0.4 percentage points from that of a year ago. From a reporting segment perspective, our employer segment had pre-tax income of $30 million, versus $2 million a year ago, and its resulting calendar year combined ratios were 99% and 100% respectively. Our Serity segment had a pre-tax loss of $2 million for the quarter versus a loss of $3 million a year ago. Serity's current accident year loss in L.A.E. ratios since its inception have been highly consistent with those of our employers' segments. Turning to investments, our net investment income was $28 million for the quarter versus $19 million a year ago, an increase of 45%. The increase was due to higher bond yields and a higher invested asset balance as measured by amortized costs, resulting from our federal home loan bank leveraged investment strategy. Pursuant to that strategy, our insurance 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 3.8 and an average credit quality of A. Our weighted average book yield was 4.1% at quarter end, which is up sharply from 3% a year ago, and our new money rate today is near 6%. Our net income this quarter was favorably impacted by $6 million of net after-tax unrealized gains from equity securities and other investments, which are reflected on our income statements. And our stockholders' equity was favorably impacted by $23 million of net after-tax unrealized gains from fixed maturity securities, which are reflected on our balance sheet. During the first quarter, we repurchased $11 million of our common stock at an average price of $42.24 per share. And thus far, we have repurchased an additional $6 million of our common stock in the second quarter at an average price of $42.29 per share. Our remaining share repurchase authority stands at $31 million. And finally, earlier this week, our board of directors declared a second quarter 2023 regular quarterly dividend of 28 cents per share, an increase of 8% from the prior quarterly dividend of 26 cents per share. This action reflects our strong balance sheet, abundant underwriting capital, and our confidence in the company's future operations. And now I'll turn the call back to Kathy.

Thank you, Mike. Over the last few quarters, we've been actively identifying areas where increased automation and digitization can unlock further improvement in our combined ratio, our workforce experience, and our customer experience. Our focus now is on implementation. Just last week, we enabled e-delivery of policyholder documents. This initiative brings numerous benefits, allowing our policyholders to go green and reducing our fixed expenses. During 2023, we've also committed to producing a best-in-class electronic claims intake process that will make it easier for our claimants to provide all the required information and reduce handling time for our claim intake staff. As a unique specialist in small business workers' compensation, we continue to be well-positioned to further benefit from the favorable trends and opportunities that we're seeing and remain confident in our continued success. And with that, operator, we'll now take questions.

Certainly. Once again, ladies and gentlemen, if you have a question at this time, simply press star 1-1 on your telephone. One moment for our first question. And our first question comes from the line of Matthew Carletti from JMP Securities. Your question, please.

Hey, thanks. Good morning.

Good morning, Matt.

Good morning. Kathy, I was hoping maybe you could just kind of give us a high-level view of obviously a dynamic environment. And you noticed, you know, the accident-year loss ratio pick improved a little bit. Could you just maybe peel things back a little bit and understand kind of what's going on with what you're seeing in frequency and severity trends? You know, pricing, I know that can vary a bit by state, but actually California is a big piece. And then maybe the last piece I'm most interested in is what you're seeing in kind of the payroll growth or really from a wage inflation perspective and what feel you might have for how much of that might act like rate versus what might be more true exposure.

Okay, yes. So let me start with the accident year loss ratio that you mentioned. You know, our current accident year loss and LAE ratio is determined by our actuaries. And it considers everything from the pricing environment of each state that we're in and our growth prospects in those states. It also looks at the trends we're seeing in frequency and severity. And then finally, any initiatives that we may be implementing that we feel could impact our results. So yes, we did choose a slightly lower accident year loss and LAE ratio this year. I certainly wouldn't read too much into the change that you're seeing. We generally like to choose a ratio at the beginning of the year, given the current environment, and we'll leave it there until there's some compelling reason to change it. So that's sort of the methodology behind how we choose our current accident-year loss ratio. In regards to pricing, you mentioned, for the business sectors and the premium sizes that we write, we would continue to characterize the environment as quite competitive, especially for the smallest policy sizes. We're having a bit more success finding policies that are generally larger than our average policy size, which runs anywhere from around $5,200. I would attribute that success to the new sales and underwriting operating model that I referenced earlier. For our renewal book, when we adjust for changes in exposure, our first quarter 2023 average pricing is showing A small year-over-year rate decrease, but that does vary by state. California continues to be our largest state. It's about 45% of our book and our results there are quite favorable. We've recently refined our pricing methodology in California and we believe that that's going to open up some more opportunities there. The combination of our appetite expansion and the economic factors that are currently in play led us to a 16% increase in California premium for the first quarter of 23 relative to 22. I was just reading this week that the WCIRB Governing Committee just voted to file for a pure premium increase of about 0.3%. And that, according to the press release, was due to some downward indemnity development, some stable medical development, and some flat frequency that they're seeing there. Still yet to be seen what Commissioner Lara will approve, though. In regards to our frequency and severity, when we look at it based on on-level premium, accident year 2022, Frequency is down from prior years, and so far 2023, obviously still very early to tell, but it's emerging lower as well. And we're seeing the decrease in both California and other states. And then finally, you mentioned what's going on with growth and the economy. With the unemployment rate hovering at around 3.5%, That's very positive for workers' compensation. The upward shift in employment levels and wages that we're seeing are impacting our policies to a somewhat greater extent than average. And that is just sort of the flip side of what we saw going into COVID, where we were impacted more negatively as the economy deteriorated. So we're still seeing strong wages in the leisure and hospitality sector. And the momentum is resulting in some strong audit pickups and endorsement activity. So I'll stop there and see if you have any more questions.

No, no, that's perfect. I guess maybe just the one follow-up is on the, with what you're seeing on kind of the pickup on the audit side to the extent that it's, you know, wage inflation, I guess, is there, Do you have a feel for, you know, how much of that is exposure? So somebody working more hours or more employees being added. So true kind of exposure versus an employee getting paid more for the same exposure. I think the latter would be much more beneficial to you.

Well, I would say that both are impacting the strong audit premium pickup. We haven't changed our audit accrual this quarter. It's still at about $37 million. We had about $9.4 million of audit pickups in the first quarter. I can tell you that's continued into April. And then we've also recognized a close to $4 million in noncompliant premium throughout the first quarter. So it's both. It's both payrolls going up by hiring and wage increases that are coming through.

Okay, great. That's wonderful. Thank you for helping me put the puzzle together.

No problem.

Thank you. One moment for our next question. And our next question. comes from the line of Mark Hughes from Truist. Your question, please. Yeah, thanks. Good morning.

Good morning.

Kathy, you had talked about, I think you were talking frequency down in 2022 and emerging lower as well in 23.

Yes.

Did you address severity in that or did that encompass severity as well?

I did not mention severity, but severity is behaving the same way as it has in recent years. Accident year 2022 is coming in, you know, emerging lower than prior accident years. We're especially seeing that in California. And other states is emerging flat to just maybe a slight tick up, but nothing that's concerning.

What do you think the NCCI is going to do in terms of lost costs? for 2023, you know, when we get all the state data? How do you think that's going to look?

Well, it's tough to say. I don't have a crystal ball, but I would say, you know, the indications that just the fundamentals that we're seeing and what I just mentioned with frequency and severity trends and so forth, there's Nothing that I'm seeing that would indicate that there should be any shift, but perhaps they will see something in the data that we haven't seen thus far. Because, you know, we are focused on small and low hazard, you know, and their filings reflect the larger market in total.

Okay. And if there's no change, is that down mid to upper single digits?

Mark, are you there? I am. Can you hear me? I'm still here. Kathy, can you hear me? One moment. Hello, can you hear me now? Kathy, can you hear me? Yes, Kathy, can you hear me?

I'm sorry, is that you, Bob? You're breaking up on our end. We can't hear you. Can you repeat your question?

Operator, I can hear you. And I can hear you, and I can hear them.

You're breaking up on our end. Hmm.

Kathy, I'll give it a try. Can you hear me now?

And are you hearing me as well?

I am, yes. You're loud and clear.

Okay.

We can barely hear you. The line is breaking up.

I'm happy to dial in. I've got a few more questions.

I can hear you, but it's very broken up. Can you hear us?

I can hear you just fine. Can you hear me?

Kathy?

Mark, I'm going to try moving to our next question just to see if that makes a difference. You can get back in the queue. Very good.

Will do. One moment. Our next question comes from the line of Bob Farnham from Janie. Can we speak?

Hey, can anybody hear me or am I just going to talk to Mark?

We seem to be having technical difficulties with the phone line on this end.

Bob, I can hear you just fine.

I guess that, yeah, they're... We can end the call and take questions offline.

That's fine.

Okay.

That's better.

You can hear us, Kathy?

It sounds better now.

Oh, okay. Bob, do you want to go ahead and try and get into your question?

Yeah, if you can hear me. I had a couple questions, but one was regarding the FHLB loan investment strategy, kind of what we should expect from that in 2023.

Now we can.

Now we can.

You can hear us? You can hear again? Kathy, are you hearing us?

I think it's best we just, we can hang up and try her offline.

Okay.

Well, all right.

You're broken up, but we can hear a bit.

Kathy, can you hear me okay right now? This is Jonathan, the operator, just trying to check and see if you're able to hear us now. Sure thing, Bob. I'll take that. So we are at $180 million, $182.5 million of loan and, you know, respective... We can.

Yes. So...

We are.

Am I clear?

Yes, you are very clear. Can you hear me now?

No, I guess not. Can you hear us? Yes, I can hear you just fine. Can you hear us? I can. Can you hear us?

Yes, I can hear you. And the audience is hearing you. I think that you're not able to hear us though. I'm not sure why.

I can hear you. Can you hear us?

Yes.

So I think since there are technical difficulties on the line, we will end the call and we'll be happy to answer questions offline.

Certainly. Ladies and gentlemen, we apologize for today's technical difficulties. Thank you for your participation.

Yes, we can.

You may now disconnect.

You can hear her?

Are we coming through now?

Yes, I can.

We can hear you from time to time.

To get back to Bob's question, if you can hear me, is we've got $182 million of Federal Home Loan Bank loan and corresponding. Okay, I'll continue.

So thank you all for joining us this morning. I'm sorry for the technical difficulties. We will be happy to take questions offline if you'd like to contact us. And we look forward to meeting with you again in July.

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