Employers Holdings Inc

Greetings and welcome to Employers Holdings Inc. Third Quarter 2023 Earnings Conference Fall. At this time, all parts of the events are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce Lori Brown, Chief Legal Officer. Thank you. You may begin.

Thank you, Doug. Good morning and welcome everyone to the third 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 obligation 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'll 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 third quarter 2023 financial results. Then I'll hand it over to Mike for more details on our financials. Prior to Q&A, I'll share some additional commentary. Our third quarter results were solid. Our net written and earned premiums were up 4% and 3% respectively. with wage increases, a strong labor market, our thoughtful appetite expansion program, and our new sales and underwriting operating model each contributing to this growth. As a result, we ended the quarter with more than 126,000 policies in force, a record level representing increases in each of the last 13 consecutive quarters. Our net investment income was up 9%. The increase was due to higher market interest rates impacting bond yields, partially offset by lower invested balances of fixed income investments. Mike will speak more about our net investment income later in the call. From an underwriting standpoint, we maintained our current accident year loss and LAE ratio on voluntary business at 63.3%, below the 64% we maintained throughout 2022. As was the case a year ago, we did not recognize any prior year loss reserve development in the quarter because the full actuarial study was not performed and the amount of indicated net prior year loss reserve development was consistent with our expectations. We will evaluate our prior year reserves in more detail at year end when we routinely perform a full reserve study. Our total commissions and associated commission expense ratio were higher this quarter due to an increase in agency incentive accruals, which are specific to individual contracts and vary with agency growth and profitability. Our total underwriting and general and administrative expenses were also up slightly, but the associated expense ratio remained consistent with that of a year ago when considering the increase in earned premium. With that, I'll turn the call over to Mike, and I'll return to provide my closing remarks. Mike?

Thank you, Kathy. Gross premiums written were $196 million versus $189 million a year ago, an increase of 4%. The increase was primarily due to higher new and renewal business writings. Debt premiums earned were $185 million versus $179 million a year ago, an increase of 3%. Our losses and loss adjustment expenses were $115 million versus $112 million a year ago. That increase was due to higher earned premiums, partially offset by a lower current accident year loss in LAE provision. Commission expenses were $27 million versus $25 million a year ago. The increase was primarily due to higher earned premiums and higher 2023 agency incentive accruals. Underwriting and general administrative expenses were $44 million versus $42 million a year ago. The increase was primarily due to higher compensation related expenses and higher policyholder dividends and bad debt expenses, each of which resulted from the increase in earned premiums. From a reporting segment perspective, our employer segment had pre-tax income of $21 million versus $26 million a year ago. and its resulting calendar year combined ratios were each 98% for the period. Our sorority segment had a pre-tax loss of $2 million in each period. Turning to investments, our net investment income was $26 million versus $24 million a year ago. The increase was due to higher bond yields, partially offset by lower invested asset balances as measured by amortized cost. The decrease in our invested assets year over year is largely the result of winding down our federal home loan bank leveraged investment strategy. Pursuant to that strategy, our insurance subsidiaries received advances from the FHLB throughout 2022, and the proceeds from these advances were used to purchase investment securities. Our fixed maturities currently have a duration of 4.4. and an average credit quality of A+. Our weighted average bond yield was 4.1% at quarter end, and our new money rate today is in excess of 6%. Our net income this quarter was unfavorably impacted by $6 million of net after-tax unrealized losses from equity securities and other investments, which are reflected on our income statement, and our stockholders' equity was further impacted by $26 million of net after-tax unrealized losses from fixed maturity securities, which are reflected on our balance sheet. During the third quarter of 2023, we repurchased 367,209 shares of our common stock at an average price of $38.95 per share, and we currently have a remaining share repurchase authorization of $36 million. Yesterday, our Board of Directors declared a fourth quarter 2023 regular quarterly dividend of 28 cents per share. This dividend is payable on November 22nd to shareholders of record on November 8th. And now I'll turn the call back to Kathy.

Thank you, Mike. We are currently laser focused on integrating CRD's operations into those of employers. After the consolidation effort is complete, policies issued by Serity and employers will be administered and serviced consistently, and redundant systems and processes will be eliminated, generating additional efficiencies and expense savings for the company. Through this initiative and others, we remain confident that we can further reduce our total underwriting expenses in 2024 as a percentage of our earned premiums. And I look forward to sharing our progress with you on that front at our next earnings call. Throughout the year, we've also been actively returning capital to our shareholders, which has enhanced our earnings per share and return on equity metrics. Our capital management efforts this year, which have consisted of share repurchases and regular quarterly dividends, totaled $22 million in the third quarter and $84 million year to date. These actions reflect our strong balance sheet, abundant underwriting capital, and confidence in the company's future operations. In closing, as a unique specialist in small business workers' compensation, we've never been better positioned to further benefit from the favorable trends 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. Ladies and gentlemen, at this time, we'll be conducting a question and answer session. If you'd like to ask your question, you may press star 1 on your telephone keypad. The confirmation tunnel indicating your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Our first question comes from the line of Mark Hughes with Truist. Please proceed with your question.

Yeah, thanks, good morning. Kathy, I think the new business or the premium growth excluding the audit adjustments was up in the double digits again. You have talked about your expansion and appetite for new class codes. I wonder if you could say whether you think the environment on a go-forward basis Is it good enough that it should allow you to kind of expand at a similar pace? Are you looking at other expansions that perhaps can increase your underwriting appetite? Just kind of a sense on the top line dynamic here.

Yeah. Well, let me give you a few numbers and then I'll talk a little bit more about the appetite expansion effort. During the third quarter, we increased our audit accrual by $1.2 million, and so that now stands at $40.2 million. That compares to what we did in Q3 of 2022 when we increased our audit accrual by $9 million. So there's a bit of a difference there. Also, audit pickups remained strong in the third quarter. That totaled about $7.4 million, which compares to $12.5 million in the third quarter of 2022. So when you exclude, as you were mentioning, all the final audit pickup and change in accrual amounts, our gross written premium increased about 12% in the third quarter of 2023 relative to the third quarter of 2022. So yes, we still do have double digit growth when you take out the audit premium adjustments. We also recognized about $14.5 million in endorsements in the third quarter, and that's up $3.5 million from last year. In addition, about $1.3 million came through in noncompliance premium. So as expired policies are being audited, we endorse the enforced policies upward to reflect that change in payroll, and that's generating a tailwind for endorsements. So we are bullish on our opportunities for growth. We continue to look at opportunities to expand our appetite. And we formed a committee to do that. They are still in effect. And we're looking at class codes that we can open up in 2024. Just to give you an idea of how that's impacting our growth, Through September 30th, new business was at $115 million of written premium and about $40 million of that is coming from our appetite expansion classes. So we like what we're seeing there. The loss ratio is coming in very similar to what we've seen on our traditional target classes and so we do expect to continue that effort.

Very good. And then healthcare inflation, what's your take? It seems like there's some additional discussion, but maybe not much sign of it yet. What do you think?

Yeah, we're certainly keeping an eye on it. Up to this point, medical inflation in the economic data has been mild relative to the inflation that we're seeing in other sectors, like energy or housing and food, and so that's good news. I can tell you that internally this quarter we performed a study that looked just at prescription drugs and whether or not we're seeing an inflationary impact on a defined basket of pharmaceuticals. And we found that our internal drug cost index for in-network pharmacy costs, it's been decreasing every year since 2019, but did experience an uptick in 2023. But despite that increase from 2022 to 2023, pharmacy costs are still lower now than they were back in 2019. So we have seen a little year-over-year increase after many years of decreasing, but it's still lower than it was pre-pandemic.

Understood. Thank you very much.

Sure. As a reminder, it is star one to ask a question. Our next question comes from the line of Bob Furnham with Jenny. Please receive your question.

Hi, thanks, and good morning. So thanks for the update on the expansion classes, Kathy. I just wanted to know what the average policy size is for that business. Is it bigger or smaller than your traditional book?

Yeah, it is larger. In fact, we've seen our average policy size increasing quite a bit since we entered into the appetite expansion. Of course, some of that is coming from just the economic growth that that I've talked about in the past with higher employment levels and wages increasing and so forth. But we have seen our average policy size for our Enforce book go from about 5,200 to about 5,500 over the course of the last year or so. So it is increasing.

Is that largely attributed to the expansion classes, or is that, like you said, just kind of more of a... the size of the payroll base going up in all of your platforms?

It's both. I would say it's both, Bob. It's both the increasing wages and our appetite expansion effort.

Okay. All right. Thanks. Quick question on Serity. I understand you're trying to consolidate Serity into the employer's platform. It sounds like you expect that to be pretty robust.

pretty much done in 2024 is that is that what your expectations are yeah we expect to have a lot of the work done in 2023 and to start experiencing the benefits of that from an expense standpoint in 2024 okay so start starting in the first quarter of 2024 you think you will have some of the expense savings there It will roll in throughout the year, but, yeah, we should start to see some in the first quarter of 2024. Okay. Great.

Thanks. And one quick question for Mike. The FHLB strategy, are we expecting that to be completely unwound in the fourth quarter this year? That's kind of what I was expecting, but I didn't know if there was any update to that.

Hard to tell, Bob. We're down to $40 million right now, and we still are seeing an adequate spread between the borrowing rate and what we're earning on the asset. We just have to watch it for liquidity and credit. And if it maintains that adequate spread, we'll keep it through year-end. If not, we'll take that trade off the table. So it's a little hard to tell, and the investment market right now is a little different. a little wild, so we watch it every day and we'll act accordingly. Okay, great. Thanks for the answers.

Thanks, Bob.

There are no further questions in the queue. I'd like to hand the call back to Ms. Antonello for closing remarks.

Okay, thank you, Doug, and thank you all for joining us this morning. We look forward to meeting with you again in February of 2024.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.