Employers Holdings Inc

Good day, and thank you for standing by. Welcome to the 2024 Second Quarter Employers Holdings, Inc. Earnings Call. At this time, all participants enlist in only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I'd like to hand the conference over to your first speaker today, Lori Brown, General Counsel. Please go ahead.

Thank you, Marvin. Good morning and welcome, everyone, to the second quarter 2024 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 are 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 the SEC's Regulation FD. Such disclosures will be included on the investor section of our website. Accordingly, investors should monitor that portion of our website in addition to following our 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 measures. Reconciliations of these non-GAAP measures 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. And now I'll turn the call over to Kathy.

Thank you, Lori. Good morning to everyone and welcome to our second quarter 2024 earnings call. Today, we will follow our typical agenda, where I'll begin by providing some highlights of our second quarter 2024 financial results. I'll then hand it over to Mike for more details on our financials. And prior to Q&A, I'll come back to you with some additional commentary. Our second quarter results were very strong. Our adjusted net income per share of $1.10 was the sixth highest quarterly result in our last 10 years of operations. higher new and renewal premiums, strong net investment income, and continued net investment gains drove year-over-year increases in revenue for both the quarter and the first six months of 2024. Our steady growth in written premium resulted from a 9% increase in new business and a 10% increase in renewal business, partially offset by lower final audit premium recognition. Excluding audit premium adjustments, our gross written premiums increased 10% for the quarter, with all major distribution channels contributing to the growth. Our investment performance was also a boost to revenue, with strong net investment income and further net unrealized gains from our common stocks and other investments. From an underwriting standpoint, our mid-year full reserve study led to the recognition of $9.3 million of net favorable prior year loss reserve development from our voluntary business. That action, coupled with a meaningful decrease in underwriting expenses, led to a combined ratio of 95.4%, excluding the LPT. And our current accident year combined ratio, excluding both the LPT and prior year development, with 100.2%, which is the lowest it's been since the fourth quarter of 2018. We believe that our accident year 2024 loss ratio of 64%, along with our existing provision for a potential increase in medical inflation, positions us well from a reserving standpoint. I'm particularly pleased with our underwriting and general and administrative expense ratio this quarter of 22%. which is down sharply from 26% a year ago, and is the lowest it's been since the third quarter of 2018. The decrease was primarily the result of the CERI integration plan, which we executed in the fourth quarter of 2023. With that, Mike will now provide a deeper dive into our financials, and then I'll return to provide my closing remarks. Mike?

Thank you, Kathy. Our gross premiums written were $208 million, an increase of 5%. As Kathy mentioned, the increase was primarily due to higher new and renewal premiums, partially offset by lower final audit premiums. Net premiums earned were $188 million, an increase of 6%. Our losses and loss adjustment expenses were $109 million versus $91 million a year ago. The increase was primarily the result of higher net earned premiums, and less net favorable prior year loss reserve development. We recognized $9 million of net favorable development during the second quarter versus $20 million of net favorable development a year ago. To both mitigate our overall tail risk and generate additional reserve salvage, we've continued to settle claims throughout 2024 on an accelerated basis consistent with that of prior years. Commission expenses were $27 million versus $24 million a year ago, and our commission expense ratio was 14.3% versus 13.3% a year ago. The increase in our commission expense ratio was primarily related to an increase in new business writings, which are typically subject to a higher initial commission rate. The increase further resulted from a reversal of commission expense made in the second quarter of 2023 relating to uncollected premium. Underwriting in general and administrative expenses were $41 million versus $46 million, and our underwriting in general administrative expense ratio was 22% versus 26% a year ago. The decrease was primarily the result of the success of our security integration plan, as Kathy previously mentioned. Our net investment income was $27 million for the quarter, a slight increase from a year ago. The increase was primarily due to higher yields on our fixed maturity investments, largely offset by the unwinding of our former federal home loan bank leveraged investment strategy in late 2023. When considering the nearly $2 million of interest expense that we incurred from that former strategy in the second quarter of 2023, our net investment income was actually up more than 8% year over year. Our fixed maturities currently have a duration of 4.4 and an average credit quality of A+. Our weighted average book yield was 4.3% at quarter end, which is up nicely from 4.1% a year ago. Our net income this quarter was favorably impacted by $4 million of net after-tax unrealized gains generated from equity securities and other investment holdings, both of which are reflected on our income statement. And our stockholders' equity was unfavorably impacted by $5 million of net after-tax investment losses generated from fixed maturity holdings, which are reflected on our balance sheet. During the second quarter, we repurchased $19 million of our common stock at an average price of $41.53 per share. And thus far, we have repurchased an additional $3 million of our common stock in the third quarter at an average price of $42.56 per share. Our remaining share repurchase authority currently stands at $44 million. And yesterday, our Board of Directors declared a third quarter 2024 regular quarterly dividend of $0.30 per share. This dividend is payable on August 28th to stockholders of record on August 14th. And with that, I'll now turn the call back to Kathy.

Thank you, Mike. This quarter, we returned $27 million to our stockholders through a combination of regular quarterly dividends and share repurchases at an average price that was highly accretive to our adjusted book value per share. After considering dividends declared over the last 12 months, our book value per share, including the deferred gain, has increased 14% to $44.91, and our adjusted book value per share has increased by more than 10% to $48.89. Both the combined ratio and the growth in our adjusted book value per share continue to be our preferred metrics for measuring our success. And we're confident we will see further improvements in these metrics in the future. In closing, last month we made the bittersweet announcement that Mike will be retiring at the end of March in 2025. And I want to personally acknowledge his tremendous contribution to the organization over the past seven years. And with that, operator, we will now take questions.

Thank you. At this time, we'll conduct the question and answer session. As a reminder to ask a question, you'll need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster.

Our first question comes from our line of Mark Hughes of Truys.

Your line is now open.

Thank you. Good morning. Kathy, the, hello. In California, does the workers' comp reimbursement follow Medicare fee schedules in whole or in part?

Yes, it is my understanding that the California medical fee schedules are tied to Medicare. I think, I believe there are some adjustments. It's not dollar for dollar, but yes, they are tied to Medicare.

Yeah. Now, under the circumstances, are we to think that the risk of future medical inflation is limited if a fee schedule is there? And many other states, I'm not exactly sure of the numbers, but if those are tied to those fee schedules, I assume the government is going to be just as motivated to suppress those costs in the future as they have been in the past. So should we think that medical inflation is less of a risk?

Well, I think generally speaking, the industry has done a really nice job over the last more than a decade of putting medical cost containment measures into place, and those would include medical fee schedules for hospitals, physicians, inpatient and outpatient, and so forth. Many but not all of those fee schedules are tied to Medicare, and so I would think they would move somewhat in tandem. But the fee schedules that have been put in place have been very successful. I mean, you mentioned California in particular, you know, back in, I think it was back in 2013 when they passed Senate Bill 863. That was highly successful, wildly more successful than I think anyone predicted. And so, I would just say generally speaking, the fee schedules and workers' compensation are working and they are helping to keep medical costs under control.

When we think about the top line outlook, audit premiums are still positive, not as positive as they've been, but we've talked about the kind of your expansion and appetite and you could throw in competition Any kind of general commentary about what you expect when it comes to top-line growth, keeping in mind all the different drivers?

Yeah, I mean, I'm pleased with the level of top-line growth that we're seeing. We did see some pressure this quarter in terms of offsetting costs. The new and renewal business growth, there was an offset in terms of audit pickup slowing down. We also decreased our audit accrual during the quarter. None of it I would say is surprising to me, though, when you look at the underlying economic conditions. As of June, just to give you a few numbers, the BLS, annual change in employment, and hourly wages for leisure and hospitality, which is where a lot of our focus is.

Jeff, are you still there? Beth, are you there? Kathy, if you were there, I have lost you. Please remain on the line.

Your conference will resume shortly. What's up?

we were talking about, so I would start back up there.

Hello, Kathy, can you hear me?

I can. My apologies for that.

Yeah, no, it was probably me. I'm sure I did something wrong. I'm sure. I had a question about the growth outlook, and you had just started a comment, so I'll Say it again, competition, appetite, all that. What should we think about top line?

Yeah. So I am not terribly surprised with the decrease we saw in audit pickups this quarter, especially given the underlying economic conditions that we're seeing. And so just to give you a few numbers, As of June, the BLS annual change in employment and hourly wages was 6% for leisure and hospitality. That compares to 10.5% a year ago. And that reduction in the change in employment and wages is what's putting pressure on our audit pickups. And it's... Hello, can you hear me?

Yeah, I can hear you. You're coming through live, Claire. Okay.

Okay, sorry about that. So that is what is putting pressure on our audit pickups, and it's also causing us to decrease our audit accrual, and it's bringing our top-line growth down a bit. We're not seeing decreases in terms of the new business premium that's coming through, and our renewal premiums continue to be strong, too. So just to give you a couple of numbers, we ended the quarter with an audit accrual of $34.2 million, and that's a decrease of $5.1 million this quarter. That compares to an increase in the second quarter of 2023. So, you know, that decrease in accrual was a meaningful contributor to both written and earned premium this quarter. But then when you look at audit pickup, they were 4.9 million this quarter versus 7.7 million in the second quarter of 2023. Like I said earlier, if you exclude the final audit pickup and the change in a pool, our gross written premium was up about 10% in the second quarter of 24 relative to the second quarter of 2023. Endorsement premium is also coming in very strong. We recognize about $13 million in endorsements and about $3 million in noncompliant premiums. So the growth that we're seeing is coming from, you know, all of our major distribution channels. Like I said, strong endorsement premium. You mentioned appetite expansion. That is a meaningful contributor to the growth. I think about $41 million of our premium this quarter. came from our appetite expansion efforts. And that's performing at a very good loss ratio, very similar to what we're seeing for all of our other classes.

I appreciate that detail. And then one final one on the expenses. Mike, the step-down sequentially this quarter is pretty striking. Historically, the progression from 1Q to 2Q is steady or up a little bit. What's the right run rate? First, was there anything unusual this quarter, one-timers, that sort of thing? And then, is this kind of the starting base, so to speak, and apply whatever expense growth or seasonality, that sort of thing, but the 41.4% Is that a good number as a base, starting base?

It's hard to say, Mark, and the reason why is our expenses can ebb and flow. I'm not aware of anything that's particularly unusual in terms of our second quarter of 2024 expenses, but they can vary dramatically based on incentive accruals, timing of IT projects, and all of those types of things. If you recall, when we had this call at year end, we kind of mentioned that the Serity runoff or the Serity integration was going to provide at least a point and a half of relief on our expense ratio versus what it would otherwise be. So that's probably the same thing to bring into the balance of the year. But keep in mind, it will ebb and flow.

And so if we think of last year, I think it's 25%. Is that the way to think about it? A point and a half off of that is a good way to look at it.

With expenses and commissions, I would always look at the year-to-dates because that'll take out some of the noise. But if you look at, say, the year-to-date and then look at at least 1.5 percentage points of savings or so, that's about...

what's the best guess I could give you right now? Yeah, okay. I'll squeeze in one more if I might. Kathy, competition, anything you would say about level of competition, that people seem more, competitors more enthused about workers' comp, about the same?

Yeah, I'd say it's about the same. You know, when you look at the sectors and policy sizes that we write, we would continue to say that the environment is fairly competitive. You know, when we look at our renewal book and adjust for changes in exposure, our 2024 average rate showed a year-over-year rate decrease of between 3% and 4%, and that's pretty typical of what we've been seeing over the last several quarters. So, yes, things are, you know, a lot of that is being driven by the decreases in lost costs that the bureaus are filing.

But it's still competitive.

Great. Thank you very much.

Thank you, Mark.

Thank you. One moment for our next question. Again, as a reminder, to ask a question, you'll need to press 11 on your telephone. Our next question comes from the line of Matt Carletti of Citizens JMP. Your line is now open.

Hey, thanks. Good morning.

Good morning, Matt.

Matthew Treskon- Kathy my first question kind of actually follows on from from one of mark's questions on a medicare but my understanding is there's the Florida there's some. Matthew Treskon- From what significant fee schedule changes coming. Matthew Treskon- I was hoping you could comment on kind of your ability to manage that, particularly in the context of Florida being more of an administered pricing state so less I guess flexibility on how you can price each risk.

Yeah, it's a great question, Matt. You know, I'll say internally, we haven't analyzed the legislation in Florida yet or, you know, or NCCI's recent filing in response to those medical fee changes. My understanding is the changes are effective in January of 2025, and that the primary reason Driver of the increase is expected to be physician services and the cost of those services, a little bit coming from hospital outpatient. But I believe NCCI is projecting a 5.6% increase in costs as a result of those legislative changes. But as you said, the truth of the matter is, you know, with Florida being the last remaining administered pricing state, There isn't a whole lot that we can do if we disagree with the pricing, you know, other than tighten our underwriting standards. But in terms of pricing flexibility in Florida, we have none. So we'll just have to look at the business that we're writing, and if we feel it's necessary, tighten our underwriting standards from a declination standpoint.

Okay, thanks. That's helpful. And then this one for Mike on reserves, on the favorable reserve development in the quarter. Can you give us any color on trends by accident year or just kind of anything, you know, kind of peel back the onion a little bit on some of the movements behind the scenes that led to that good result?

Sure. So the favorable development that we saw this quarter was predominantly years 2022 and prior. We did have a little bit of unfavorable experience in 2023 that partially offset the amount that we recognized relating to other states with some large losses that occurred late in the year and have developed a little bit unfavorably in this calendar year. And that's where we came out.

Okay, great. Thank you. Appreciate it.

Thanks, Matt.

Thank you. One moment for our next question. Our next question comes from the line of Bob Farnham of Jenny Montgomery Scott.

Your line is now open.

Yeah, hey there, and good morning. My primary question was on the performance of the book of expansion business, but Kathy, it sounds like that business is performing as expected or in line with your other business. I guess I'll focus on another question I had was, is there much of a difference between the performance of the book you're getting from ADP versus your non-ADP book?

We do analyze those results separately. And the ADP book of business for us has always been very favorable. And it continues to be. We have a very strong relationship with them and continue to. And, you know, I think it's a very strong book. We haven't seen any changes in that book of business.

Okay. Yeah, that's it for me. Again, I want to think more interested in the expansion book of business. But, again, you kind of already answered that. So thanks.

Yeah, yeah, that expansion book, we've been very, very pleased with the results that we're seeing there and have, you know, our intention is to continue to expand into new class codes as we see the environment is favorable. So continuing to do that. Great. Thanks.

Thank you, Bob.

Thank you. I'm showing all further questions at this time. I would now like to turn it back to Kathy and Telo for closing remarks.

Okay. Thank you, Marvin. And thank you all for joining us this morning. I look forward to meeting with you again in October.

Thank you for your participation in today's conference.

This does conclude the program. You may now disconnect. Thank you. Thank you. Thank you. Thank you. Good day, and thank you for standing by.

Welcome to the 2024 Second Quarter Employers Holdings, Inc. Earnings Call. At this time, all participants 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 will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I'd like to hand the conference over to your first speaker today, Lori Brown, General Counsel. Please go ahead.

Thank you, Marvin. Good morning and welcome, everyone, to the second quarter 2024 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 are 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 non-public information and for complying with disclosure obligations under the SEC's Regulation FD. Such disclosures will be included on the investor section of our website. Accordingly, investors should monitor that portion of our website in addition to following our 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 measures. Reconciliations of these non-GAAP measures 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. And now I'll turn the call over to Kathy.

Thank you, Lori. Good morning to everyone and welcome to our second quarter 2024 earnings call. Today, we will follow our typical agenda, where I'll begin by providing some highlights of our second quarter 2024 financial results. I'll then hand it over to Mike for more details on our financials. And prior to Q&A, I'll come back to you with some additional commentary. Our second quarter results were very strong. Our adjusted net income per share of $1.10 was the sixth highest quarterly result in our last 10 years of operations. higher new and renewal premiums, strong net investment income, and continued net investment gains drove year-over-year increases in revenue for both the quarter and the first six months of 2024. Our steady growth in written premium resulted from a 9% increase in new business and a 10% increase in renewal business, partially offset by lower final audit premium recognition. Excluding audit premium adjustments, our gross written premiums increased 10% for the quarter, with all major distribution channels contributing to the growth. Our investment performance was also a boost to revenue, with strong net investment income and further net unrealized gains from our common stocks and other investments. From an underwriting standpoint, our mid-year full reserve study led to the recognition of $9.3 million of net favorable prior-year loss reserve development from our voluntary business. That action, coupled with a meaningful decrease in underwriting expenses, led to a combined ratio of 95.4%, excluding the LPT. And our current accident-year combined ratio, excluding both the LPT and prior-year development, with 100.2%, which is the lowest it's been since the fourth quarter of 2018. We believe that our accident year 2024 loss ratio of 64%, along with our existing provision for a potential increase in medical inflation, positions us well from a reserving standpoint. I'm particularly pleased with our underwriting and general and administrative expense ratio this quarter of 22%. which is down sharply from 26% a year ago, and is the lowest it's been since the third quarter of 2018. The decrease was primarily the result of the CERI integration plan, which we executed in the fourth quarter of 2023. With that, Mike will now provide a deeper dive into our financials, and then I'll return to provide my closing remarks. Mike?

Thank you, Kathy. Our gross premiums written were $208 million, an increase of 5%. As Kathy mentioned, the increase was primarily due to higher new and renewal premiums, partially offset by lower final audit premiums. Net premiums earned were $188 million, an increase of 6%. Our losses and loss adjustment expenses were $109 million versus $91 million a year ago. The increase was primarily the result of higher net earned premiums, and less net favorable prior year loss reserve development. We recognize $9 million of net favorable development during the second quarter versus $20 million of net favorable development a year ago. To both mitigate our overall tail risk and generate additional reserve salvage, we've continued to settle claims throughout 2024 on an accelerated basis consistent with that of prior years. Commission expenses were $27 million versus $24 million a year ago, and our commission expense ratio was 14.3% versus 13.3% a year ago. The increase in our commission expense ratio was primarily related to an increase in new business writings, which are typically subject to a higher initial commission rate. The increase further resulted from a reversal of commission expense made in the second quarter of 2023 relating to uncollected premium. Underwriting in general and administrative expenses were $41 million versus $46 million, and our underwriting in general administrative expense ratio was 22% versus 26% a year ago. The decrease was primarily the result of the success of our SARITY integration plan, as Kathy previously mentioned. Our net investment income was $27 million for the quarter, a slight increase from a year ago. The increase was primarily due to higher yields on our fixed maturity investments, largely offset by the unwinding of our former federal home loan bank leveraged investment strategy in late 2023. When considering the nearly $2 million of interest expense that we incurred from that former strategy in the second quarter of 2023, our net investment income was actually up more than 8% year over year. Our fixed maturities currently have a duration of 4.4 and an average credit quality of A+. Our weighted average book yield was 4.3% at quarter end, which is up nicely from 4.1% a year ago. Our net income this quarter was favorably impacted by $4 million of net after-tax unrealized gains generated from equity securities and other investment holdings, both of which are reflected on our income statement. And our stockholders' equity was unfavorably impacted by $5 million of net after-tax investment losses generated from fixed maturity holdings, which are reflected on our balance sheet. During the second quarter, we repurchased $19 million of our common stock at an average price of $41.53 per share. And thus far, we have repurchased an additional $3 million of our common stock in the third quarter at an average price of $42.56 per share. Our remaining share repurchase authority currently stands at $44 million. And yesterday, our board of directors declared a third quarter 2024 regular quarterly dividend of $0.30 per share. This dividend is payable on August 28th to stockholders of record on August 14th. And with that, I'll now turn the call back to Kathy.

Thank you, Mike. This quarter, we returned $27 million to our stockholders through a combination of regular quarterly dividends and share repurchases at an average price that was highly accretive to our adjusted book value per share. After considering dividends declared over the last 12 months, our book value per share, including the deferred gain, has increased 14% to $44.91, and our adjusted book value per share has increased by more than 10%. to $48.89. Both the combined ratio and the growth in our adjusted book value per share continue to be our preferred metrics for measuring our success. And we're confident we will see further improvements in these metrics in the future. In closing, last month we made the bittersweet announcement that Mike will be retiring at the end of March in 2025. And I want to personally acknowledge his tremendous contribution to the organization over the past seven years. And with that, operator, we will now take questions.

Thank you. At this time, we'll conduct the question and answer session. As a reminder to ask a question, you'll need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster

Our first question comes from a line of Mark Hughes of Truys.

Your line is now open.

Thank you. Good morning. Hi, Mark. Hello. In California, does workers' comp reimbursement follow Medicare fee schedules in whole or in parts?

Yes, it is my understanding that the California medical fee schedules are tied to Medicare. I believe there are some adjustments. It's not dollar for dollar, but yes, they are tied to Medicare.

Yeah. Now, under the circumstances, are we to think that the risk of future medical inflation is limited if a fee schedule is there and many other states? I'm not exactly sure of the numbers, but if those are tied to those fee schedules, I assume the government is going to be just as motivated to suppress those costs in the future as they have been in the past. So should we think that medical inflation is less of a risk?

Well, I think generally speaking, the industry has done a really nice job over the last, you know, more than a decade of putting medical cost containment measures into place. And those would include medical fee schedules for hospitals, physicians, you know, inpatient, outpatient, and so forth. many but not all of those fee schedules are tied to Medicare. And so, you know, I would think they would move somewhat in tandem. But the fee schedules that have been put in place have been very successful. I mean, you mentioned California in particular, you know, back in, I think it was back in 2013 when they passed Senate Bill 863. That was highly successful, wildly more successful than I think anyone predicted. And so I would just say, generally speaking, the fee schedules and workers' compensation are working, and they are helping to keep medical costs under control.

When we think about the top-line outlook, audit premiums are still a

positive not not as positive as they've been but we've talked about the kind of your expansion and appetite and you could throw in competition um any kind of general commentary about what you uh expect when it comes to top line growth you know keeping in mind all the all the different drivers

Yeah, I mean, I'm pleased with the level of top line growth that we're seeing. We did see some pressure this quarter in terms of, you know, offsetting the new and renewal business growth. There was an offset in terms of audit pickup slowing down. We also decreased our audit accrual during the quarter. None of it, I would say, is surprising to me, though, when you look at the underlying economic conditions. As of June, just to give you a few numbers, the BLS, annual change in employment and hourly wages for leisure and hospitality, which is where a lot of our focus is,

Kathy, are you still there? Kathy, are you there? Kathy, if you were there, I would have lost you. Please remain on the line.

Your conference will resume shortly. Thank you.

were talking about so i would start back up there hello kathy can you hear me and my apologies for that yeah no i'm it's probably me i'm sure i did something wrong um i'm sure i had uh i had a question about the growth outlook and you had just started a comment um so i'll Say it again, you know, if you take into account competition, appetite, all that, what should we think about top line?

Yeah, so I am not terribly surprised with the decrease we saw in audit pickups this quarter, especially given the underlying economic conditions that we're seeing. And so just to give you a few numbers, As of June, the BLS annual change in employment and hourly wages was 6% for leisure and hospitality. That compares to 10.5% a year ago. And that reduction in the change in employment and wages is what's putting pressure on our audit pickups. And it's all... Hello, can you hear me?

Yeah, I can hear you. You're coming through loud and clear. Okay.

Okay, sorry about that. So that is what is putting pressure on our audit pickups, and it's also causing us to decrease our audit accrual, and it's bringing our top-line growth down a bit. We're not seeing decreases in terms of the new business premium that's coming through, and our renewal premiums continue to be strong, too. So just to give you a couple of numbers, we ended the quarter with an audit accrual of $34.2 million, and that's a decrease of $5.1 million this quarter. That compares to an increase in the second quarter of 2023. So, you know, that decrease in accrual was a meaningful contributor to both written and earned premium this quarter. But then when you look at audit pickup, they were 4.9 million this quarter versus 7.7 million in the second quarter of 2023. Like I said earlier, if you exclude the final audit pickup and the change in a pool, our gross written premium was up about 10% in the second quarter of 24 relative to the second quarter of 2023. Endorsement premium is also coming in very strong. We recognize about $13 million in endorsements and about $3 million in noncompliant premiums. So the growth that we're seeing is coming from, you know, all of our major distribution channels. Like I said, strong endorsement premium. You mentioned appetite expansion. That is a meaningful contributor to the growth. I think about $41 million of our premium this quarter. came from our appetite expansion efforts. And that's performing at a very good loss ratio, very similar to what we're seeing for all of our other classes.

I appreciate that detail. And then one final one on the expenses. Mike, the step-down sequentially this quarter is pretty striking. Historically, the progression from 1Q to 2Q is steady or up a little bit. What's the right run rate? First, was there anything unusual this quarter, one-timers, that sort of thing? And then, is this kind of the starting base, so to speak, and apply whatever expense growth or seasonality, that sort of thing, but the 41.4% Is that a good number as a base, starting base?

It's hard to say, Mark, and the reason why is our expenses can ebb and flow. I'm not aware of anything that's particularly unusual in terms of our second quarter of 2024 expenses, but they can vary dramatically based on incentive accruals, timing of IT projects, and all of those types of things. If you recall, when we had this call at year end, we kind of mentioned that the Serity runoff or the Serity integration was going to provide at least a point and a half of relief on our expense ratio versus what it would otherwise be. So that's probably the same thing to bring into the balance of the year. But keep in mind, it will ebb and flow.

And so if we think of last year, I think it's 25%. Is that the way to think about it? You know, 0.5 off of that is a good way to look at it.

With expenses and commissions, I would always look at the year-to-dates because that'll take out some of the noise. But if you look at, say, the year-to-date and then look at at least 1.5, you know, percentage points of savings or so, that's about...

What's the best guess I could give you right now?

Yeah, okay. I'll squeeze in one more if I might. Kathy, competition, anything you would say about level of competition, that people seem more, competitors more enthused about workers' comp, about the same?

Yeah, I'd say it's about the same. You know, when you look at the sectors and policy sizes that we write, we would continue to say that the environment is fairly competitive. You know, when we look at our renewal book and adjust for changes in exposure, our 2024 average rate showed a year-over-year rate decrease of between 3% and 4%, and that's pretty typical of what we've been seeing over the last several quarters. So, yeah, things are, you know, a lot of that is being driven by the decreases in lost costs that the bureaus are filing.

But it's still competitive.

Great. Thank you very much.

Thank you, Mark.

Thank you. One moment for our next question. Again, as a reminder, to ask a question, you'll need to press 11 on your telephone. Our next question comes from the line of Matt Carletti of Citizens JMP. Your line is now open.

Hey, thanks. Good morning.

Good morning, Matt.

Matthew Treskon- Kathy my first question kind of actually follows on from from one of mark's questions on a medicare but my understanding is there's the Florida there's some. Matthew Treskon- From what significant fee schedule changes coming. Matthew Treskon- I was hoping you could comment on kind of your ability to manage that, particularly in the context of Florida being more of an administered pricing state so less I guess flexibility on how you can price each risk.

Yeah, it's a great question, Matt. You know, I'll say internally, we haven't analyzed the legislation in Florida yet, or, you know, or NCCI's recent filing in response to those medical fee changes. My understanding is the changes are effective in January of 2025, and that the primary reason The driver of the increase is expected to be physician services and the cost of those services, a little bit coming from hospital outpatient. But I believe NCCI is projecting a 5.6% increase in costs as a result of those legislative changes. But as you said, the truth of the matter is, you know, with Florida being the last remaining administered pricing state, There isn't a whole lot that we can do if we disagree with the pricing, you know, other than tighten our underwriting standards. But in terms of pricing flexibility in Florida, we have none. So we'll just have to look at the business that we're writing, and if we feel it's necessary, tighten our underwriting standards from a declination standpoint.

Okay, thanks. That's helpful. And then this one for Mike on reserves, on the favorable reserve development in the quarter. Can you give us any color on trends by accident year or just kind of anything, you know, kind of peel back the onion a little bit on some of the movements behind the scenes that led to that good result?

Sure. So the favorable development that we saw this quarter was predominantly years 2022 and prior. We did have a little bit of unfavorable experience in 2023 that partially offset the amount that we recognized relating to other states with some large losses that occurred late in the year and have developed a little bit unfavorably in this calendar year. And that's where we came out.

Okay, great. Thank you. Appreciate it.

Thanks, Matt.

Thank you. One moment for our next question. Our next question comes from the line of Bob Farnham of Jenny Montgomery Scott.

Your line is now open.

Yeah, hey there, and good morning. My primary question was on the performance of the book of expansion business, but Kathy, it sounds like that business is performing as expected or in line with your other business. I guess I'll focus on another question I had was, is there much of a difference between the performance of the book you're getting from ADP versus your non-ADP book?

We do analyze those results separately. And the ADP book of business for us has always been very favorable. And it continues to be. We have a very strong relationship with them and continue to. And, you know, I think it's a very strong book. We haven't seen any changes in that book of business.

Okay. Yeah, that's it for me. I just, again, I want to think more interested in the expansion book of business. But, again, you kind of already answered that. So thanks.

Yeah, yeah, that expansion book, we've been very, very pleased with the results that we're seeing there and have, you know, our intention is to continue to expand into new class codes as we see the environment is favorable. So continuing to do that. Great. Thanks.

Thank you, Bob.

Thank you. I'm showing all further questions at this time. I would now like to turn it back to Kathy and Telo for closing remarks.

Okay. Thank you, Marvin. And thank you all for joining us this morning. I look forward to meeting with you again in October.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.