Employers Holdings Inc

Good day, and thank you for standing by. Welcome to the Q3 2025 Employees Holding, Inc. Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there'll be a question and answer session. To ask a question during the session, you'll need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To restore your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to turn the conference over to your speaker for today, Lori Brown. Please go ahead.

Thank you, Lisa. Good morning and welcome everyone to the third quarter 2025 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. 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 in 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 webcast. 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 we'll turn the call over to Kathy Antonello, our Chief Executive Officer. Thank you, Lori. Good morning, everyone. And again, welcome to our third quarter 2025 earnings call. Joining me today is Mike Pedraja, our Chief Financial Officer. During today's call, I'll begin by providing highlights of our third quarter 2025 results, and then I'll hand it over to Mike for more details on our financials. Prior to our Q&A, I'll come back to you with some additional thoughts. I want to begin by discussing the decisive actions we took during the quarter to strengthen our loss in LAE reserves. When we spoke last quarter, I mentioned we had identified significant loss in LAE reserve redundancies in older years and utilized this favorable development from accident years 2021 and prior to strengthen reserves for accident years 2023 and 2024. We also provided our preliminary view of accident year 2025 and shared that the underlying driver of the need for an off-cycle third quarter reserve review was the increased frequency of California cumulative trauma claims in recent accident years. During the third quarter, we completed a thorough reserve analysis, which included a detailed review of our complete book of business, and we compared our internal selections to those of an external actuarial review performed mid-year. Our comprehensive and rigorous analysis indicated the need to increase prior year reserves by $38.2 million, or 2.8% of net unpaid loss in LAE. Accident years 2023 and 2024 were the primary contributors of the increase. with AY2024 increasing by 40.5 million, AY2023 increasing by 16.1 million, and accident years 2022 and prior decreasing by 18.4 million in total. In addition, we increased our AY2025 loss in LAE ratio from 69% to 72%. We strongly believe these adjustments fully address the recent trends we and the industry have seen in California and want to emphasize that these adjustments are not a sign of broad deterioration in our book of business. With the increased frequency of California CT claims, our third, without the increased frequency of California CT claims, our third quarter 2025 overall reserve position would have developed favorably. As we have discussed, the increased frequency in CT claims is a California-only issue. Frequency in other states continues to show a decreasing trend. I now want to speak to why California CT claims for accident years 2023 and 2024 are impacting our reserves this quarter. In California, older years continue to develop favorably, but more recent years have experienced a meaningful uptick in CT claim frequency. As there is typically a significant delay in CT claim reporting, the increased CT claim frequency trend did not fully emerge until well after the first 12 months of each accident year, making it more challenging to predict or detect the trend in real time through traditional reserving and pricing analyses. In addition, the continued declining frequency trend of non-CT claims in California initially masked the increasing trend in CT claims and further delayed visibility. Given the uncertainty in the California CT environment, And more generally, our desire to utilize a more conservative approach across our complete book of business. This quarter, we implemented refinements to our analysis of prior years. These refinements, which strengthened our reserves across all states, were designed to build additional resilience on our balance sheet and significantly reduce future uncertainty. A comparison of our third quarter 2025 reserve selections to reserve estimates prepared mid-year by an independent external actuarial firm reinforced our conservative reserve position. Now let's focus on accident year 2025. The increase in our AY2025 loss in LAE ratio is due solely to the increasing frequency of California CT claims, as frequency in the rest of our book continues to decline. Comparing AY2025 to AY2024, at three months, AY2025's incurred loss ratio was higher than 2024's. But at both six and nine months, AY2025's loss ratio was lower than 2024's at the same ages of maturity. Other data points on both an accident year and a policy year basis point towards AY2025 performing better than both 2024 and 2023. This suggests the underwriting and pricing actions we've implemented are having a positive impact. While we could have held the AY2025 loss ratios steady at our second quarter selection, given the more conservative reserving approach mentioned earlier in recognizing the increased frequency In California CT claims, we decided to increase the accident year 2025 loss ratio. We have implemented a four-pronged approach in California to help mitigate the impact that CT claims may have on our book of business going forward. This includes targeted pricing actions, more aggressive claims handling and litigation management, underwriting refinements, and continued geographic diversification. We are also actively engaged in California's efforts to pursue meaningful legislative reforms to better align California's CT rules to those throughout the country. Having said that, our commitment to providing best in class care to all injured workers, whether their claim arose from cumulative trauma or not, is unwavering. We are confident that the actions we have made are timely, appropriate, and prudent, and will better position the more recent accident years for the future. We believe that our current reserves are more than adequate. I'll now turn to discuss other highlights from the quarter. Our third quarter gross written premium increased by 1.4% compared to 2024 due to increases in renewal business premiums. As I stated in previous quarters, in this sustained soft workers' compensation market, we are prioritizing underwriting margin over growth, and we've continued to undertake targeted pricing actions and implement enhanced risk selection to maintain underwriting margin. While competitive pressures have impacted our desire to grow at the same pace, in certain classes, jurisdictions, and policy sizes, we remain pleased with the continued growth in our small commercial business and our strong policy retentions as evidenced by our 4% growth in policies in force this quarter. We view the small commercial growth as validation that our clients value the investments we've made in automation and ease of use. Over the last 10 years, we've considerably increased our diversification by expanding geographically into a national carrier and into new distribution channels, while also expanding our appetite into new industries and classes. These initiatives are ongoing. To further that diversification, we're excited to announce our first expansion into a new product. We have commenced the build-out of a new excess workers' compensation offering by hiring a talented, experienced underwriter and developing the infrastructure to distribute and manage this new product. We plan to start accepting submissions in early 2026. Our entry into the excess workers' compensation market leverages our existing expertise and systems, capabilities, and customer base. and will strengthen our relationships and offerings with our distribution partners. We earned $26.1 million of net investment income during the quarter, which was slightly lower than the third quarter of 2024. Our net realized and unrealized gains on investments increased to $21.2 million for the quarter compared to $10.9 million for the prior quarter. We continue to be committed to delivering operational efficiencies and automation of the entire customer journey. In August, we made the difficult decision to undergo a reorganization, which was designed to better align our resources with our current and future business needs and objectives. As a result of this action and broader expense reduction efforts, we reduced our third quarter underwriting expense ratios significantly compared to the third quarter of 2024. Despite the tremendous progress we've already achieved, we now see further improvement potential as we implement our well-designed AI roadmap. As part of our relentless focus on value creation for our shareholders, Yesterday, we announced a $125 million debt-funded recapitalization plan and an associated $125 million increase to our existing share repurchase authorization. This expands our existing share repurchase authority to $250 million. In addition to a meaningful return on investment, We believe the recapitalization plan will reduce our cost of capital, improve our return on equity, and expand our earnings per share and adjusted book value per share. The recapitalization plan highlights our belief that our stock price is undervalued and our confidence in our balance sheet and future prospects. With that, Mike will now provide a deeper dive into our financial results, and then I will return to provide my closing remarks. Mike?

Thank you, Kathy. Gross premiums written were $183.9 million compared to $181.2 million for the prior year, an increase of 1.4%, due primarily to renewal business premium growth. Net premiums earned were $192.1 million compared to $186.6 million for the prior year, an increase of 3%. due primarily to larger levels of 2024 written premium earning in 2025. During the period, our losses and loss adjustment expenses were $186.6 million versus $117.7 million a year ago. As Kathy just summarized, we increased our current accident year loss and LEA estimates in response to the rapid rise in cumulative trauma claim frequency in California. The current quarter loss in LE includes a cumulative catch-up adjustment of $11.4 million to the carried 2025 accident-year loss in LE reserves at June 30, 2025, to reflect the 72% current accident-year loss in LE ratio. As a result, the 2025 accident-year loss ratio for the quarter was 78.1%. In addition, we strengthened our reserves related to prior action years by $38.2 million due to the increased frequency of California CT claims and our desire to utilize an even more conservative approach across our complete book of business. Commission expense was $23 million for the quarter versus $25.8 million for the prior year. Our commission expense ratio for the corresponding quarters was 12% and 13.8% respectively. The commission expense and ratio decreases were primarily related to the increased proportion of renewal business, which has a lower commission rate compared to new business and lower agency incentive accruals. Underwriting expenses were $39.6 million for the quarter versus $43.8 million for the prior year. Our underwriting expense ratios for the corresponding quarters were 20.6% and 23.5% respectively. The underwriting expense decrease was primarily a result of lower compensation related expenses, including reductions associated with the August reorganization Kathy mentioned, along with year-over-year declines in policyholder dividends and bad debt expense. Higher net premiums earned also contributed to the lower underwriting expense ratio. Net investment income of $26.1 million for the quarter was relatively flat compared to the prior year. despite a lower yield environment. The current quarter net income results included after-tax realized and unrealized gains from our investments in equity securities and other invested assets of $17.8 million and $63.3 million, sorry, $6.3 million, respectively. The market value of our fixed maturity holdings has benefited from the lower interest rate environment reducing our accumulated other comprehensive loss included in our shareholders' equity by $16.6 million. Our fixed maturities currently have a modified duration of 4.4 and an average credit quality of 8+. Our weighted average book yield was 4.6% at quarter end compared to 4.4% for the prior year. During the quarter, our average new money investment yield was 5.5% versus 5.7% a year ago. Our adjusted net loss, which excludes net realized and unrealized investment gains and losses, and the benefit of our LPT deferred gain amortization was $25.5 million compared to adjusted net income of $20.2 million a year ago. Our nine-month year-to-date adjusted net income was $34 million versus $90 million last year. Due to market opportunities, we increased our level of common stock and purchases to $45.2 million in the quarter. we achieved the purchases in an average price of $43.09 per share, which represents a 17% and 13% discount for our June 30, 2025 adjusted book value per share and our book value per share plus the LPT gain, respectively. Since September 30th, we have repurchased an additional 243,000 shares of our common stock at an average price of $41.77 per share for a total of $10.2 million. As Kathy highlighted, we announced the board's approval of a recapitalization plan authorizing a $125 million increase to the existing 2025 share purchase program. Initially, we will utilize a combination of three-year debt funding sources, including our existing borrowing facility at the Federal Home Loan Bank. We ultimately plan to fund the recapitalization with long-term debt.