Employers Holdings Inc

Good day and thank you for standing by. Welcome to the Employer Holdings Inc. Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a Q&A 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 today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Jeff Lisenby, Executive Vice President, General Counsel. Please go ahead.

Thank you, Bonnie. Today's call is being recorded and webcast from the Investors 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 nonpublic information and for complying with disclosure obligations under the SEC's Regulation FD. Such disclosures will be included in the Investors 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 of our website. Now I will turn the call over to Kathy Antonello, our chief executive officer.

Thank you, Jeff. Good morning, everyone, and welcome to our second quarter 2026 earnings call. Joining me today is Mike Pedraja, our chief financial officer. Attracting and retaining high-quality executives and directors is always an important priority for us, and we're pleased to welcome Stephanie Bush to our Board of Directors and Jeff Lisenby, who you just heard from, as our new General Counsel. I am confident that both Stephanie and Jeff will make meaningful contributions to our organization. As usual, I will begin by providing highlights of our second quarter 2026 financial results and then hand it over to Mike for more details on our financials. Before Q&A, I'll come back to you with some additional thoughts. If I had to sum up the second quarter, I'd say it's the quarter where the benefits of our recapitalization became fully visible. Diluted earnings per share grew 29% year over year, and adjusted earnings per share grew 46%, even though net income was essentially flat. The gap between net income and per share growth is the direct compounding benefit of the accretive share repurchases we've executed since undertaking the recapitalization. On the underwriting side, our net premium earned declined 12% year over year, while policies in force declined 5%. These amounts reflect the pricing and underwriting actions we've put in place to prioritize profitability over volume. Most of the decreases were directly related to the customer segments and geographies we targeted as part of our plan to concentrate on our core small business segment. We're currently focused on building new sources of growth. And in June, we wrote our first excess workers compensation policy. marking the successful launch of our new product line. The success of this new product continued in July with over 200 policy submissions and 20 policies bound, producing $4 million in premium. It's a new lever for growth and one that complements our core book. Our second quarter actuarial review came in as expected. As a result, we made no change to loss reserves for accident years 2025 and prior. We also maintained our current accident year loss in LAE ratio, excluding the LPT, on voluntary business at 72%, which is consistent with the full year 2025 accident year ratio. Our underwriting expenses declined to $40 million from $43 million a year ago. Driven by our continued focus on innovation and a reduction in variable expenses. Net investment income was $27 million, up 1% year over year, aided by a 40 basis point increase in our book yields, which was a result of the investment rebalancing we executed last year. We are laser focused on expanding our book value per share. With dividends, our book value per share, including the deferred gain, grew 9% year-over-year to $52.58. With that, Mike will now provide a deeper dive into our second quarter financial results, and then I'll return to provide my closing remarks. Mike?

Thank you, Kathy.

Gross premiums written were $163 million compared to $203 million for the prior year quarter, a decrease of 20%. due primarily to a decrease in new and renewal business writings. These decreases were partially offset by an increase in our ending final audit premium accrual and a 2.5 million premium restitution from a former policyholder. Our losses in LEE were at 122 million versus 140 million a year ago. The current quarter did not include any prior period losses or development on our voluntary business and the current action year loss and LE ratio of 72% is consistent with the full year 2025 action year ratio. The 2.5 million premium restitution reduced our second quarter combined ratio by approximately 1.5 percentage points. Commission expense was 22 million for the quarter versus 26 million for the prior year, driven by lower agency incentive accruals and a lower proportion of new business premium which carries a higher commission rate. Underwriting expenses were $40 million for the quarter versus $43 million for the prior year, a decrease of 8%. The improvement in underwriting expenses for the second quarter was due primarily to our continued expense management efforts including reduced personal costs, policyholder dividends, and bad debt expense. Our second quarter net investment income of $27 million was essentially flat year over year. Our fixed maturities maintain a modified duration of 4.5 with a strong average credit quality of A+. Aided by our investment rebalancing that Kathy mentioned, our weighted average book yield was 4.9% at quarter end compared to 4.5% for the prior year, a 40 basis point improvement. Our adjusted net income, which excludes net realized and unrealized investment gains and losses, and the benefit of our LPT deferred gain amortization, was $13 million for the quarter compared to $12 million last year. We remain committed to being good stewards of our shareholders' capital. During the second quarter, we repurchased 651,752 shares of our common stock at an average price of $42.43 per share or $28 million. The average repurchase price represented a 17% discount to our beginning book value per share, including the deferred gain and an 18% discount to our beginning adjusted book value per share. With that, I'll turn the call back to Kathy.

Thank you, Mike. Yesterday, our Board of Directors declared a third quarter 2026 dividend of $0.34 per share, consistent with the 6.25% increase we implemented last quarter. In addition to executing our underwriting strategy, we continue to make progress in our technology initiatives. including a major claim system upgrade, a new customer relationship management system, and the continued rollout of our AI tool. During the quarter, we achieved a 94% AI staff adoption rate and implemented several AI-assisted use cases with meaningful, tangible ROIs. As the guaranteed cost workers' compensation market softened, our focus turned to building our excess product. We are now turning our attention to rounding out our workers' compensation offerings with other loss-sensitive products, including large deductible. We also see opportunities to leverage our prior success and expand our appetite further. We are confident these new offerings will diversify our book, provide optionality during market cycles, and increase new business. We step into the second half of 2026 with genuine momentum at our backs. Our new business pipeline is accelerating, our renewal book continues to perform as designed, and our underwriting discipline remains solid. The California Insurance Commissioner's approval of a 6.6% advisory pure premium rate increase, effective September 1st, provides a significant opportunity for improved results in our largest market. Employers remains well capitalized, well positioned, and firmly focused on our North Star, which is delivering profitable, sustainable growth for our shareholders. And with that, Bonnie, we will now take questions.

Thank you. At this time, we will conduct the question and answer session. As a reminder, to ask a question, you will 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 the line of Mark Hughes with Truist. Your line is open.

Yeah, thank you. Good morning.

Good morning, Mark.

Kathy, you mentioned the 6.6% rate increase. What's your experience? Do you think carriers will follow that? And assuming you take the 6.6, what will that mean in terms of your overall pricing kind of all in with other pricing actions for you in California?

Yeah, so if we're talking specifically about California, we do internally feel like we've been ahead of the curve in terms of rate adequacy in the state. So the increase that the Bureau filed and the Commissioner approved, not the entire increase, but some of it, We feel like we already had that baked into our rates. So we feel like it's more, we were ahead of the curve on that, I would say. So I would not expect it to impact our book significantly. We're feeling good about where we are positioned in California. And, you know, I can't speak to where other carriers are. But I think the commissioner has done a nice job of sort of laying out the issues in the state that need to be addressed. And we're hopeful that there will continue to be a lot of focus on those areas where reform could help. But we feel like we're well positioned in terms of our rate adequacy in the state. You know, overall, countrywide, You know, just to give you a view of the landscape in terms of rates there, payrolls have been relatively flat, up about a half a percent. And we've achieved overall across the country about a 5% increase in our rates when you look at our renewal book year over year.

Very good. How would you characterize the competition? I think you would. Talked about kind of expecting mid-teens decline. The dip was just a little bit faster. Did you see more competition in the quarter, and what was the nature of that? Workers' comp specialists, package writers, how would you describe it?

Yeah, you know, package writers have always been an area of fierce competition because of the optionality that they have. We are seeing most of the competition in the middle market space to the point where we're just turning away when we don't feel like we can get the margins that we need. I would say there's definitely some irrational behavior going on in certain jurisdictions, but we're working hard to find those areas where we can continue to grow. In our release and the prepared remarks, we talked about how our premium is down, but the number of policies is down not near to the same extent, and that's because of the competition that we're seeing in the middle market.

Yeah. In thinking about your reserves, I know I think some slight favorable Development this quarter. Relative to the industry as a whole, I think you're still seeing meaningful reserve releases, though at a bit slower pace these days. When you think about your book, is it maybe just some care or concern around CT claims, and so therefore you're You're kind of holding the line to protect the balance sheet, or is there something about your book that may be different than what we're seeing more broadly, which is still redundancy, still reserve releases?

Yeah, I think you're spot on. Every book of business is different. We have a higher weight in California than countrywide. So When you mentioned CT, yes, we're trying to remain conservative, remain cautious, and protect the balance sheet. Exactly like you said, the more recent years, which is where we've seen the cumulative trauma claims come through, there's just more uncertainty in those years, and we're just being ultra-cautious there. We're continuing to see favorable development emerge in the older accident years, just as we would expect.

Yeah, okay. And then the excess workers' comp, that $4 million number, was that June?

That was July. July today. We did write one policy in June, but that was, we were getting you up to date for what we have done, you know, month to date.

Yeah. That seems like Pretty good start. How do you feel about that? And it seems like that could be a decent contributor if you just even if you kept up that pace.

Yeah, I would agree. You know, I would add that July 1 is a big for the for the segments that we're targeting municipalities, schools and so forth. July 1 is a big renewal day. That's why we targeted that as our launch. And so, you know, I wouldn't expect that same amount every month going forward, but we're seeing a very strong submission flow and a lot of interest from the brokers. So it's exciting to watch and we look forward to seeing the growth there.

Yeah. And I'll ask just one more. The share repurchase appetite at this point, how do we think about that?

Mark, we have a very strong view of our intrinsic value, and that intrinsic value is above the current stock price. We do believe in being very prudent purchasers of our shares, and so, as you know, we have $113 million of additional capacity left, and so we think we'll be continued active repurchasers, but obviously we're going to do it on a prudent basis, and we'll use the return on investment as our guidepost to to focus on those purchases.

Okay, so $113 million, would that be kind of 12 months? Yeah, through the end of next year.

So the program we implemented was $125 million through the end of 2027, and so we have $113 million left.

Okay, and that seems like reasonable pacing, it sounds like.

It all depends. If the market opportunity, to be candid, if the market opportunity has the stock down, we will accelerate those repurchases.

Yeah. Okay.

Thank you very much.

Great.

Thank you. Thank you. Our next question comes from the line of Carol Schmill with Citizens Bank Europe.

Yeah, hi, good morning. Thank you for taking my questions. I just got two questions. First one is just a general, your viewpoint on the whole re-underwriting of some of the policies due to the CT phenomenon. And would you categorize it as being more than 50% done in terms of re-underwriting those risks?

Yes, I would characterize it as more than 50% done. We started this at the tail end of 2025. So I think that's an accurate way to view it.

Great, thank you. And then just to follow up on the repurchases, do you have anything you want to share regarding your repurchases in Q3?

As far as to date?

As far as, you know, if you've used the authorization to purchase any shares, yeah.

Yeah, no, like I said, we're eager and, you know, we're very focused on being prudent, you know, monitors our shareholders for our shareholders, and we continue to watch the stock, and so we're active repurchasers. It just depends, the fluctuation will depend simply on how the stock performs. and so, as I mentioned to Mark, if the stock drops, we will accelerate the level of repurchases. Understood.

Thank you so much. That's all. Thank you.

I'm showing no further questions at this time. I would now like to turn it back to Kathy Antonello for closing remarks.

I think we might have a follow-up question in the queue.

I do see that. Thanks. We have Mark Hughes with a follow-up question.

Hey, right on time. Anything, Kathy, from a medical inflation standpoint, you know, kind of the CT issue to the side, but underlying inflation, Transmedical Inflation, Frequency Severity. What's the latest vibe on that?

Yeah, I mean inflation generally as it's impacting the workers' compensation environment is quite benign. We're not seeing anything that's alarming. We haven't seen anything that has emerged from the tariffs or their impact on medical prices. We internally, as you're aware, have a prescription drug index that we monitor on a quarterly basis. We're not seeing anything there that is concerning to us. And it seems like we are in lockstep with the rest of the industry. And CCI just published a new economic study on medical inflation. I think it just came out last week. and they had a similar result in their study and their medical inflation index that they track. So seems to be pretty calm right now.

Yeah, yeah. Any more on AI? You described some good use cases. Anything around the budget in order to implement AI? I think you've done really well on expenses and Mike, I think you've You know, kind of intimated that the expense discipline should continue. Just wonder whether there's anything you would highlight there, either from a customer service, customer acquisition, internal efficiency. You know, we'd be interested in any more thoughts.

Yeah. I do feel like AI is helping us from an efficiency standpoint. We are very focused on the cost of AI, and as many of the models turn from license-based to usage-based fees, how we're going to manage that internally, and we think we have a good plan for that. and we're seeing a lot of use cases. I mentioned in my prepared remarks the vast majority of our organization is utilizing AI. We're pushing out tools to help with productivity in almost every area of the company and we're really excited about the momentum we're seeing there. I fully expect that we'll be building out our large deductible product utilizing AI exactly the same way that we built our access workers compensation product. So we're true believers and it's exciting to watch all the success that we're having from it.

Very good. Thank you.

Thank you.

Excellent. This concludes the question and answer session and I would now like to turn it back to Kathy Antonello for closing remarks.

Okay, thank you Bonnie and thank you all for joining us this morning and we look forward to meeting with you again in October.

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