Employers Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 26, 2023

There are 6 speakers on the call.

Operator

Greetings, and welcome to Employers Holdings, Inc. 3rd Quarter 2023 Earnings Conference 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.

Speaker 1

Thank you, Doug. Good morning, and welcome, everyone, to the Q3 2023 earnings call for employers. Today's call is being recorded and webcast from the Investors 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.

Speaker 1

These statements are made in and reliance on the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. Although we believe the expectations expressed and answer session. 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 answer session will be included on the Investors 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.

Speaker 1

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, to our investor presentation and any other materials available in the Investors section on our website. Now, I'll turn the call over to Kathy.

Speaker 2

Thank you, Laurie. Good morning to everyone and thanks for joining us today. To start this morning, I'll provide some highlights of our Q3 2023 financial results, Then I'll hand it over to Mike for more details on our financials. Prior to Q and A, I'll share some additional commentary. Our 3rd quarter results were solid.

Speaker 2

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 As a result, we ended the quarter with more than 126,000 policies in force, a record level representing increases mode 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 to 2022.

Speaker 2

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, With that, I'll turn the call over to Mike and I'll return to provide my closing remarks. Mike?

Speaker 3

Thank you, Kathy. Gross premiums written were $196,000,000 versus $189,000,000 a year ago, an increase of 4%. The increase was primarily due to higher new and renewal business writings. Net premiums earned were $185,000,000 versus to $179,000,000 a year ago, an increase of 3%. Our losses and loss adjustment expenses were $115,000,000 versus $112,000,000 a year ago.

Speaker 3

That increase was due to higher earned premiums, partially offset by a lower current accident year loss in LAE Commission expenses were $27,000,000 versus $25,000,000 a year ago. The increase was primarily due to higher earned premiums And higher 2023 agency incentive accruals. Underwriting and general administrative expenses were $44,000,000 versus 40 to $2,000,000 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 $21,000,000 versus $26,000,000 a year ago and its resulting calendar year combined ratios for each 98% for the period.

Speaker 3

From a reporting I'm sorry, Our Ceredity segment had a pre tax loss of $2,000,000 in each period. Turning to investments, our net investment income was $26,000,000 versus $24,000,000 a year ago. The increase was due to higher bond yields, partially offset by lower invested asset balances as mode, 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 mode throughout 2022 and the proceeds from these advances were used to purchase investment securities.

Speaker 3

Our fixed maturities currently have a duration of 4.4 and an average credit quality of A plus 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 $6,000,000 of net after tax unrealized losses from equity securities and other investments, to maturity securities, which are reflected on our balance sheet. During the Q3 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 $36,000,000 Yesterday, our Board of Directors to the Q4 2023 regular quarterly dividend of $0.28 per share. This dividend is payable on November 22nd

Speaker 2

We are currently laser focused on integrating Cerity's operations into those of employers. After the consolidation effort is complete, policies issued by Cerity 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.

Speaker 2

Our capital management efforts this year, which have consisted of share repurchases and regular quarterly dividends, to 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.

Operator

Our first question comes from the line of

Speaker 3

Kathy,

Speaker 4

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 state 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 expansion that perhaps can increase your underwriting appetite, just kind of a sense on the top line dynamic here.

Speaker 2

Yes. Well, let me give you a few numbers and then I'll talk a little bit more about the appetite expansion effort. During the Q3, we increased our audit accrual by $1,200,000 and so that now stands at 40.2 $1,000,000 That compares to what we did in Q3 of 2022 when we increased our audit accrual by $9,000,000 So there's a bit of a difference there. Also, audit pickups remained strong in the 3rd quarter That totaled about $7,400,000 which compares to $12,500,000 in the Q3 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 Q3 of 2023 relative The audit premium adjustments. We also recognized about $14,500,000 in endorsements in the Q3, and that's up $3,500,000 from last year.

Speaker 2

In addition, about $1,300,000 came through in non compliance So as expired policies are being audited, we endorse the enforced policies upward So we are bullish on our opportunities for growth. We continue to look At opportunities to expand our appetite and our we formed a committee to do that. They are still in effect and 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 30, new business was at $115,000,000 of Written premium and about $40,000,000 of that is coming from our appetite expansion classes. So we like what we're seeing there.

Speaker 2

The loss ratio is coming in very similar to what we see we've seen on our traditional target classes. And so we do expect to continue that effort.

Speaker 4

Very good. And then, healthcare inflation, what's

Speaker 2

Yes. We're certainly keeping an eye on it. Up to this point, medical inflation And 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 defined basket of pharmaceuticals. And we found that our internal drug cost index For in network pharmacy costs had been it's been decreasing every year since 2019, But did experience an uptick in 2023.

Speaker 2

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

Operator

Our next question comes from the line of Bob Firdam with Janney. Please proceed with your question.

Speaker 5

Hi, Hi, thanks and good morning. So thanks for the update on the expansion classes. Kathy,

Operator

Sorry. I just wanted to know,

Speaker 5

what the average policy size is for that business? Is it bigger or smaller than your traditional book?

Speaker 2

Yes, 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 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 in force book go from about 5,200 to about 5,500 over the course of the last So it is increasing. Is

Speaker 5

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 clients?

Speaker 2

It's both. I would say it's both, Bob, it's not it's both the increasing wages and our appetite expansion effort.

Speaker 5

Okay. All right. Thanks. Quick question on Cerity. I understand you're rolling you're trying to consolidate to the Employers platform.

Speaker 5

It sounds like you expect that to be pretty much done in 2024. Is that what your expectations are?

Speaker 2

Yes. 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.

Speaker 5

Okay. So starting in the Q1 of 2024, do you think you will have some of the expense savings there?

Speaker 2

It will roll in throughout the year, but yes, we should start to see some in the Q1 of 2024.

Speaker 5

Okay, great. Thanks. And One quick question for Mike. The FHLB strategy, are we expecting that to be completely unwound In the Q4 this year, that's kind of what I was expecting, but I didn't know if there was any update to that.

Speaker 3

Hard to tell, Bob. We're down to $40,000,000 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.

Speaker 3

So it's a little hard to tell and the investments the investment market right now is a little wild. So we watch it every day and we'll act accordingly.

Speaker 5

Okay, listen. Thanks, Piyenters.

Speaker 2

Thanks, Bob.

Operator

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

Speaker 2

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

Operator

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation.

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Key Takeaways

  • Employers reported 4% growth in net written premiums and a 3% rise in net earned premiums for Q3, driven by wage increases, a strong labor market, appetite expansion and a new sales and underwriting model, taking policies in force to a record 126,000.
  • Net investment income increased by 9% to $26 million thanks to higher market interest rates, with the investment portfolio carrying a 4.4-year duration, A+ average credit quality and a 4.1% average bond yield (new money rates exceed 6%).
  • The company is integrating Cerity’s operations into Employers’ platform with completion expected in 2023 and expense savings to begin in Q1 2024, aiming to reduce underwriting expenses as a percentage of earned premiums.
  • Capital return remained a priority with 367,209 shares repurchased at an average of $38.95 per share (leaving $36 million authorization) and a Q4 dividend of $0.28 per share declared.
  • Appetite expansion continued to yield results, with Q3 gross written premiums up about 12% excluding audit adjustments and roughly $40 million of new business premiums coming from expanded class codes.
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Earnings Conference Call
Employers Q3 2023
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