Employers Q1 2023 Earnings Call Transcript

Key Takeaways

  • Employers reported a 36% increase in revenue year-over-year driven by a 13–15% rise in written and earned premiums and significantly higher net investment income and gains.
  • Written and earned premiums grew on higher new, renewal and audit premiums, aided by a disciplined expansion in low-to-medium hazard classes and Phase 1 of a new sales & underwriting model, resulting in a record number of policies in force.
  • Net investment income jumped 45% to $28 million—the highest quarterly level in company history—and the firm recognized $8 million of net investment gains compared to a $17 million loss a year ago, leveraging a Federal Home Loan Bank financed CLO strategy.
  • Underwriting metrics improved with a current accident year loss & LAE ratio of 63.3%, and commission and G&A expense ratios each down 0.4 percentage points to 13.5% and 25.7%, respectively.
  • Key 2023 digital initiatives include e-delivery of policyholder documents to reduce paper usage and a best-in-class electronic claims intake process to streamline claimant submissions and accelerate handling.
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Earnings Conference Call
Employers Q1 2023
00:00 / 00:00

There are 6 speakers on the call.

Operator

You for standing by, and welcome to the Employers Holdings First Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Lori Brown, Executive Vice President, General Counsel.

Operator

Please go ahead.

Speaker 1

Thank you, Jonathan. Good morning, and welcome, everyone, to the Q1 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 reliance on the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. Although we believe the expectations Rest 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 SEC's Regulation FD.

Speaker 1

Such disclosures 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, 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 Investors section on our website. Now, I will 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 Q1 20 23 financial results. Then I'll hand it over to Mike for further details on our financials. And prior to Q and A, I'll touch on a few of our Digital initiatives that we plan to complete in 2023.

Speaker 2

I'm very pleased with our Q1 results. Continued premium growth, significantly higher net investment income and a return to net investment gains drove a 36% increase in revenue year over year. Our written and earned premiums in the quarter were up 13% 15%, The strong increase arose from higher new, renewal and final audit premiums And 2 recent initiatives also contributed to the growth. The first is our thoughtful and disciplined expansion within the low to medium hazard group classes. And the second was the successful implementation of Phase 1 of our new sales and underwriting operating model, which was designed to create efficiency and optimize our agent engagement in our core business segment.

Speaker 2

As a result of these efforts, we ended the quarter with yet another record number of policies in force. Our net investment income was up 45% for the quarter. The sharp increase was primarily due to higher market interest rates impacting bond yields and higher invested balances of fixed maturity We earned $28,000,000 of net investment income during the quarter, which is significantly higher than any other quarter in our history as a publicly traded Our income statement further benefited from $8,000,000 of net investment gains, A markedly different result than the $17,000,000 of net investment losses we experienced a year ago. From an underwriting standpoint, we set our current accident year loss and LAE ratio on voluntary business at 63.3% versus 64% recorded throughout 2022. We did not recognize any prior year loss reserve development this quarter Because a full actuarial study was not performed and the indications were consistent with our expectations.

Speaker 2

We will evaluate our prior year reserves in more detail midyear when we routinely perform a full reserve study. Despite an increase in our year over year commission expense, Our commission expense ratio improved by 0.4 percentage points to 13.5 percent when considering the corresponding increase And net earned premium. The same was the case with our consolidated underwriting and G and A expense ratio, which also improved by 0.4 percentage points to 25.7%. With that, Mike will now provide a further discussion of our financial results, and then I'll return to provide my closing remarks. Mike?

Speaker 3

Thank you, Kathy. Gross premiums written were $195,000,000 versus $172,000,000 a year ago, an increase of 13%. As Kathy mentioned, the increase was due to higher new renewal and final audit premiums. Net premiums earned were $173,000,000 Insurance solutions directly to consumers contribute nicely to our growth in earned premium this quarter. Our loss and loss adjustment expenses were $107,000,000 versus $94,000,000 a year ago, an increase of 14%.

Speaker 3

The increase was due to our higher earned premium, partially offset by a lower current accident year loss in LAE provision. Commission expenses were $23,000,000 versus $21,000,000 a year ago, an increase of 12%. The increase was primarily due to our higher earned premiums. As Kathy mentioned, our commission expense ratio for the quarter was down by 0.4 percentage points from that of a year ago. Underwriting and general and administrative expenses were $44,000,000 versus $39,000,000 a year ago, an increase of 13%.

Speaker 3

The increase was primarily due to higher compensation related expenses as well as higher policyholder dividends and bad debt expenses resulting from the increase in earned premium. As was the case with our commission expense ratio, our consolidated underwriting and general and administrative expense ratio was also down 0.4 percentage points from that of a year ago. From a reporting segment perspective, our employer segment had pre income of $30,000,000 versus $2,000,000 a year ago and its resulting calendar year combined ratios We're 99% 100%, respectively. Our Cerity segment had a pre tax loss of $2,000,000 for the quarter versus a loss of $3,000,000 a year ago. Therity's current accident year loss and LAE ratio since its inception and have been highly consistent with those of our Employers segment.

Speaker 3

Turning to investments, our net investment income was $28,000,000 for the quarter $19,000,000 a year ago, an increase of 45%. The increase was due to higher bond yields and a higher invested asset balance As measured by amortized costs resulting from our Federal Home Loan Bank Leveraged Investment Strategy. Pursuant to that strategy, our insurance subsidiaries have received advances of $183,000,000 from the Federal Home Loan Bank, and the proceeds from those advances were used to purchase a similar amount of high quality collateralized loan obligation securities. Our fixed maturities currently have a duration of 3.8 and an average credit quality of A. Our weighted average book yield was 4.1% at Quarter end, which is up sharply from 3% a year ago, and our new money rate today is near 6%.

Speaker 3

Our net income this quarter was favorably impacted by $6,000,000 of net after tax unrealized gains from equity securities and other investments, which are reflected on our income statements and our stockholders' equity was favorably impacted by $23,000,000 of net after tax unrealized gains from fixed maturity securities, which are reflected on our balance sheet. During the Q1, we repurchased $11,000,000 of our common stock At an average price of $42.24 per share, and thus far, we have repurchased an additional $6,000,000 of our common stock in the 2nd quarter At an average price of $42.29 per share, our remaining share repurchase authority stands at $31,000,000 And finally, earlier this week, our Board of Directors declared a Q2 2023 regular quarterly dividend of $0.28 per share, An increase of 8% from the prior quarterly dividend of $0.26 per share. This action reflects our strong balance sheet, abundant underwriting capital and are confident in the company's future operations. And now, I'll turn the call back to Kathy.

Speaker 2

Thank you, Mike. Over the last few quarters, we've been actively identifying areas where increased automation and digitization can unlock further improvement in our combined ratio, Our workforce experience and our customer experience. Our focus now is on implementation. Just last week, We enabled e delivery of policyholder documents. This initiative brings numerous benefits, allowing our policyholders to go green and reducing our fixed During 2023, we've also committed to producing a best in class electronic claims intake process That will make it easier for our claimants to provide all the required information and reduce handling time for our claim intake staff.

Speaker 2

As a unique specialist in small business workers' compensation, we continue to be well positioned to further benefit from the favorable trends and opportunities And with that, operator, we'll now take questions.

Speaker 4

Certainly.

Operator

And our first question comes from the line of Matthew Carletti from JMP Securities. Your question please.

Speaker 4

Hey, thanks. Good morning.

Speaker 2

Good morning, Matt.

Speaker 4

Good morning.

Speaker 3

Kathy, I was hoping maybe you

Speaker 4

could just kind of give us A high level view of, obviously a dynamic environment and you noticed the accident year loss ratio pick improved a little bit. Could you just maybe peel things back a little bit and assuming you understand kind of what's going on with what you're seeing in frequency and severity trends, Pricing, I know that can vary a bit by state, but obviously California is a big piece. And then maybe the last piece I'm most interested in is, What you're seeing in kind of the payroll growth or really from a wage inflation perspective, and what feel you might have for How much of that might act like rate versus what might be more true exposure?

Speaker 2

Okay. Yes. So, let me start with the accident year loss ratio that you mentioned. Our current accident year loss and LAE ratio is determined by our actuaries. And it considers everything from the pricing environment of each state that we're in And our growth prospects in those states, it also looks at the trends we're seeing in frequency and severity.

Speaker 2

And then finally, any initiatives that we may be implementing that we feel could impact our results. So yes, it was we did choose a slightly lower accident year loss and LAE ratio this year. I certainly wouldn't read Too much into the change that you're seeing. We generally like to choose the ratio at the beginning of the year given the current environment and we'll leave it there until There is some compelling reason to change it. So that's sort of the methodology behind How we choose our current accident year loss ratio.

Speaker 2

In regards to pricing, you mentioned For the business sectors and the premium sizes that we write, we would continue to care Try to see environment as quite competitive, especially for the smallest policy sizes. We're having a bit more success finding policies that are generally larger than our average policy size, which runs anywhere from around $5,200 I would attribute that success to the new sales and underwriting operating model that I referenced earlier. For our renewal book, when we adjust for changes in exposure, our Q1 2023 average pricing is showing Small year over year rate decrease, but that does vary by state. California continues to be our largest state. It's about 45% of our book and our results there are Quite favorable.

Speaker 2

We've recently refined our pricing methodology in California, and we believe that that's going to open up Some more opportunities there. The combination of our appetite expansion and the economic factors That are currently in play led us to a 16% increase in California premium for the Q1 of 'twenty 3 relative to 'twenty 2. I was just reading this week that the WCIRB Governing Committee just voted to file for a pure premium increase of about 0.3%, and that according to the press release was due to Some downward indemnity development, some stable medical development and some flat frequency that they're seeing there. Still yet to be seen what Commissioner Laura will approve though. In regards to our frequency and severity, When we look at it based on on level premium, accident year 2022, frequency is down from prior years And so far 2023, obviously still very early to tell, but it's emerging lower as well.

Speaker 2

And we're seeing the decrease in both California and other states. And then finally, you mentioned What's going on with growth and the economy? With the unemployment rate hovering at around 3.5%, That's very positive for workers' compensation. The upward shift in employment levels and wages that we're seeing Are impacting our policies to somewhat greater extent than average, and that is Just sort of the flip side of what we saw going into COVID where we were impacted more negatively as the economy deteriorated. So we're still seeing strong wages in the leisure and hospitality sector, and the momentum is resulting in some Strong audit pickups and endorsement activity.

Speaker 2

So I'll stop there and see if you have any more questions.

Speaker 4

No, no, that's perfect. I guess maybe just the one follow-up is on the with what you're seeing on kind of the pickup on the audit side to the extent that it's Wage inflation, I guess, is there do you have a feel for how much of that Is exposure, so, somebody working more hours or more employees being added, so true kind of exposure versus Employee getting paid more for the same exposure. I think the latter would be much more beneficial to you.

Speaker 2

Well, it's actually both I would say that both are impacting the strong audit premium pickup. We haven't changed our audit accrual this quarter. It's still at about $37,000,000 We had about $9,400,000 of audit pickups in the Q1. I can tell you that's continued into April. And then we've also recognized close to $4,000,000 in non compliant Premium throughout the Q1.

Speaker 2

So it's both. It's both payrolls going up by Hiring and wage increases that are coming through.

Speaker 4

Okay, great. That's wonderful. Thank you for helping me put the puzzle together.

Speaker 2

No problem.

Operator

Thank you. One moment for our next question. And our next question comes from the line of Mark Hughes from Truist. Your question please.

Speaker 5

Yes, thanks. Good morning.

Speaker 2

Good morning.

Speaker 5

Kathy, you had talked about I think you were talking frequency down in 2022 and emerging lower as well in 2023.

Speaker 2

Yes.

Speaker 5

Did you address severity in that or did that encompass severity as well?

Speaker 2

I did not mention severity, but Severity is behaving the same way as it has in recent years. Accident year 2022 It's coming in emerging lower than prior accident years. We're especially seeing that in California. And other states is emerging flat to just maybe a slight tick up, but nothing that's concerning. What do you

Speaker 5

think the NCCI is going to do in terms of loss costs for 2023, when we get all the state data, how do you think that's going to look?

Speaker 2

Well, it's tough to say. I don't have a crystal ball, but I would say the indications that Just the fundamentals that we're seeing and what I just mentioned with frequency and severity trends and so forth, there's Nothing that I'm seeing that would indicate that there should be any shift, but perhaps they will see something in the data that we have Because we are focused on small and low hazard and their filings Reflects the larger market in total.

Speaker 5

Okay. And if there's no change, is that down mid to upper single digits?

Speaker 2

Mark, are you there?

Speaker 5

I am. Can you hear me? I'm still here, Kathy. Can you hear me?

Operator

One moment. Kathy, can you hear me?

Speaker 2

Hello?

Operator

Yes. Kathy, can you hear me?

Speaker 2

Sorry, is that you, Bob? You're breaking up on our end. We can't hear you. Can you repeat your question?

Speaker 5

Operator, I can hear you.

Operator

And I can hear you and I can hear them.

Speaker 2

You're breaking up on our end.

Speaker 5

Kathy, I'll give it a try. Can you hear me now?

Operator

And are you hearing me as well?

Speaker 5

I am. Yes, you're loud and clear.

Operator

Okay. They seem

Speaker 2

to We can barely hear you. The line is breaking up.

Speaker 5

I'm happy to dial in. I've got a few more questions.

Speaker 2

I can hear you, but it's very broken up. Can you hear us?

Operator

I can hear you just fine. Can you hear me? Kathy? Mark, I'm going to try moving to our next question just to see if that makes a difference. You can get back in the queue.

Speaker 5

Very good. Will do.

Operator

One moment. Our next question comes from the line of Bob Farnam from Janney. Hey, can anybody hear me or am

Speaker 4

I just going to talk to Bob? We seem

Speaker 2

to be having technical difficulties with the phone line on this end.

Operator

Bob, I can hear you just fine. I guess that yes,

Speaker 2

there We could end the call and take questions offline.

Speaker 3

That's fine.

Speaker 5

Okay.

Speaker 2

That's better.

Operator

You can hear us, Kathy?

Speaker 2

It sounds

Operator

Okay. Can we Bob, do you want to go ahead and try and get in your question? Yes. If you can hear me, I had a couple One was regarding the FHLB load investment strategy, just kind of what we should expect from that in 2023.

Speaker 2

Now we can.

Speaker 5

You can hear us.

Operator

You can hear again? Kathy, are you hearing us?

Speaker 3

I think it's best

Operator

we just We can hang up and try her offline. Okay. All right.

Speaker 2

You're broken up, but we can hear a bit.

Operator

Kathy, can you hear me okay right now? This is Jonathan, the operator, just trying to check and see if you're able to hear us now.

Speaker 3

Sure thing, Bob. And I'll take that.

Speaker 4

So So we

Speaker 3

are at $182,500,000 of loan and respective

Speaker 2

We can.

Speaker 5

Yes.

Speaker 3

So

Speaker 2

We are.

Speaker 3

Am I clear?

Operator

Yes, you're very clear. Can you hear me now? No, I guess not.

Speaker 2

Can you hear us?

Operator

Yes, I can hear you just fine. Can you hear us?

Speaker 2

I can. Can you hear us?

Operator

Yes, I can hear you. And the audience is hearing you. I think that you're not able to hear us though. I'm not sure why. I

Speaker 2

can hear you. Can you hear us?

Speaker 4

Yes.

Operator

Certainly. Ladies and gentlemen, we apologize for today's technical difficulties. Thank you for your participation.

Speaker 2

Yes, we can.

Operator

You may now disconnect. You can hear

Speaker 3

So are we coming through now?

Operator

Yes, I

Speaker 5

can

Speaker 3

We can hear you from time to time. To get back to Bob's question, if you can hear me, We've got $182,000,000 of Federal Home Loan Bank loan and corresponding

Operator

Okay. I'll continue.

Speaker 2

So thank you all for joining us Morning. I'm sorry for the technical difficulties. We will be happy to take questions offline if you'd like to contact us. And we look forward to meeting with you again in July.

Operator

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.