Employers Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 27, 2023

There are 7 speakers on the call.

Operator

Hello, and welcome to the Employers Holdings, Inc. 2nd Quarter 2023 Earnings Conference Call and Webcast. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to your host, Lori Brown, Executive Vice President, CLO, General Counsel and Secretary.

Operator

Please go ahead, Laurie.

Speaker 1

Thank you, Kevin. Good morning, and welcome, everyone, to the Q2 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 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 SEC's Regulation FD. Such disclosures will be included in the Investors section of the company's website. Call and Webcast.

Speaker 1

In our earnings press release and in our remarks or responses to questions, we may use non GAAP financial metrics. Now I'll turn the call over to Kathy.

Speaker 2

Thank you, Lori. Good morning to everyone and thanks for joining us today. To start this morning, I'll provide some highlights of our Q2 2023 financial results And then I'll hand it over to Mike for further details on our financials. Prior to Q and A, I'll touch on some of our recent accomplishments that I'm particularly proud of. Our second quarter results were excellent.

Speaker 2

Significant premium growth, strong net investment income and net investment gains Wage increases, a strong labor market, our thoughtful appetite expansion program And our new sales and underwriting operating model each contributed to this growth. As a result of these efforts, We ended the quarter with yet another record number of policies in force. And just last week, we celebrated achieving over 125,000 Our net investment income was up 34%. The sharp increase was primarily due to higher market interest rates Our income statement further benefited from $11,000,000 of net investment gains, a welcome swing from $50,000,000 in losses we experienced a year ago. From an underwriting standpoint, our midyear Full reserve study led to the recognition of $20,000,000 of net favorable prior year loss reserve development from our voluntary business.

Speaker 2

That action, coupled with our continual focus on commissions and other underwriting expenses, yielded a consolidated combined ratio of 92%, which is a terrific result. Lastly, we recently terminated the lease associated with our former corporate headquarters in Reno, Nevada, which Mike will speak to in more detail. This action will serve to continue our meaningful reduction in underwriting expenses. With that, I'll now 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 198,000,000 versus $179,000,000 a year ago, an increase of 11%. The increase was primarily due to higher new and renewal business writings And an increase in final audit premiums. Net premiums earned were $177,000,000 versus $165,000,000 a year ago, An increase of 7%. Our losses and loss adjustment expenses were $91,000,000 versus $93,000,000 a year ago.

Speaker 3

The decrease was primarily the result of net favorable prior year loss reserve development recorded in connection with our mid year reserve study. We recognized $20,000,000 of net favorable development during the quarter versus recognizing $10,000,000 of net favorable development a year ago. Commission expenses were $24,000,000 which were largely consistent with our commission expenses of a year ago. As a result of the increase in our earned premium, our consolidated commission ratio was 13% this period, down from 14 Underwriting and general administrative expenses were $46,000,000 Versus $39,000,000 a year ago, an increase of 17%. The increase was primarily due to higher payroll related expenses As well as higher policyholder dividends and bad debt expense.

Speaker 3

As a result of the increases in these expenses, which Was 26%, up 24% from a year ago. During the quarter, we incurred a $9,000,000 Pre tax nonrecurring charge in connection with the early termination of the lease associated with our former corporate headquarters in Reno, Nevada. This previously announced action was undertaken as part of our ongoing review of our facility needs and is a tribute to the success of our work from home model. From a reporting segment perspective, our Employers segment had pre tax income of $47,000,000 Versus a loss of $12,000,000 a year ago and its resulting calendar year combined ratios were 87% 92%, respectively. Our Ceredy segment had a pretax loss of $2,000,000 for the quarter versus a loss of $3,000,000 a year ago.

Speaker 3

Turning to investments. Our net investment income was $27,000,000 for the quarter versus $20,000,000 a year ago, an increase of 34%. The increase was due to higher bond yields and a higher invested asset balance as measured by amortized cost. Our fixed maturities currently have a duration of 3.9 and an average credit quality of an A. Our weighted average book yield was 4.1% at quarter end, which is up sharply from 3.3% a year ago, And our new money rate today is north of 5%.

Speaker 3

Our net income this quarter was favorably impacted By $9,000,000 of net after tax unrealized gains from equity securities and other investments, which are reflected on our income statement, And our stockholders' equity was unfavorably impacted by $15,000,000 of net after tax unrealized losses from fixed maturity securities, The $37.89 per share, which served to exhaust our prior stock repurchase authorization. In response, our Board authorized a new stock repurchase program yesterday to allow for repurchases of up to $50,000,000 of our common stock From July 31st this year through December 31, 2024. And finally, yesterday, our Board of Directors declared a Q3 2023 regular quarterly dividend of $0.28 per share. The dividend is payable on August 23 to stockholders of record on August 9. And with that, I'll turn the call back to Kathy.

Speaker 2

Thank you, Mike. I'm pleased to say that with our current levels of written premium, our focus on expense management and our Prudent Capital Management, we've significantly improved our key operating metrics in recent quarters. Today, our premium to surplus ratio is 80% and climbing, up from just 55% when I took the helm in early 2021. And our consolidated underwriting and general and administrative expense ratio has been at a steady 26% or below, down from 30%. During my tenure as CEO, we've also lowered our current accident year loss and LAE ratio by 1 percentage point.

Speaker 2

In closing, as a unique specialist in small business workers' 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

Certainly. We will now be conducting a question and answer session. Our first question today is coming from Mark Hughes from Truist Securities. Your line is now live.

Speaker 4

Yes. Thank you. Good morning. Kathy, anything new or interesting when you looked at the midyear study? You obviously had a Nice.

Speaker 4

Reserve gain, anything you noticed about how losses are developing?

Speaker 2

2019 prior. We have a very conservative reserving philosophy. And our current provision does recognize the possibility of an increase in the implicit inflation that's Built into our triangles. So we've continued to hold That explicit inflation provision. We look at several scenarios And have reflected that in our booked reserves for over a year now.

Speaker 2

But we complete Another full loss reserve study at year end. And so we'll be taking a look then And seeing how the losses emerge over the second half of the year.

Speaker 4

Anything on the economic front? I think your audit premium continued to be pretty good. Are you seeing any sort of Changes in payroll, any midterm adjustments, anything like that that might bear on the economic health

Speaker 2

We kept our audit accrual flat this quarter at around 39,000,000 We had almost $8,000,000 in audit pickup. So that was really strong for the quarter, and we're continuing to see that Into July of this year. We also recognized about $12,000,000 in endorsements And another about $1,500,000 noncompliance premium. We're continuing to see Some strong wage increases come through, as a result of employment levels And especially in the leisure and hospitality industry. So we do think we will continue to see these strong tailwinds In the future.

Speaker 2

The unemployment rate is hovering at about 3.6%, so that's really positive for workers' compensation. And yes, I mean, I'm feeling pretty good about the next few quarters when it comes to The potential for audit pickup.

Speaker 4

Any observations on the competitive environment?

Speaker 2

Well, in terms of pricing, the environment hasn't changed too terribly much For the business sectors and the premium sizes that we write, I continue to characterize the environment as competitive and For the smallest policy sizes. We are having more success finding policies tend to be more moderate for the policy sizes over $10,000 right now. When we looked At our renewal book, we saw an average rate decrease of slightly below 2%. And that was made up of premium increase of about 7% and exposure of about 9%.

Speaker 4

Thank you for that. And then on the expense front, any Particular initiatives to bring that down, how should that trend over the next few quarters?

Speaker 2

Yes. We continue to work to bring our expense ratio down. I do feel like there's more we can do. We announced This month, the reevaluation of our real estate footprint and the exit of our We know Nevada headquarters. So that will be an improvement in our So going forward.

Speaker 2

But at this point, there are a couple of things that need to happen and that we're focused on and that's increasing our premium without Sacrificing profitability, and then a lot of digital initiatives that we're working on that are going to allow for automation and scalability. And those two things together are what's going to drive our expense ratio improvement going forward.

Speaker 4

Thank you.

Speaker 5

Thank

Operator

you. Next question today is coming from Matthew Carletti from JMP Securities. Your line is now live.

Speaker 6

Hi, good morning. This is Carl calling in for Matt. And my first question is really just regarding the CERITY top line. Can you comment on the growth?

Speaker 2

Yes, sure. So, Steriti is chugging along. And at the end of the 2nd quarter premium, it increased about 166% year over year, was up to 7,200,000 We are attributing that growth to our appetite expansion effort and CIGERITY's enhanced Back end capabilities, so they continue to generate increasing policy flows And we're seeing significant interest from companies that are looking to collaborate with CRD like our recent Simply Business

Speaker 6

Perfect. And then to just go back briefly into the Prior period development, I know it's multiple years, but is there a certain claim aspect that Maybe driving it, is it a medical drive or is it an indemnity drive that you're seeing?

Speaker 2

Yes. It's mostly being driven by lower medical development that is emerging. And as I mentioned earlier, it's coming from accident years 2019 and prior, and it's pretty widespread In regard to the more recent accident years, We have sort of said it and forget it philosophy for a few years because of the long tail nature of workers' compensation. And we like to See those losses emerge for a little bit and settle in before we move the more recent years. But Yes, that's high level what we're seeing and it is mostly coming from the medical side.

Speaker 6

Perfect. Thank you. That's all for me.

Speaker 2

Thank

Operator

you. Thank you. Our next Question is coming from Bob Farnam from Janney. Your line is now live.

Speaker 5

Yes. Hi there and good morning. So On the expense side, with the your expenses for the headquarters down, I mean, you still need to have I'm just curious how much of an impact that's going to have in the underwriting expenses going forward? Obviously, with the $9 plus 1,000,000 of savings in that side, So what should we expect for savings going forward?

Speaker 3

So Bob, I'll take that. And the exit of our Reno Space all in is going to save us about $3,000,000 per year from here on out. However, we are going to or We plan to move into much smaller platform in Reno in probably December of this year. That amount of space will be about a tenth of what we had previously and will cost about a tenth of what we had previously. So I think going forward, Starting in December, the run rate would be about $2,500,000 to $2,700,000 of annual savings associated with that real estate swap.

Speaker 5

Okay. Great. And while you're answering questions, I have another For you, the net investment income kind of as you unwind your FHLB investment strategy And with the offset with the new money yield still in North Texas, just kind of curious what investment income is going to look like over the next 6 months year?

Speaker 3

Well, right now, we're between $26,000,000 $27,000,000 I'd like to think we can try to get close to that next Knowing that we have as much as $100,000,000 of CLOs coming off of our books, winding down The Federal Home Loan Bank trade that we had, but we are again seeing higher yields. We're looking to see if there is a way in which we can substitute and benefit from a future plan along the lines of what we did With the CLO program, but I'm hoping that we can come in at or close to between $26,000,000 $27,000,000 Next quarter, it's all going to depend on timing of the reinvestment of lower yielding securities that are coming off And how quickly we take down the remaining CLOs associated with the Federal Home Loan Bank trade. So I wish I could give you more information, but we'd very much like to maintain where We are right now. I don't think that we'll increase our net investment income next quarter.

Speaker 5

Right. Got it. So you're basically thinking they should offset each other going forward. That's what the plan is. On severity, I know every quarter asked about severity.

Speaker 5

So what lessons have you learned as Cerity gets up to speed? And or thinking it another way, what would you have done differently

Speaker 2

So I think looking at Cerity, where our focus is right now is integrating a lot of the back end capabilities on the employer With employers so that we can bring that expense ratio down for Cerity over the course of the next year or so. So that's where our focus is now. I think in hindsight looking at there was a A concern about channel conflict. And I think in hindsight, one of the lessons learned is that, it's not As prevalent as we thought it would be. So we could have integrated some of these back end capabilities sooner.

Speaker 5

Interesting. Okay. Good for that. And last question for me is, I know it may be too soon to know, but Your expansion classes of business, just kind of curious how they're performing relative to expectations. Are there loss ratios Different from your established book?

Speaker 5

Is the competition different? Just kind of get a feel for what those expansion lines are, how they're performing?

Speaker 2

Yes. It's a great question and we do look at them separately. We are not seeing those classes emerge any From a loss ratio standpoint, they're highly consistent with our other classes that we've been in For quite some time. And we're still, as I mentioned earlier, attributing a lot of our growth to those expanded So, yes, right now, no concerns from a loss ratio standpoint on that business.

Speaker 5

Okay. And The competition is basically from the same peers for these types of risks.

Speaker 2

Yes. Largely, I would agree with that. Okay,

Speaker 5

great. Thanks for the color.

Operator

Sure. Thank you. We reached end of our question and answer session. I'd like to turn the floor back over

Speaker 2

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

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Key Takeaways

  • Employers Holdings reported 11% growth in gross written premiums to $198 M and ended Q2 with a record 125,000+ policies in force.
  • Net investment income jumped 34% to $27 M and the company recorded $11 M of net investment gains versus $50 M of losses last year, with average bond yields rising to 4.1% and new money north of 5%.
  • A midyear reserve study drove $20 M of favorable prior-year development, helping to achieve a consolidated combined ratio of 92%.
  • The early termination of the Reno headquarters lease will save roughly $3 M annually, reflecting continued focus on expense management and work-from-home efficiencies.
  • Capital actions include a new $50 M share repurchase program and a Q3 dividend of $0.28 per share, with the premium-to-surplus ratio climbing to 80%.
A.I. generated. May contain errors.
Earnings Conference Call
Employers Q2 2023
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