Q3 2019 Earnings Call
Thousand 19 employers Holdings Inc. earnings conference call at this time, all participants' lines are in listen only mode.
The speakers presentation, there will be a question and answer session to ask a question. During this that shouldn't you will need to press star one on your telephone.
Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero I'd now like I hand, the conference over to you're speaking to date Boy Brown General Counsel. Thank you. Please go ahead.
Thank you Jamie good morning, and welcome everyone to the third quarter 2019 earnings call for employers today's call is being recorded and webcast from the Investor section of our website, where a replay will be available following the call with me today on the call our Doug Dirks, our Chief Executive Officer, Steve Festa.
Our chief operating officer, and Mike The Cat, our Chief Financial Officer.
Statements made during this conference call that are not based on historical facts are considered forward looking statements. These statements are made and 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.
Oh remarks made during the call our current at the time of the call and will not be updated to reflect subsequent development.
In our earnings press release, and then our remarks are responses to questions. We may use non-GAAP financial metrics, including those that exclude the impact of the 1999 loss portfolio transfer or L.P.T.
Reconciliations of these non-GAAP metrics 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 Doug.
Thank you Laurie and thank you all for joining us today.
Our third quarter and year to date results were highly favorable.
And our accident year results were broadly in line with our expectation.
Within property and casualty insurance workers compensation continues to be on a relative basis.
Much more attractive line of business.
And consequently remains highly competitive.
Notably we are finding that the smaller end of the middle market.
Is prone to the most aggressive pricing behaviors.
Our business model focuses on small low hazard accounts.
Appeared to the middle market. This business is characterized by less competition less price sensitivity and higher persistency.
And therefore is more resilient to pricing changes.
This is confirmed with the high unit and premium retention rates, we are achieving in California, and our smaller accounts. Despite our recent rate actions.
We remain focused on alleviating or eliminating friction in the sales process be it for our agency partners or through security, our direct to customer platform.
So the is currently open for business and 24 states in the district of Columbia.
And is rapidly expanding nationally.
We continue to execute on our plan of accelerated development and implementation of digital I T capabilities that benefit and support both our agency force as well as our direct customers.
During the quarter, we delivered a 9.3% annualized return on adjusted equity.
We also maintained our current accident year loss ratio at 65.5%.
Delivered a combined ratio before the impact of the L.P.T. of 92.4%.
And grew our book value per share, including the deferred gain by 3.8%.
Our topline was negatively impacted by the meaningful rate increases we recently undertook in California.
To address what we consider to be generally unfavorable pricing trends in the market.
The decrease in new business premiums was expected and we are committed to remaining proactive in terms of ensuring rate adequacy, while remaining competitive in the marketplace.
We have and will continue to protect margins, even if that requires actions that have unfavorable impact on the top line and the expense ratio.
And now I'll turn the call over to Steve for additional detail on new business right.
Thank you Doug and good morning.
Net written premium for the quarter of $165 million was down 22 million.
Were 11.9% from the third quarter of 2018.
The quarter Labor decline in net written premium is principally the result of decreases in premium related to final audience.
The decrease in new business writings in California, due to our increased rates, which were effective for new and renewal business as of July 1st 2019.
With respect to the decrease in final audit premium we continue to see payroll growth on existing policies, but at a slower rate this quarter relative to last years third quarter growth.
Our results for the quarter appear to be in line with the observations outlined in the September ATP National Employment report, which noted that average monthly job growth for the past three months is down 32% from the same period last year.
New premium decrease quarter over quarter by $9.5 million.
This decrease is directly related to our July one rate filing that increased pricing in California, our largest state.
Excluding California, new business grew by $2.2 million quarter over quarter Importantly, we believe that workers compensation loss trends remain favorable but significant pricing headwinds persist.
Renewal premium continues to be strong as evidenced by an $8.8 billion increase for the quarter. Our unit retention also improved our current unit retention rate is at 95.3%, which is up from 93.5% in the prior year period at.
Disappoint, our renewal retention rate continues to be strong in California, as well, especially in our small business book.
The strong persistency as well as the increased rates in California have been key contributors to our renewal premium growth.
Overall on a year over year basis, we grew our in force policy count by 7.4%.
During the quarter, we entered the state of Hawaii.
As a result, we have now completed our national footprint. This footprint now allows us to capitalize on new business opportunities and partnerships that were not previously available to us.
With that I'll turn the call over to Mike for further discussion of our financial results.
Thank you Steve.
Our third quarter loss in LAE ratio before the impact of the LPT of 54.2% was 2.4 points lower than a year ago.
During the quarter, we recognized $20 million a favorable prior year loss reserve development relating to nearly all prior accident years versus $12 million, a favorable development recognized a year ago.
Our third quarter Commission expense ratio of 12.5% was 0.4 percentage points lower than a year ago, primarily as a result of a decrease in projected 2019 agency incentive commissions, which were directly impacted by reductions in premiums written.
Our third quarter underwriting and other operating expense ratio of 25.8% was meaningfully higher than a year ago.
The reduction in earned premium for the quarter represented 2.4 of the 5.8 percentage point increase with the balance representing expenses associated with the accelerated development and implementation of our digital technologies and capabilities, including those of Seritage.
As discussed in the past we have worked to accelerate these expenses into a tighter period and so far we're pleased with the result.
We expect to have greater clarity into our anticipated expense ratio for future years, as we move forward into the fourth quarter in early 2020.
Moving to investments net investment income for the quarter was $22.3 million up 10% from a year ago, our pretax book yield on the portfolio was 3.4% for the quarter versus 3.3% a year ago.
At quarter end, our fixed maturities had a duration of 3.6 and an average credit quality of a plus and our equity securities and other investments represented 11% of the total investment portfolio.
Our current duration is lower than the 4.4 reported a year ago due to recent investments, we've made and variable rate bank loans as well as changes in prepayment speed assumptions affecting our mortgage backed securities.
During the first nine months of 2019, we benefited from $134 million a pretax investment gains.
Our portfolio of fixed maturities increased in value by $104 million, which is reflected on our balance sheet and our equities and other investments increased in value by $30 million, which is reflected on our income statement.
These investment gains were the primary driver of our 16.5% year to date increase in book value per share, including the deferred gain.
And finally during the quarter, we repurchased $4.7 million of our common stock at an average price of $42.22 per share and our remaining share repurchase authority currently stands at $48 million.
And with that I'll turn it back to Doug for his final remarks.
Thanks, Mike.
As we move through this segment of the cycle, our favorable view of the broad workers compensation environment remains unchanged.
Frequency and severity continue to be stable to falling.
And general economic conditions continue to support growth.
Albeit currently at a slower pace than in recent periods.
As a nimble model and ensure we have experience data tools.
And a perspective that allows us to closely monitor changes in the market and to react quickly to changing conditions and with that operator, we'll open the call up to questions.
Thank you as a reminder to ask the question you will need to press star one on your telephone to withdraw your question press the pound key please stand by what we compile the culinary roster.
Our first question comes from Matthew Carletti with JMP Securities. Your line is now open.
Hey, good morning.
Just had a few questions.
Maybe first might be for Steve or Doug.
Regarding the growth can you can you break apart hopefully both kind of renewal retention and new business production.
California versus X, California, So can get an idea of kind of what the newer states are doing versus the rate actions and in California.
Sure Matt This is Steve I'll take that.
So for the new business production for the quarter quarter over quarter, California was down $11.7 million over the prior.
Comparable period last year.
And we saw a 2.2 million dollar increase in premium in the other states. We also saw in the other states quarter over quarter, a 17% increase in policy count.
In those states. So the policy count percentage, obviously is higher than the premium growth percentage because of the rate declines we've seen in those other states.
From a unit retention standpoint at renewal.
California since we implemented to the July a rate hikes. The the retention rates have held up very steady, especially in particular on our accounts 25000 below we've seen a little bit of slippage on those above 25000, but the accounts that were.
Sticking which are the majority of our accounts, they're getting that higher rate attached to it so in California.
For the third quarter, we actually grew our renewal premium in California.
But more so than we had the prior two quarters of the year.
Okay, Great very helpful. And then and then maybe one more number just so we can kind of get the comparables going forward.
Do you have kind of what the audit premium impact was.
Year ago, Q4, and then maybe even you know Q1 this year.
Right in front of mind right do though is that the.
The audit impact a quarter over quarter was a $16.7 million decrease about 60% of that came through the.
The even though we're still seeing payroll growth the slower growth about 60% of that number came from that and about 40% of that came from a process change that we implemented that elevated the audit numbers in the third quarter of last year.
And the decline this year with some of that moving into the premium renewal because through endorsement processes.
Okay got it so was it sounds like the year ago, as maybe a little bit tougher comp because of that process than than otherwise would have been yes. That's true and then we'd expect to see a little bit of that residual carrying over into the fourth quarter, but we expect that to normalize by next year.
Okay, Great and then just one other question. This one probably for Mike I'm just on net investment income.
Can you give us kinda.
Expectation going forward I know, we have a bank loan portfolio now it's largely variable rate has been movements in interest rates lately I has that kind of all been captured in and what we're seeing already or do we need to think about kind of how that flows through in the next few quarters in terms of and I run rate.
So Matt.
So as you can see we had a big increase in our net investment income this quarter and a lot of that is because of the change and allocation in the roughly $200 million a bank loans as you mentioned, so, whereas we are higher than we were a year ago I'm not entirely sure how much higher we go from here, where we're right where they currently do I do think.
We're probably at a decent run rate for this quarter, but I wouldn't expect a lot of inflation from here until things change.
All right great. Thanks, a lot for the answers.
Thank you and our next question comes from Mark Hughes with Suntrust. Your line is now open.
Yes. Thank you the audit decrease they did you say 16.7 million with the magnitude of the decrease yes more quarter over quarter Thats, the about 16.7 billion.
How much was that the technical change the just the 40% 40, 40% of that is due to that.
Okay.
And you say that is the sort of the this quarter next quarter, but the normalizes a little better yes that will normalize because we've worked our way through the year over year process change that normalizes as we move into 2020, but the 60% of that figure came from as I said before we're still seeing payroll growth.
So I want to make that that very clear, but the rate of that growth has slowed and that seems to be in line with some of the other reports that came out.
In September I referenced at least one of those already.
Yep.
Do you I think you gave a number I'm not sure if I wrote it down the renewal premium growth overall.
Oh, yes, the renewal premium for the quarter over quarter was up $8.8 million, including growth in California.
Right so.
And when you calculate the renewal premium that's just your existing book of business the.
The 4% for so that you retained 95.3% unit retention.
Yes, you calculate the renewal change and and on that cohort of up 8.8 billion right. So so that renewal growth is really we have a higher base because of the growth we had last year to start with.
We saw a rate increase on a renewal book in California, and then increasing our retention rates all three of those characteristics led to the 8.8 million dollar increase in renewal production, despite declining rate environments and all the other states, we do business and.
Right. So when you think about of the it's really the audit.
Decrease the.
Out of the key issue here you renewal premium is up for new business is down about the same amount.
So it's the audit premium and 40% of that as the process change well, yes properly yes.
If you look at the renewable production being up 8.8 billion in the new production being down 9.5, but outside of California up 2.2 million. It's the audit fits the primary driver this quarter in an audit that can be volatile.
We don't necessarily extrapolate what's happening this quarter to the next quarter. The other thing that I would call out on the new business production.
For the final month of the quarter.
September we actually saw some growth in new business production driven by.
The states outside of California.
So you're saying that growth the new business production in the month of September .
Is that year over year or is that.
Comparing year over year September whatever this year to September prior we grew.
Okay.
I don't think you gave the average rate or average pricing I think you've done that in the past in California, or otherwise anything you can share this time around well for the for the for the company as a whole the average rate decrease on renewals, which we talked about in the past.
For the quarter over quarter was 8.4% and year over year was 11.8%.
So 11.8% versus Threeq you last year.
1.8% on a year over year, and then 8.4 in the quarter over quarter.
Okay.
You are in California, I think you had said you.
Need to increase rate because of the rate competition.
Howard loss trends in California, I would assume that it's your your need for rate is going to be driven by your loss outlook rather than the price competition.
Well my thinking about that properly and what is your outlook for losses, roughly speaking well and we said this before mark and our perspective Hasnt changed even with three months more worth of data.
The loss environment in California is still seats seems to be very favorable to us in the industry as a whole.
We're seeing as Doug alluded to earlier on the call.
Frequency and severity appears to be very stable.
The reforms are still holding up very very well in California, but as I think we called this out on the last earnings call. If you look at the industry. The average charged rate filed rate, but charged rate in California. Since 2015 is down 33% and it's the lowest charged rates since.
18, 76, and that data comes from the WCS or be so as we said before we just feel like the pricing decreases have reached the inflection point, where the need that was justified for us to do the rate hikes that we made in California effective July one so it's not a deteriorate.
Adding loss environment, it's just that we feel that the pricing has declined so much the rate of decline so much over the course of the past several years that that there will be deterioration in loss ratio if the pricing doesn't change.
Did you overshoot on the downside is that what you're saying.
I don't think so I wouldn't I wouldn't say that I would just say that we're noticing trends that we think are very appropriate.
No.
Visual into the future that now is the time to make that change even though.
We're.
We're taking that move without seeing much in that way from a comp competitive standpoint.
We think it's the time to do it now based on the the rate decreases that have occurred that were justified in the past, but we think it's time to make the rate increase that we did for July .
And then I'll ask one more apologize to ask some money, but the.
Doug on the Seritage could you give us some.
Updated thoughts kind of how.
You are seeing your marketing strategy distribution strategy evolves.
Are you still anticipating breaking out the any financials are operating metric.
Okay.
On the on Saturday.
Yes at this point, Mark we're not breaking out any detail it wouldnt be material to the results.
We're really focused on getting the company stood up as quickly as we can so getting the licenses in place I'm getting rate and form filings done as indicated we're now in 24 states in DC. So we've made very good progress over the last quarter.
Within the last day or two we just added five more states to that so they are starting to roll in fairly quickly in terms of marketing.
There's still quite a bit of testing going on in terms of what is the best approach, we're still trying to identify where the customers are and how we get to them.
There are and.
A number of things that are ongoing some of which I'm just not prepared to comment on yet but.
Only.
We're working very diligently to build that market out.
As we've said this isn't going to happen overnight, but we think it's inevitable.
It is taking different shapes than maybe we expected we're finding different customers than we initially had planned.
But that's not surprising either as that market is developing as rapidly as this one is so we continue to be optimistic but.
It will be sometime before this has a meaningful impact on the overall results.
Thank you.
Thank you and our next question comes on Bob Farnam, with Boenning and Scattergood. Your line is now open.
Yes, Thanks, and good morning, I guess follow a question on the severity comments.
Do you plan on using severity the insurance company as another pricing tier four year independent agent business or is and where you're not going to able to use Saturday in that in that fashion going forward.
Yeah, we don't think of it as another pricing tier four hour agents. So we're certainly aware of other companies that are doing that and no at this point, we're not planning that.
It has a unique rate filing it is separate from all of the other employers companies.
They are different customers.
It is a different channel, but they're different channels in pursuit of different customers and we think thats a.
Significant distinction.
Okay.
And did you.
Pardon me, if I missed it but do you happen to give the the amount of the rate increase you might you charged in California effective someone.
I would just go up.
Yes, it went up so it depended upon the territory, we have four territories that we price in California.
The net for the state as a whole was about 8%.
Okay.
And more high assume it seems like the Los Angeles County, always seems to be the kind of the more litigious environment, So more high rates down there and but lower rates. The rest of the rest of the thanks, Bob you're exactly right the rates higher and I'll lay the rate increases higher no later than the rest of the state.
Okay.
And have ice have you seen any competitors following suit or is this still kind of you guys standing on their own.
Well, we haven't seen any competitors.
Raise their rates yet not just yet, but what we have seen very recently is what I'll call noticeable moderation in some of their recent filings when compared to previous filings. So I would call that out is a movement that we're noticing.
Okay, Great I think.
Thats all I had for questions remaining so thanks.
You're welcome.
Thank you and as a reminder, if you'd like to ask the question. Please at Star then one on your Touchtone telephone. Our next question comes from Rob Bachman with capital returns. Your line is now open.
Hi, Thanks, a lot and I I applaud your rate action.
In stuff to zig when everyone else is lagging.
So it's.
Quite quite impressive.
Could you expand on that last point that you had referred to about competitive competitor action.
I think you sort of seeing sort of moderating could you could you expand that was a little bit more specifics sure. We we have access to.
To some data that calls out what what.
Companies in California are doing with respect to their their filings and when I say that we've noticed a noticeable moderation what would I. If you would have looked back the last three to four years you'd see some pretty large rate decreases in the filings.
The moderation comes into play when you look at the recent filings and you see that.
At least in the case of one company recently saw a filing where it was flat not up at this point, but flat and several other companies where you called out.
A much lower.
A decrease percentage than we've historically seen so when I say noticeable moderation, that's what I'm referring to.
I think in the past over many years of following the company you sort of educate us that all the companies that have a fair bit of latitude on.
Offering sort of credits in debits to sort of filed rates.
And so when you when you speak to sort of when you speak about rate filings here.
That's action that I should think that sort of dwarfs, the flexibility that companies could otherwise effect by way of issuing are not issuing credits. Yes. That's correct. Okay. Thats that is correct alright, thanks, a lot gentlemen, and again well done thank you.
Thank you and I'm showing no further questions in the queue at this time I'd like to turn the call back to Doug Dirks for any closing remarks.
Very good. Thank you everyone for your participation today again, we were very pleased with the results for the quarter. We continue to have a very strong conviction that what we're doing in California is the right move and we will continue to pursue this strategy, it's doing exactly what we thought it would.
Thank you all again for participating we looking look forward to speaking to you early next year with our year end results. Thanks have a great day.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.