Q2 2020 Employers Holdings Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the employers Holdings second quarter 2020 earnings Conference call.
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I'd now like to hand, the conference over to your house today is Laurie Brown General Counsel. Please go ahead.
Thank you Liz good morning, and welcome everyone to the second quarter 2020 earnings call for employers today's call, what's being recorded webcast from the Investor section of our website, where a replay will be available following the call presenting today on the call will be doctor.
Our Chief Executive Officer.
Mike The Cat, our Chief Financial Officer, and Steve Festa, our Chief operating 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 at 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 only at the time of the call and will not be updated to reflect subsequent development.
The company also uses its website as a means of disclosing material nonpublic information and for complying with disclosure obligation under Fccs regulation FD.
Such disclosures will be included in the Investor section of the company's website Accordingly, investor should monitor that portion of the company's website. In addition to the fall.
In addition to following the company's press releases FCC filings.
Conference calls and webcast.
And 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.
Or investor presentation, and any other materials available in the Investor section of our website now I will turn the call over to Doug.
[noise]. Thank you Laurie Thank you all for joining us today.
Our second quarter results were highly favorable and our accident year results were in broadly in line with our expectations.
Although we expected to see our new business writings down sharply in the quarter because of lower submission volume.
We were pleased to see a rebound in June when compared to April and May level.
We are hopeful that this is a sign that businesses in our targeted classes are beginning to reopen and resuming their operations.
Albeit with lower payrolls than they had previously.
We also believe that at the strategic investments we've made over the last several years and data analytics and technology have in fact enabled a compellingly superior ease of doing business.
Further contributing to our growth.
A result at an individual state level reflect the significant differences in the depth and breadth of post shutdown reopenings.
We see this particularly in some of our hospitality classes.
Where some states have returned to normal while others remain almost completely shuttered.
In some states we are experiencing business activity that is on par with or exceeds what we observed immediately prior to the pandemic shutdowns.
Let others, most notably and significantly California.
Activity levels continue to lag.
Excluding California.
Our policies in force were up 5.5% over the previous corridor.
And to up 11.3% year to date.
While in force premium was down a mirror eight tenths of a percent for the quarter and down 1.3% year to date.
We have been impacted by regulatory actions that have either mandated or requested that we suspended cancellation of policies for nonpayment of premium.
These orders or requests were for deferring lengths of time varying by jurisdiction and then now and now have mostly expired permitting us to resume routine cancellation activities.
Our year to date results reflect actual and anticipated increases in uncollectable premium and bad debt.
Although it is still too early to estimate the ultimate cost, resulting from these orders.
We expect that both actual policies in force and enforce premium will be lower than our current count because of these moratorium.
And the opaque business they have created.
We will have greater clarity on their impact in the coming weeks.
Unlike most other lines of property and casualty insurance, where pandemic related changes in exposure resulted in broadly applied premium credits.
Workers' compensation is self adjusting to actual exposure for the policy period.
The through mid term endorsements, we're final audit adjustments.
[noise] mid term premium dorfman process in the corridor, where a positive $1.1 million.
A reduction of $5.6 million year over year.
And final audit adjustments were a negative $4.4 million a reduction of $11.1 million year over year.
Combined for the quarter. These two exposure or just in components reduced written premium by 9.5% year over year.
[noise]. Unlike most other lines of insurance workers' compensation benefits are defined by statute and consequently cannot be changed to buy us through policy terms, but rather can only be changed to legislative action War judicial interpretation.
In many states insurance commissioners legislatures, and governors have retroactively expanded definitions of compensable already and created new presumptions related to virus exposure.
Many of these changes have been limited to first responders in front line health care providers.
Some states however have adopted more expansive categories of workers entitled to Compensable Realty presumptions related to cope with 19 exposures.
These changes will have a negative impact on ultimate losses for the workers compensation industry.
Although we continue to believe our exposure to additional losses from currently enacted changes are likely immaterial given the classes of business we right.
It is important to note however that the materiality these changes could be greater if the presumptions or further expanded or the time periods during which they apply our lengthened.
In the quarter, we recorded $24 million of favorable prior year loss reserve development, which related to nearly every accident year.
The favorable change in reserves that we recognized this quarter related solely to development that has emerged since March 31st 2020.
You may recall that last quarter, despite absorbing favorable loss development in nearly every year.
We recognized observed to reserve redundancies only for years 2010 in prior.
As we believe those years have relatively low exposure to negative recessionary impacts.
As a result, our current year reserving position our current reserving position continues to reflect our view.
That there's a higher degree of uncertainty in the loss reserves of more recent years as a result of a recession.
We have invested significantly over the last several years in an operating model that drive superior customer experiences.
And enhance the efficiencies.
As our agents and in shorts have adjusted to a different and more challenging operating environment.
We believe the solutions, we provided them are resulting in more business opportunities for us and more durable relationships with our partners.
We have been fully functional since we closed all of our buildings to employees and the general public in March.
And continue to operate in a work from home mode in order to protect the safety and well being of our employees their families and our stakeholders.
We feel that employers isn't a strong position to weather the challenges created by the pandemic.
And to potentially benefit from a different set of opportunities.
Our strong financial position and operational capabilities allow us to continue providing superior service to our agents and insureds without disruption.
With that Mike will now provide a further discussion of our financial results. Steve will then discuss some of the current trends.
And then I'll return for a few brief closing remarks, Mike.
Thank you Doug.
During the second quarter, we delivered an 8.9% annualized return on adjusted equity, which is a terrific results under the current circumstances.
Our underwriting results were solid for the quarter, but our topline was adversely impacted by a threeq decrease in new business premium reduction in estimated find a lot of premium and additional but moderating premium reducing mid term endorsements.
Our net premiums earned $152 million, a decrease of 14% year over year.
Since premiums earned are primarily a function of the amount and timing of net written premiums I'll, let Steve described the decrease in premium writings that we've experienced.
In his remarks.
Our loss and loss adjustment expenses were $73 million, a decrease of 16%, which was primarily due to the decrease and earned premiums as.
As Doug previously mentioned, we recognized $24 million of favorable prior year loss reserve development. During the current period, which was recognized across nearly every prior accident year.
Our current accident year loss and LAE ratio was 65.5%, which is unchanged from our first quarter and full year 2019 indications.
Commission expenses were $19 million, a decrease of 19% year over year that decrease was primarily due to the decrease in earned premiums.
[noise] underwriting in general administrative expenses were $45 million for the quarter consistent with that of a year ago.
From a reporting segment perspective, our employers segment had underwriting income of $18 million for the quarter versus $23 million, a year ago, and its combined ratios were 88% and 87% respectively.
Our 30 cents segment had an underwriting loss of $4 million for the quarter consistent with its underwriting loss a year ago.
Turning to investments our net investment income was $20 million for the quarter down 7%.
The decrease was primarily due to a sharp decrease in the amortization of bond premiums associated with our residential mortgage backed securities, which was caused by an acceleration in mortgage loan prepayment speed assumptions.
At quarter end, our fixed maturities had a duration of 2.7 and an average credit quality of a plus and our equity securities and the other investments represented 9% of the total investment portfolio.
We were favorably impacted by $69 million of after tax unrealized gains from fixed maturity securities, which are reflected on our balance sheet and $25 million net after tax unrealized gains from equity securities and other investments, which are reflected on our income statement.
These net unrealized investment gains were the primary driver of our more than 11% increase in book value per share a including the deferred gain during the quarter.
Finally during the quarter, we repurchased $31 million of our common stock at an average price up $29 in 76 cents per share and we repurchased a further for $3 million of our common stock. Thus far in July at an average price per share of $29 in 21 cents.
Our remaining share repurchase authority, which was increased by $50 million earlier. This week currently stands at $52 million.
So our third quarter repurchase activities will be tempered as compared to those are the first two quarters due the timing of plan subsidiary dividends to the parent.
Now I'll turn the call over to Steve.
Thank you, Mike and good morning.
Net written premiums for the quarter of $139 million were down $36 million or 20.7% from the second quarter of 2019.
The primary drivers for this decrease where new business premium and final audit premium.
New business bound policies were down for the quarter relative to the second quarter of 2019, driven by decreases in the months of April and May.
This was driven by lower submission volume for these two months as we saw less accounts going to market, which is what we expected due to the cobot 19 impact.
This trend changed in June, which reverted back to strong year over year growth in both submissions and bound policies for June new business submissions were up year over year by 4.8%.
New business policies bound were up 14%.
However, we saw a decrease in average premium size on new business bound for the quarter.
This decrease was greater than seen in previous quarters, and we attribute this larger decrease primarily to lower than usual payroll due to cobot related impacts to business.
With respect to renewable business for the quarter, we continue to see high policy unit retention rates for the quarter. The rate was 95.3% an increase from 93.9% in the first quarter.
This was offset to some degree by continued rate decreases renewal premium was down 3.8% when compared to the second quarter of 2019.
Total written premium endorsements decreased quarter over quarter by $5.6 million, driven primarily by endorsements related to payroll reductions. The peak of those payroll reductions was seen in April with May and June showing a slowing down of those reductions.
Final audit premium was reduced quarter over quarter due to decreases in actual and projected payroll.
New claim volume continues to decline on a year over year basis in comparing each month of the quarter to the prior year April exhibited a 49% decrease in last time claims made decreased 41% and June was down 11%.
These decreases are driven by less exposure caused by businesses being shuttered as well as lower headcount and hours worked in businesses that remain to open.
And now I will turn the call back over to Doug.
Thank you Steve.
Was the case last quarter, we continue to believe that the cobot 19 pandemic.
Is more likely to be a premium event than either a capital Ori claims event for workers compensation.
We continue to carefully monitor political intervention in expanded definitions of compensable Andy.
And to actively engage in public policy discussions where appropriate.
Although we are experiencing less volatility today than we did in the first half of the second quarter.
We expect that new business production and renewal premium will continue to be somewhat uneven as states either allow businesses to reopen or reinstate business closures.
And with that operator, we'll now turn the call over for questions.
As a reminder, ladies and gentlemen, if you'd like to ask a question at this time. Please press. The Star then the number one key on your Touchtone telephone.
To withdraw your question press the pound Jackie.
Our first question comes from Matt Carletti with JMP Securities. Your line is now open.
Thanks, Good morning.
Couple of questions, hoping I can start off.
Maybe on pricing and loss costs I know, it's hard to strip out everything going on with code that.
But how do you feel about the market here in terms of kind of frequency and severity trends.
Kind of maybe adjusted for premium or payroll fall off.
And kind of where pricing is and maybe if you could separate kind of California outside of California. One of your big competitors study called the called the bottom of the market yesterday I hope that's the case, but just curious where were you guys are saying it.
[music].
So let's start with the the observation that.
Going into this year virtually every state in which we do business had a filed rate decrease.
And there's nothing in any of.
What's happened over the last six months that changes that so just in the ordinary course, we would've expected to see continuing headwinds on average rate and in fact Theres. No reason to think that has changed so to the extent that anyone is observing any stress.
Turning in pricing in the market it would be more reflection of the competitive environment than it would have to do with the underlying loss costs.
And rates.
It continues to be for us a very competitive environment as we've observed in the past that's particularly true.
On larger accounts.
We continue to see every bit as much pricing competition today.
As we were seeing three and six months ago. So.
At least from our perspective.
The market hasn't yet changed.
Why don't I turn this over to Steve I'll, let Steve talk a little bit about what are you seeing in terms loss trends.
Yeah, as I mentioned earlier, Matt Matt the what we're seeing is a decrease in last time claim incur roles, we saw that happening even before coal that the first two months of this year, we saw a decrease in.
Our incoming claim volume and that's obviously continued its accelerated.
In this quarter.
It's too early to call out what's happening in July, but clearly with the reduced exposure that we have with less employees working.
We expect to see this.
What what we don't have a handle on it for some time is.
As this recession continues.
When we see replication of what we saw in the last recession with respect to post termination CTG claims.
In particular the industry saw that.
Quite a bit in California.
So that's that's something that we're going to be obviously monitoring going forward from a severity standpoint.
We're not seeing anything with respect to changes in in the average severity.
And.
We're not expecting to see that change in the near term either.
Gotcha and then my one other question is just as we think about the topline obviously, there's a lot of forces at work like I. Appreciate it's really nicely provide the monthly numbers in terms of seeing the new business production coming back but is there any way you can help us think about.
You know, obviously, some states, California, notably add your moratoriums on cancellations and things like that.
How should we think about that impact as we progress into Q3.
You know.
Do you think Q2 kind of has seen the worst of it or are there some catching up to do I don't know if you can you help but think about you know maybe how much of the book in Q2, maybe Wasnt <unk> Wasnt current on payments that thats been a big change or a small change from what it would normally run app you in any way to help think about kind of that piece of the pie would be help.
Thanks.
So that you may recall that we.
We had employers made a decision to put a cancellation moratorium in place.
Above and beyond what some states required and that moratorium was lifted it was it was put in place early on in the coated.
Crisis, but that was lifted on June 15th.
So post June 15th.
We sent out notice of cancellation letters to those.
So those insurance that.
Had been into holding pattern from being canceled because of our moratorium.
The states that we do business and have different requirements with respect to how long and insured has to make a payment.
Upon receipt of the notice of cancellation letter and that varies by state.
We'll have a better handle on how much of an impact.
That lifting of the moratorium will have probably in the next two to three weeks. It's early enough now we don't have a good handle on that.
And then there are small handful of states that have moratoriums in place fit.
Extend beyond what ours was but that's a small percentage of our overall premium. So so we'll have a better handle the next two to three weeks on what that lifting of the moratorium will do to our in force business.
Okay.
The business you have with ATP or from that direct on a reporting does that help in this exercise where you can kind of see some of that in real time come through the payrolls and are you able to use any of that kind of data that you see on that part of the book to try to extrapolate it to to the rest.
The book in Q2, or do you really just have to wait to see what happens in Q3.
Yes, I mean, the benefit we get from the 25% of our business that's driven through pay as you go programs ATP and paychex being the largest.
Is that we get some.
From co real time within two weeks.
Visibility into what's happening with payroll.
But what we don't have at this point is a better understanding which we will in the future of how many businesses are lowering their payroll.
Because.
Reduce staff temporarily versus those that have reduced payroll.
On a permanent basis, because they will be closed and that's the data point that we'll have some perspective on in the near future that we don't have today.
Okay, Great very helpful. Thank you for the answers and your best of luck import.
Thank you.
Our next question comes from Mark Hughes with Suntrust. Your line is now open.
Yeah. Thank you good morning.
Just following up on that it seems like were several months into the I just wonder how much variability there could be when you do not enforce premium presumably you would have heard for most folks who are under.
Stress, you're getting a lot of input the seem to point to stabilization how much variation could there be when we think about the.
Imports.
Yes, I think some of the uncertainty Mark as we saw what happened in.
Late March mostly April really, peaking in April and as as states started to allow reopening we're seeing some of that impact as well as as business returns to something.
More like it was at the beginning of the year I think the challenges with states opening and closing kind of.
Very irregular schedules and depending on the state youre in its very difficult to project the impact.
The things that's really interesting is that.
California continues to be very challenging and obviously, California has.
Has been in fairly strict to shutdown mode for some time now although.
I'm hearing that there is much more activity in California today.
At the same time, although Florida is being hit very hard right now with with new positive tests.
Our business flow in in Florida is quite strong and on a day to day basis doesn't seem to be being impacted by.
What we're hearing about in Florida. So it is extremely difficult to project.
What activities are causing what type of either acceleration or slowdown in business activity.
But I will call out again, notably.
California is is the most challenging environment, we're seeing anywhere in the country.
It's been tough in the northeast, but it appears to be getting better now.
And the balance of the states are either are flat to growing for us. So.
Absent a rather severe shutdown of the entire national economy again, we're somewhat optimistic that we've seen the worst of this but to project just really difficult.
Under those circumstances is that fair to think that it wouldn't be maybe more than a few points you do see some a.
Variability on that imports.
Yeah, I think the challenge with the in force is and I referenced it in my comments about the opaque business to the extent that we have had.
Moratoria across the states on cancellation for non payment activities.
In some cases, we don't know if that business is even in business anymore.
Or if they are in business, if they're going to come back with a significantly lower payroll and maybe at that point in time del indoors back down to what their expected payroll is.
And so it is it is exceedingly difficult to get in the mind of 104000, policyholders and which ones are still in business in which ones are now you probably saw the article that came out I'm referencing.
What yelp is observing and weekly pay very close attention to all of those that would suggest that a lot of businesses in the classes. We write are gone and and so we're we're paying attention to that were simply not seeing it part of it because of the way workers compensation is structured.
And the way states have extended periods of time for policyholders to go without paying.
I do expect however that we are over counting in our current count the number of policies that are in force and what in force premium is.
Simply because and I can't imagine they're going to those numbers will go up they can only go down how much. They go down is fairly uncertain. So I'll go back to the two question related to it to ATP.
And our payroll partners paychex the others.
We do keep an eye did that to try to understand what type of activity. Those policies are exhibiting in real time, and then trying to apply that against the other 75% of our business that is being written on a guaranteed cost and so when we were thinking about what the adjustments might be too.
Things like premium audit bad debt and the like we did take into consideration what we were seen in other parts of the business. So so it's not that we don't know what it is and we're consequently, ignoring it we actually have already taken into consideration, albeit not directly.
And then I'm, sorry did you say what proportion of your Oh premium basis, the subject of the moratorium or you've.
You haven't had the premium payment.
So mark yes, we we self imposed our own moratorium that ended on June 15, there are about to four states.
Left that have a cancel moratorium that extends beyond June 15th, but I don't have the percentage of the premium, but they're they're states that make up a very small percentage of our in force premium.
And I'm, Oh, I'm, sorry, I was up.
We're thinking of the viewer policyholder base, what proportion has not paid during this the moratorium period.
It's it's a single digit number I don't have that in front of meats.
It's a it's a relatively small percentage.
In terms of the number of insurers.
But I don't have that exact number in front me right now.
Yeah, So I kind of get back to things like viewpoint.
I will push the which are belabor the issue but.
When you think about the C.
Comparisons in the coming quarters in terms of the.
Audit premium or Ah.
And midterm adjustment.
Assuming you have your flat on both categories in the second half.
How much of a headwind to that from a year over year perspective, or how much of a benefit was the last year's second half.
Certainly the headwind continues and Mark that's a difficult question for at the answer because it it's going to be influenced so much bye.
When the recovery truly begins how rapid it is because what I suspect is happening and Steve referenced it in respect to new business, even though we're seeing more units and more binds the average premium is down and I suspect that because.
Those policies are now being essentially priced in real time.
And I would expect that most businesses at renewal are providing a more pessimistic view of what they're likely payroll is going to be for the next 12 months and the reason I called that out as because at some point in time audit premium probably swings back around to being a positive none.
However, because the economy is getting better payrolls are increasing in the initial estimates were low.
And it's that will be a function of when the economy recovers and and.
How quickly payrolls come back.
In some instances, we do see insureds come in and doors, there their existing policies to add classes or increased payroll because they want to remain current.
But in most cases, we picked that up and final audit and the final audit cycle is 12 to 15 months out post.
Policy inception, so if you think about it business we were writing in April.
We're not going to be be seeing the auto results until a year from now and it's just extremely difficult to project that number.
And I'm I definitely definitely sympathize on the thinking what was the year ago actual.
When we think about Threeq, you and pork you.
How much if we're just thinking about.
I was trying to do what's your enforce premium what are going to be the pluses and minuses in coming quarters, but then trying to think about that.
The next into last year's second half or just sort of curious if you have the specifics on last year's second half what those adjustments equated to.
Yeah, we don't have that immediately in front of as Mark that something we'd be happy to follow up with <unk>.
I think to the comments that we made earlier.
We are seeing endorsement premium reducing endorsements.
Fall over where they were early in the second quarter.
Things continue on the track there on I don't see any reason to think Thats going to go up it's not yet return to what we would have described as normal.
So if you'll look at at the June numbers.
Certainly much better than April and May, but still worse than what we would have seen in January and February so they've got quite return to what we would call normal yet although there there are just.
Uh huh.
A fraction of what they order in April.
In terms of premium audit that number is always the challenging number for us.
As I indicated I think we'll probably have maybe a quarter or to have pressure on premium audit for those policies that haven't endorsed their payroll down but have in fact decrease their payrolls, we'll be seeing that as they come up for audit.
But I think when we start getting out into the beginning of next year. We would expect that if in fact, those payrolls were Pessimistically stated, we'll start seeing lift again from premium on it.
And then a final question Steve did you mentioned with the new business trends have been like in July so far.
I didn't mention it mark but I can tell you that we're seeing.
It's very similar to June.
An increase in submissions and an increase in bound in fact in terms of.
At the halfway point through the month the increase in bounds was at a higher percentage than we even saw in June.
So positive trend replicating what we saw in June.
Thank you very much.
Thank you.
As a reminder, ladies and gentlemen that is star then one if you'd like to ask a question at this time.
Our next question comes from the line of Bob Farnam with pending Scattergood. Your line is now open.
Yes. Thanks, a question on California, the you're talking about it being pretty competitive or most competitive state are you seeing any other of your peers raising rates there yet or is that kind of one of the primary reasons why you're.
I think probably getting new business. There is just the rates are higher.
No we ask Bob we have not seen that happened in fact, the market is competitive as it ever has been in.
In fact, I would I would tell you that over the past few months, we've probably seen even heightened competition from a pricing standpoint on the larger accounts definitely the middle market business. So we're not seeing a turn in the market in California from a competitive pricing standpoint.
Okay.
And one other question I have on the accident year loss ratio, you're talking about a pretty steep declines and claims frequency at least in April and may still kind of kept that accident year.
Loss ratio level at 65, and happy I'm, just curious if you're if you're thinking that's going to be end up being conservative overtime or or what your thoughts are on that.
Bob what I'd say there is I think it's too early to tell so even though we've got some data that probably looks.
That number would be favorable.
Presumption can change Ur cobot click cases can change and we're keeping it at the level that we're comfortable with for right now despite the fact that kind of the actual claims.
Levels that were seeing right now could argue for a decrease in future periods.
Yeah, I guess, we're in a.
Radically states can Ken retroactively changed things that make it a little more conservative with itself. Okay. That's it for me.
I'm showing no further questions in queue at this time I'd like to turn the call back to Doug Dirks for closing remarks.
Thank you operator, thank you everyone for joining us today again.
We were quite pleased with the performance in the quarter.
Although things are challenging we're fairly optimistic about how we're positioned going into a a recovery. We hope you are all well in stay safe.
Look forward to talking to you next quarter. Thank you all very much.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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