Q3 2020 Employers Holdings Inc Earnings Call
Thank you for standing by welcome to the third quarter 2020 employees Holdings Inc. earnings Conference call. At this time, all participants are in listen only mode.
The speakers presentation, there will be a question and answer session.
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At this time I would like to turn the conference over to Mr. Laurie Brown General counsel. Thank you ma'am. Please begin.
Thank you Howard good morning, and welcome everyone to the third quarter 2020 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 presenting today on the call will be Doug Dirks, Our Chief Executive Officer, Mike CATT, 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 in 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.
All remarks made during the call our 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 nonpublic information and for complying with disclosure obligations under Stcs regulation FD.
Such disclosures will be included in the Investor 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 FCC 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 on our investor presentation and any other material.
Available in the Investor section on our website now I will turn the call over to Doug.
[noise]. Thank you Laurie and thank you all for joining us today.
Our third quarter results were good considering the continuing challenging macro economic environment.
And our accident year results were broadly in line with our expectations.
Our new business writings were down sharply earlier in the year.
Whatever rebounded since June.
We are currently experiencing significant year over year increases in new business submissions in buying in.
In nearly all the states in which we operate with.
With the notable exception of California, which continues to lag all other states.
Despite the increases in new business that we have experienced year to date our.
Our new business premium has fallen.
Driven primarily by a significant decline in policies with premium greater than $25000.
Excluding California.
Our policies in force were up 1.5% over the previous quarter.
And up 12.9% year to date.
Well enforced premium was down 3.4% for the quarter.
And down 4.6% year to date.
Unlike most other lines of the property and casualty insurance, where pandemic related changes in exposure resulted.
And broadly applied premium credits workers.
Workers compensation insurance is self adjusting to actual exposure for the policy period.
Hi, either through mid term endorsements or final audit adjustments.
Mid term premium endorsements processed in the quarter were a net positive.
But final audit adjustments were a negative $15.7 million.
The net reduction in our final audit of the school year over year is currently $45.5 million, which.
Which represents nearly 50% of the decline in our net written premium year to date.
Earlier this year regulatory actions mandated or requested that we suspend cancellations of policies for nonpayment of premium.
These orders or requests were deferring lengths of time varying by jurisdiction.
End up now mostly expire.
We have since resumed routine cancellation activities in most jurisdictions.
As a result, our year to date results reflect a clearer picture.
All of our anticipated uncollectable premium and bad debt.
Which proved to be much better than we expected for in force premiums receivable.
And were well within our expectation for final audit receivables.
Workers compensation benefits are uniquely defined by statute and consequently cannot be changed by us through policy terms.
But rather can be changed only through legislative action or judicial interpretation.
In many states insurance commissioners legislatures, and governors have retroactively expanded definitions of compensable letting and.
And created new presumptions related to virus exposure.
Many of the changes had been limited to first responders and frontline health care providers.
Some states however have adopted more expansive categories of workers entitled to Compensable Liddy 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 enacted changes are likely to be less impactful given the classes of business we write.
In the quarter, we recorded $15 million the favorable prior year loss reserve development.
Which related to nearly every accident year.
Note that in the first quarter of 2020, despite observing favorable loss development in nearly every year we.
We recognized observed reserve redundancies, only three years 2010 and prior.
As we believe those years have relatively low exposure to negative recessionary impacts.
Our current reserving position continues to reflect our view that theres a higher degree of uncertainty in the loss reserves of more recent years, given the increased risk of a prolonged recession.
We have invested significantly over the last several years and an operating model that drives superior customer experiences and enhanced efficiencies as.
As our agents and shorts have adjusted to a different and more challenging operating environment. We.
We believe the solutions that we provided them are resulting in more business opportunities for us and more.
And more durable relationships with our partners.
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 quarter, we delivered a 5% annualized return on adjusted equity and a 13% annualized increase in our book value per share, including the deferred gain.
Each represents a solid result, given the ongoing negative impact of the COVID-19 pandemic on the us economy and on small businesses specifically.
Although our operating results for the third quarter were good our topline continues to be adversely impacted by meaningful decreases in new business premium principally related to larger accounts as well as reductions in final audit premium.
Our net premiums earned were $144 million, a decrease of 18% year over year.
Since premiums earned are primarily a function of the amount and timing of associated net premiums written I'll, let Steve described the decrease in his remarks.
Our loss and loss adjustment expenses were $77 million.
Decrease of 17%, which was primarily due to the decrease in earned premiums.
As Doug previously mentioned, we recognized $15 million of favorable prior year loss reserve development during the current period.
Also our accident year for the for the current accident year loss and loss adjustment expense ratio was 65.3% was essentially which is essentially unchanged from our prior 2020 and 2019 indications.
[noise] Commission expenses were $19 million, a decrease of 11% year over year. The decrease was primarily due to the decrease in earned premiums.
Underwriting and general administrative expenses were $46 million for the quarter, an increase of 2% year over year the.
The increase was largely the result of higher premium taxes assessments and bad debt expenses.
From a reporting segment perspective, our employer segment had underwriting income of $7 million for the quarter versus $22 million, a year ago, and its combined ratios were 95% and 87% respectively.
Our 30 segment had an underwriting loss of $4 million for the quarter consistent with its underwriting loss of a year ago.
Turning to investments net investment income was $19 million for the quarter down 17%, but.
The decrease was primarily due to lower bond yields and an increase in the amortization of bond premiums caused by an acceleration of mortgage loan prepayment speed assumptions.
During the quarter, we broadly reduced our exposure to equity securities.
At quarter end, our equity securities and other investments represented less than 8% of the total investment portfolio, which is down from 10% at the prior quarter and year end.
We were favorably impacted by $8 million of after tax unrealized gains from fixed maturity securities, which is reflected on our balance sheet and $14 million of net after tax investment gains from Exane.
From equity Securities and other investments, which are reflected on our income statement.
These net unrealized investment gains were the primary driver of our 3.3% increase in book value per share, including the deferred gain this quarter.
Finally during the quarter, we repurchased $9 million of our common stock at an average price of $29.75 per share and we have repurchased an additional $2 million of our common stock thus far in October at an average price per share of $30.71.
Our remaining share repurchase authority currently stands at just over $44 million and.
And now I will turn the call over to Steve.
Thank you, Mike and good morning.
Net written premiums for the quarter of $130 billion were down $36 million or 21.6% from the third quarter of 2019.
The primary drivers for this decrease were new business premium and final audit premium accruals.
New business bound policies for the quarter were up relative to the third quarter of 2019.
You will recall that new business bound policies for the second quarter were down in comparison to the prior year, but June did show an increase that increase has continued through the third quarter and the growth has accelerated for the call.
For the quarter, new business submissions were up 14% year over year and new business bound policies were up 25.4% we continue to see.
We continue to see a decrease in new business average policy size, which we attribute primarily to lower than usual payroll due to cold weather related impacts to business.
With respect to renewal business for the quarter, we continue to see high policy unit retention rates unit retention rates for the quarter were slightly higher than the third quarter of 2019.
This was offset to some degree by continued rate declines as low as well as lower payroll at renewal as a result renewal premium was down 6.3% when compared to the third quarter of 2019.
Total written premium endorsements increased by $3.5 billion quarter over quarter, a reversal of the trend noted last quarter.
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 July exhibited a 17% decrease in lost time claims while August and September last time claims each decreased 22% on a year to date.
Basis last time claims have decreased to 22% leased.
These decreases are being driven by less exposure caused by businesses being shuttered as well as lower headcount and hours worked in businesses that remain open.
Now I will turn the call back over to Doug.
Thank you Steve.
The strong increase in new business activity that we are seeing in most states today is an encouraging sign that many of our targeted businesses have reopened and are resuming their operations.
And that the significant investments we have made in delivering a superior customer experience for our agents uninsured are contributing to growth in our business in an unprecedentedly challenging time.
We continue to believe that the COVID-19 pandemic will likely be more of a premium event than a capital event in that employers is in a strong position to weather these challenges and to capitalize on new opportunities that may arise as a result of the pandemic and with that operator, we'll now take care.
Yes.
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We have a question or comment from the line of Mark Hughes from Truest. Your line is open.
Yes. Thank you good morning.
Doug you had given some numbers for both premium and policies in force the I think change sequentially in the year to date.
Could you repeat those.
Didn't write them down fast enough.
All right, so, let's let's start Mike.
Mark we.
With new.
New business premium.
Yes.
Well actually let me, let me give it to you. This way. So this is what the script provided four excluding California. So this is non California policies in force were up 1.5%.
For the quarter.
And year to date policies in force are up 12.9%.
In force premium was down 3.4% for the quarter and down 4.6% year to date.
Moves inforce numbers are those ex California, as well that will.
That would yes that was all ex California.
And then including California did the in force premium numbers no versus new.
Mid year versus Threeq of last year.
Yes, I don't have those in front of it and those will be in the in the queue.
In the Q, so you'll be able to see those when we file.
Just to give you a sense, California la.
Lags significantly from all of the other states.
And it's why we broke it out that way because some of the states were seeing fairly remarkable growth in policies under $25000.
So really when you think about the results for the quarter and really for the year.
If you exclude California, and you exclude policies over $25000.
We're seeing some fairly significant growth.
What do you attribute that to the bigger bifurcated market, where you're getting a lots of submissions for small accounts.
Is that just a recovery in the economy something about your distribution, but at the same time, you've got the larger accounts that you view as the it's too competitive and so you stepped away from the.
Yes, that's principally when I look at the book today, So, let's let's segmented by size and lets just draw that line at $25000.
The business below $25000, we continue to see a very strong pipeline.
Submittals and binds and actually starting to see year over year increases in premium.
So a lot of strength there.
Completely different story, when you look at California over $25000.
The story is fairly consistent across the country. Both in terms of submissions binds premiums a little more difficult simply because theres quite a bit of volatility in average premium.
We attribute that mostly to the competitive environment.
As you know we took some rate actions in California about 15 months ago, and it had an immediate impact, particularly on new business over $25000.
We've seen that across the country and again thats not a fee.
Function of of a unattractive claims environment, that's a function of competitive pricing and we believed 15 months ago and continue to believe.
That.
Great that is that is being achieved on business over $25000.
Simply isn't attractive.
Mike did you say the reserve.
Development in the quarter was only 2010 and prior.
No that we were making a reference to what we did in the first quarter of this year and the first quarter of this year, we saw favorable developing development.
Emerging in nearly every accident year, but we chose only to look to two years 2010 in Pryor and we've maintained that.
In the <unk> for the first quarter in the second and third quarters, we saw and took the favorable development that had occurred since that period.
Okay. Thank you and then one final question the.
Claims.
Could you describe the down 17% in July.
Those absolute numbers or is that the adjusted for premium or exposures. That's one question and then two is up but your loss pick your clearly holding at the steady.
When the when are we going to know.
Whether those low claims they are going to translate into low.
Low losses into whether you're going to have confidence how do you see it now and when will you make that final determination. So.
So your first part of your question Mark.
Those are pure cases incurred pure lost time, click cases incurred quarter over quarter that I provided to you. So they're not a reflection of the percentage of payroll or percentage of premium they're just pure numbers.
And then and then I Didnt really hear clearly your second part of your question.
Second part was claims are down but your current accident year loss pick is steady.
What's up with that.
Good question.
I'll take that one mark so as you may recall, we do.
Extensive reserve studies twice here midyear and at the end of the year and on the off quarters, we do a comparison to expected at.
And so as as we looked at the third quarter.
We didnt feel that we needed to make an adjustment at this point in terms of.
Where we are booking.
Where we are booking at the end of the second quarter, obviously, when we get to year end, we'll do a more extensive study and to the extent that we observe.
Favorable trends, we may choose to adjust.
Our carry current year provision at that time.
I will note that we are seeing.
Declines in frequency and a relatively stable.
Severity environment, and so that the trends arent discouraging in anyway.
But we are in a fairly volatile period of time and we will.
We believe the most prudent thing to do here is to wait till year end do a full study and at that point, we'll take a view as to where we stand.
Thank you very much.
Thank you again, ladies and gentlemen, if you have a question or comment at this time. Please press Star then one on your telephone keypad.
We Oh, we have a next question or comment comes from the line of Bob Farnam from Boenning and Scattergood. Your line is open.
Yes, hi, there I just wanted to get an update on Saturday and I just wanted to know how is it performing relative to your expectations.
And the plan that you put forward when you when you roll that out.
So relative to the expectation in this case I'll make that a reference to premium.
It is not meeting our expectations at the time, we rolled it out we.
We are continuing to see grow I'm not at the rates, we would've expected, but there is a slight pickup in the amount of business that is coming through that channel.
We don't attribute that Miss to COVID-19 that certainly didn't help.
And as far as the economies recovering we're seeing a little bit of an uptick there. So that's that's relative to our expectation in terms of revenue in terms of the technology and the platform we deployed.
I would say, what we've actually launched probably exceeded our expectations. It's a very solid platform I thought.
I think it positions us nicely.
That market just hasn't taken shape, yet at the rate we would have expected it to.
Do you do you have you have to kind of updated your expectations as to when that might start to some some positive numbers.
We're in the process of doing that right now Bob.
Okay. Thanks.
Thanks for the color. Thanks.
Thank you. Our next question or comment is a follow up from Mr. Mark Hughes from Truest. Your line is open.
Doug on the severity how much of the.
The delay perhaps is a function of the paid search dynamic I think you've talked in the past about how the.
Carriage.
Providers want to capture all the economics for them so.
How much of that is the constraint versus the that market is just a little slower in developing the new and expected the number of people actually in the market by that kind of coverage maybe less than expected.
Yes, let me let me touch on a few of the points that are mark.
We are learning as we expected to.
What marketing spend is most effective in early on after immediately after the launch what we found is that paid search tended to be fairly expensive.
And we were paying for.
Opportunities that never ultimately resulted in the issuance of a policy.
We've gotten quite a bit better at that and so what we have seen more recently is that in fact paid search does seem to be the way to generate business.
And we're finding more efficient ways to do that.
Making sure that the that the inquiries we get from those customers who are looking to buy directly from us are within our classes of appetite and that we're likely to have a greater chance of success. So we continue to to tune that because we do think that paid searches.
Going to have to be a part of ultimately what successful marketing looks like but we have found that there are more efficient and effective ways to do that so we can continue to experiment.
Oh in California with.
With your approach to pricing how far away are you from the market so to speak.
[music].
Well again that goes back to the segmentation definitely when you're looking at policies in that over 25000 range.
I suspect were further out of the market simply because we don't think the market price is right. It may be it may be the market price, but it's not a price that we'd be comfortable selling business at below $25000, we're seeing very high retention rates, which suggests.
Yes that you are pricing really isn't out of the market, but when it comes to new business opportunities.
It's still challenged in California. It is.
It is improving.
So you know I think we're going to have to be patient here.
Certainly we're hearing the commentary in the market that maybe it's time for rates to start moving up it would seem to us that California would be a logical place for that to start happening.
We're not seeing that yet in especially in that business over 25000.
You've heard us comment in the past that we have a little bit more visibility into that business than we do the broad the small accounts broadly and we continue to lose business by 20 to 30 points and as you've heard me say many times, our price may not be right, but we're not wrong by 20.
Need to 30 points.
That's simply a market that's chasing top line in an otherwise difficult environment.
When do you analog that question makes sense, but when do you lap that effect, where you had trouble with the 25 of them on a BOE, California has obviously been very tough for you.
One point, that's baked in the cake in your.
Youre a benefit from those smaller accounts becomes more clear in the a and the top line.
Any any sense on the.
Yes, I am looking at that market I don't think its going to start emerging yet you know just kind of at a very high level at what point does the growth in the small policies exceed the loss in those over $25000. We took this rating action in California 15 months ago. So we're already through.
One full cycle there.
And then with the COVID-19 impact I think it stretches that out a little bit, but I think as we get into next year. If current trends continue we should expect to see the growth in those small policies offsetting whatever remaining loss is left in the larger accounts.
You know in some states that's already happening it's not across the entire book, yet and Thats why I say if things continue on the current trend we could start seeing that next year and remember that this isn't only a topline phenomenon for us.
The larger accounts historically have generated worst loss results for us as well so what I would expect is that as we move into next year and as the economy continues to grow and small businesses start, adding payroll and headcount.
We're going to see much more growth in that business couple that with a very high retention rate and then a lessening impact from the large accounts I think next year actually presents an opportunity to be a fairly strong year for us.
Yes.
Maybe I'll just stick around.
[laughter].
Good good just joking hey.
One more question when you look at the.
When you look at the small accounts.
And I think it might have asked this and I'm sorry, if you answered and I didn't pick it up but yeah, we've got the.
Yes, the economy is that your distribution and what do you what do you make of all these submissions coming in the door.
So there are there are a lot of late.
Likely causes to that it's interesting to see how it how it's occurring geographically because when you look at it that way I think you can see.
The COVID-19 impacts so you've got California that is has essentially yet to reopen and so thats very challenging.
The northeast so you've got Connecticut.
New York, Pennsylvania, New Jersey.
They're actually looking quite a bit better at the moment.
Best they've looked since March.
They're not quite all the way back, but we're starting to see some favorable favorable trends there there.
There are other parts of the country and I would call out the southeast.
Texas.
Where we're seeing very strong growth numbers growth numbers like I've never seen before so I think some of that as a result of of the economy's opening up our our some of the newer states broader distribution channels I think our ease of doing business our customer experience has made.
This a much more attractive product than our competitors are offering and I think thats driving a lot of the business as well we're very focused.
Driving that small account business because it generates better returns it has higher.
Retention rates and it has.
Less price sensitivity, we've been saying that for 20 years, we're now in the middle of a pandemic and it continues to be the case.
Thank you very much.
Thank you again, ladies and gentlemen, if you have a question or comment at this time. Please press Star then one on your telephone keypad.
I'm showing no additional questions in the queue at this time Sir.
Thank you. Thank you everyone for joining us today I know these are difficult times.
We are we are heads down working here everyone is still working from home, we continue to be able to provide a very high level of service and that environment.
We remain optimistic about our opportunities.
In the future, we think our business model is very robust very durable and very resilient and.
I think we'll start seeing that as the economy recovers through this year and into next.
Thank you again for joining us we look forward to talking to you again in February when we report our full year results. Thank you everyone very much.
Ladies and gentlemen, thank you for participating in today's conference. This concludes the program you may now disconnect everyone have a good day.