Q4 2020 Employers Holdings Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Q4, 'twenty and 'twenty employers Holdings incorporated earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During this session you will need.
To press Star one on your telephone please be advised that today's conference is being recorded if you require any assistance. Please press star zero and thank you and without father and do not like to hand, the conference over to your host today Ms. Lori Brown.
Thank you. Please go ahead.
Thank you operator, good morning, and welcome everyone to the 'twenty and 'twenty fourth quarter and year end earnings call for employers today's call is being recorded and webcast from the investor website.
Mr Section of our website, where a replay will be available following the call presenting today on the call will be caffeine and Antonello, our chief Actuary, Mike Paquette, Our Chief Financial Officer, Steve Festa, Our Chief operating Officer, and Doug Dirks, Our Chief Executive Officer statements made during this conference call that are not based on his.
Oracle 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 and 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 nonpublic information and for complying with disclosure obligations under SEC's regulation FD.
Such disclosures will be included and the investors section of the company's website. Accordingly investors should monitor that portion of the company's website and addition to following the company's press releases and SEC filings public 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, our investor presentation and any other material.
[noise] available and the investors section of our website.
Now I will turn the call over to Kathy.
Thank you Lori and welcome everyone. It's a pleasure to be with you today 'twenty and 'twenty was an exceptional year for employers and that we achieved record levels for the number of policies and force stockholders' equity statutory surplus and book value per share. We also generated more submission.
<unk> quote and bind than at anytime and the history of the company. We accomplished these feats during a pandemic, while working from home and supporting agents small businesses and their injured workers.
Our fourth quarter and full year results were very strong, especially considering the challenging macroeconomic environment.
A record number of policies in force at year and demonstrates that our policyholders are in during the pandemic with reduced payrolls, which directly impact workers' compensation premium.
We remain optimistic that as more vaccines are delivered and state restrictions are lifted we will be able to begin replacing the premium we lost in 'twenty and 'twenty.
And supported this anticipated recovery, we have continued to pursue and advance the significant investments, we have made and delivering a superior customer experience for our agents and insureds.
As expected the challenging pandemic environment confirms that ease of doing business is the critical element and producing and servicing small account business.
Prior to the COVID-19, pandemic, we experienced strong new business opportunities as evidenced by record levels of submissions quotes and buying but the levels began to decrease as the pandemic progressed, particularly in certain states.
And the here as many businesses began to reopen and resume more fulsome operations, we began to experience year over year increases and new business submissions and new policies bound in nearly all of the states and which we operate with the notable exception of California.
Unfortunately, even with the increase and new business policies that we experienced outside of California, and 2020, our new business premium has fallen and driven primarily by significant declines and payrolls and declines in the number of policies with annual premiums greater than 25000.
In regard to losses, we experienced a significant decline and the frequency of compensable indemnity claims and 2020, despite government mandates and legislative changes related to the COVID-19 pandemic, including the presumption of COVID-19, Compensable 80 for all our certain occupational groups and.
Many states.
We experienced this decline and nearly all states, including California as a result, we reduced our current accident year loss and LAE ratio to 64, 3% during the fourth quarter from the 65, 5% maintained throughout the prior 21 months.
We also reduced our prior accident year loss and LAE reserves by nearly $40 million during the quarter, which related to net nearly every prior accident year.
Our underwriting expenses for the quarter and the year were each down and we have recently taken actions that will further reduce our underwriting expenses and 2021.
Our plan is to achieve our targeted expense ratios as quickly as possible. Despite the meaningful reductions in earned premium we're currently experiencing.
My primary goal as the new CEO will be to fully capitalize on the post COVID-19 economic lift on the horizon, while continuing to maintain discipline, both in terms of our underwriting and our underwriting expenses.
With that Mike will now provide a further discussion of our financial results. Steve will then discuss some of the current trends and then Doug will provide his closing remarks Mike.
Thank you Kathy.
For the year, we delivered a seven 6% return on adjusted equity and increased our book value per share, including the deferred gain by more than 15%.
These results are impressive and just about any operating environment and particularly during a pandemic.
Our fourth quarter results contributed nicely to these financial successes in 2020.
Our in force policy Count ended the year at an all time high we experienced reductions and our current accident year loss and LAE and underwriting expense ratios.
And we recognized a significant amount of favorable prior year loss reserve development all despite the significant declines we experienced and our premiums written and earned.
Our net premiums earned were $152 million.
A decrease of 11% year over year.
Since premiums earned are primarily a function of the amount and the timing of the associated premiums written I'll, let Steve described that increase in his remarks.
Our loss and loss adjustment expenses were $48 million.
A decrease of 51% year over year.
Due to the current and prior year favorable loss reserve development that Kathy spoke to previously as well as the decrease and earned premiums.
Commission expenses were $19 million for the quarter, a decrease of 7% year over year.
The decrease was largely the result of a decrease and earned premium.
Partially offset by a higher concentration of alternative distribution business, which is subject to a higher commission rate.
Underwriting and general administrative expenses were $43 million for the quarter, a decrease of 15% year over year.
The decrease was largely the result of reductions and employee benefit costs professional fees and travel expenses.
From a segment reporting perspective.
Our employer segment had underwriting income of $45 million for the quarter versus $8 million, a year ago and its combined ratios were <unk>, 70% and 96% respectively.
Our <unk> segment on an underwriting loss of $5 million for the quarter consistent with its underwriting loss of a year ago.
Turning to investments net investment income was $18 million for the quarter down 20%.
The decrease was primarily due to lower bond yields.
At quarter, and our fixed maturities had a duration of three two and and average credit quality of a plus and our equity securities and other investments represented 8% of the total investment portfolio.
We were favorably impacted by $5 million of after tax unrealized gains from fixed and fixed maturity securities, which are reflected on our balance sheet and $15 million of net after tax unrealized gains from equity securities and other investments, which are reflected on our income statement.
These net unrealized investment gains contributed to our nearly 6% increase and our book value per share, including the deferred gain this quarter.
During the quarter, we repurchased $17 million of our common stock at an average price of $32 50 per share and we have repurchased an additional $10 million of our common stock thus far and 2021 at an average price per share of $32 19.
Our remaining share repurchase.
Authorities.
Currently stands at $19 million.
Yesterday, the board of directors declared a first quarter 2021 dividend of <unk> 25 per share, which is payable on March 17th to stockholders of record as of March 3rd.
And now I'll turn the call over to Steve.
Thank you, Mike and good morning.
Net written premiums for the year of $575 million were down $117 million or 16, 9% from the prior year. The primary drivers for this decrease are new business written and final audit pickup.
With respect to the decrease and final audit pickup we continue to see the impact of declining payrolls due to the pandemic and resulting shutdowns as discussed on previous calls.
New business premium.
Decreased 33, 3% despite increases in submissions quotes and bound policies.
Submissions were up three 7% year over year quotes were up seven 4% and bound policies were at 0.2% growth.
On a year over year basis, our in force policy count increased by four 8%.
The recent workers' compensation and industry report that was released with information from the Vale and data consortium reflected decreased new business opportunity trends.
New business submissions were down 10% from the comparable periods in 2019 and were down as much as 23% in some industries.
The authors of the report suggested that the owners of these businesses were likely preoccupied with other matters and did not take time to shop for insurance and.
Despite our increase and submissions over the prior year. This is in line with some of our observations and feedback from our distribution partners relative to the Pandemics impact starting in the second quarter of 'twenty and 'twenty.
We continue to experience high unit retention rates, however, renewal premium for the year decreased three 6% the decrease and renewal premium was driven primarily by decreased payroll related to the pandemic and continuing our continued declining rates and the majority of states and which.
We do business.
In addition, we non renewed some middle market accounts that underperformed our profitability expectations.
I will be retiring in March. So this will be my last earnings call I would like to thank you all for your support throughout the years and I am proud to have played a role and the success of employers during my tenure.
With that I'll turn the call over to Doug.
Thank you Steve good morning, everyone.
It's been my pleasure to lead employers for over 27 years.
And I believe that the company is in the strongest financial position and it's 108 year history.
I will soon be handing control of the company over to Kathy whose background and experience are ideal to move employers forward into the future.
I'm very excited for Cathy and her team and for the future of the company.
In closing I want to express my gratitude to all of you.
For giving me the opportunity to be the CEO of this remarkable organization.
I'm very proud of what we've achieved and it's been a privilege to serve you and with that operator, we'll turn the call over to questions.
As a reminder, ladies and gentlemen, if you have a question. Please press Star then one on your and telephone keypad again that star Wanda and your telephone keypad. If your question has been answered and you wish to remove yourself from the queue. Please press the pound key.
And that will we check for questions.
Our first question is from Mark Hughes with twist. Your line is open.
Yes, Thank you and good morning.
Yes.
Good morning, Doug and.
Doug and Steve and hate to see you go.
It's.
It's too bad for us, but the congratulations so.
And Kathy welcome.
Did have a few questions.
And.
Kathy the frequency and severity when you think about the.
'twenty and 'twenty and just how unusual this period.
Period was how do you get a good grip on what 'twenty and 'twenty, one is going to look like.
Yes, good morning, Mark.
So we saw frequency declines and 2020.
Across the board, whether you measure it and in terms of just purely the number of claims that came in the door or as a percentage of payroll or premium they were all down double digits.
And then from a severity standpoint, the severity was.
And was had a very what I would call moderate increase.
And so you're absolutely correct. It is very difficult to project future frequency declines, our changes and severity and and extremely uncertain environment such as this.
And I can tell you we look at it on a monthly basis and we're tracking it very closely.
I would not expect these.
These frequency trends to continue into the into the future.
It's a different environment and I would expect a lot of this is coming of course from the.
And the impact of the pandemic.
So it does make it difficult to project it forward, but we are watching it very closely.
Understood Steve.
Missions I think you said were up three seven per cent for the year I assume can you give us and sense of the fourth quarter and also any early thoughts about the Q1.
And it was.
And is shaping up January renewals, just any sense of that would be great.
Sure.
They are in the fourth quarter those submissions.
We're up for the quarter as well.
But.
And.
There's still the shutdown and so that we're seeing in the larger states that we do business and as such as California, Illinois.
New York in particular.
And and.
And so.
With the decline and.
Bound policies occurred in the fourth quarter.
Because.
Because of the shutdowns that we're seeing we saw that continuing into January.
As well, it's too early to forecast what may happen now, although a lot of those states that I referenced are starting to reopen.
And we're optimistic about those re openings and their impact on us.
What about the competitive situation and the.
California, I know you were.
Early and active and adjusting your pricing for what you thought was the.
And the loss trend and how do you sit now relative to your competition.
Yeah, Mark So, California is about 45% of our book currently and we have been watching California very closely and.
And we're satisfied that some of the concerns that were raised back in July of 2019 that led to our rate increases at that point in time on.
Arent materializing to the same extent that we thought at that point and time. Our current indications are more favorable and so that has led us to reduce rates and California effective February 1st and we've also lowered our minimum premiums and California.
And yet which.
Could be impactful for some of the small businesses as they open up.
Understood.
The.
Mike the premium in force I think you suggested it would be and the K are you able to share and this.
The venue and Nicole.
Sure just give me one second mark.
The in force premium for the year at December 31 was $578 million.
Okay. Thank you very much and again congratulations to everybody and appreciate it.
Thanks Mark.
Again, ladies and gentlemen, if you have a question at this time. Please press Star then the number one on your telephone.
We have a follow up from Mr. Mark Hughes with twist. Your line is open.
Alright very good.
Okay. So you had mentioned the expenses, making sure that they were.
We're hitting the <unk>.
Target can you share what the expense ratio target might be for the company.
So mark I'll take that and so.
As you know with the reduction in premium this year our expense ratio has grown.
You can see by the progress that we made and particularly in the fourth quarter not only were the expenses down year over year significantly, but also our expense ratio and the quarter was was down as well. So we've been chasing the decrease in premium which has been abrupt largely because of reductions and audit premium.
And we had told you all along that we would reduce our expenses accordingly, and it's now starting to catch up so we're going to take those expense savings into 2021 with the hope that we can offset that premium so right now and initially our target is to kind of get back to an expense ratio.
That's consistent with the amounts before we lost the premium to Covid and then once we achieve that we'll we'll try to improve it even more.
Yeah.
What are sort of like what did you say the share repurchase was so far and 2021.
We're at just under $10 million and we have $19 million remaining on the current authorization.
And this is.
Just curious to hear your explanation when do we think about net premiums earned.
The <unk> was 144 million bumped up 152 million refresh me on and we said was the audit premium impact what was the day.
The sequential uptick and earned.
I'm sorry, Mark you were a little.
Confused by your question could you do that again, maybe we can just misheard you.
Yeah, No I'm sure it was poorly phrased.
In the third quarter your earned premium was $144 million.
And the fourth quarter was 152 million.
That uptick and seven or $8 million what were the what was the main component of.
On the.
What were the drivers there.
Yeah, Yeah, I'll take that Mark So we did reduce our audit accrual and the third quarter pretty significantly we brought it down to zero and and so we had no further reduction in the fourth quarter. So I think it's the reduction and the audit accrual that you saw coming through the third quarter that day.
And had no impact and the fourth quarter is why youre seeing an uptick and earned premium.
And I guess the.
And thinking about that your Q2 earned was 150 to Q4 was the same as that.
And we had a run rate here on earned is that one way to interpret that.
I would say absent a change in our premium accruals, which as you know they're there at zero right now.
I'd say, it's a fair run rate at least for the short term and short term.
Okay.
And did you give me the premium in force.
I did.
Yes.
And I got to flip through it again I got Lucky the first time opened right up to at $5 78.
Okay. Yeah, there it is really going on right there.
Maybe I need to retire two.
Okay.
Yeah.
And then the national pricing environment.
The you know theres been some.
On the pricing flattening out maybe moving up and some markets, but obviously you had the.
A.
Noteworthy year from a declining frequency stand point, which doesn't necessarily point to.
You know put upward pressure on pricing.
Sort of curious where you think we sit and the cycle so to speak from a national perspective around pricing.
So bureau on loss cost decreases.
Moderated a bit.
Throughout 2020 on the bureaus arent filing quite as many double digit decreases as they did in the past.
And some of even filed increases.
<unk> has led me to believe that that any.
Huge excesses that might be and bureau filed loss costs have been that those have been removed.
But the environment really continues to be pretty competitive.
But I would say year over year rate reductions have moderated and our average rate at renewal across the book and 2020 was down 6% on that.
And as compared to a decrease and 2019 that we saw more like 12%.
But continued rate reductions and an environment like this with record low.
New money yields can't be sustainable and the long run so we're going to continue to focus on strict underwriting discipline until the market improves.
But that's kind of what we're seeing right now mark.
And then just a final question Cathy given your background and I'm sort of curious is this idea that the.
Do you think the.
Hum.
The loss cost numbers do you think the and CCI, we'll be able to pick up a transition as it comes.
How much should we think of those as.
As predictive versus just kind of reflective of.
History is it rearview mirror.
And they'd be happy to.
Yeah go ahead.
Yeah, I have full faith and confidence and N CCI, but they will pick up on the trends appropriately.
Yeah I know they are.
They they are watching it very closely.
I'm sure they will do the right thing.
Yeah.
Very good thank you.
Once again, ladies and gentlemen, if you have a question. Please press Star then one on your telephone. Our next question is from Bob Farnam of Boenning and Scattergood. Your line is open.
Yeah, Hi, there and good morning, and I just wanted to reiterate Mark's comments and say, congrats and best wishes, Doug and Steve.
Had a pretty good run there so.
Sad to see you go.
Two two questions one.
Can you give us and update on kind of Covid related claims in California, and it sounded like there was some rumblings of and increase uptick in claims and California. So I'm just kind of curious what youre seeing in terms of Covid claims.
Good morning, Bob This is Steve I'll answer that question.
But we did see and I don't know if your question is broader than California, but.
California, we did see an uptick at the end of the fourth quarter and Covid claims, but I'd like you to keep in mind that.
And recall that in the fall of 2020 that the California Legislature passed SB, 11, 59, which requires and Theres penalties involved if the reports aren't made requires businesses to report.
Any COVID-19 diagnosis within their employee ranks.
And.
And that lends itself to the presumption of <unk>, depending upon how many of the employees within a particular business.
Are diagnosed with Covid. So that's led to an uptick obviously for us and the industry in terms of the number of claims reported and I will tell you that overall.
On that.
And we're trending very closely to the data that I've seen and the industry.
And about 25% of our overall claims that we've received across the country.
Are compensable.
And the remainder obviously have not met the presumptive burden.
And then the average cost or the average severity on those those claims whether Theyre lost time claims where medical only claims are much less severe than than we typically see and in our typical last time and to our medical only claims and that those trends are very much.
In line with the data that we're seeing for the industry as a whole.
So that gives you a little bit of insight into just overall claims from Covid standpoint, and then a little more detail on California.
And that's good so it sounds like Youre seeing a lot of claims but.
It was kind of a higher portion and I thought that you find to be non compensable. So is it.
Are you surprised by that and fact that.
Coming underneath the definitions.
I don't know that I am surprised as you well know Bob a lot of states as Covid started.
You know lowered the threshold from a presumption standpoint, and particularly some of the larger states.
But but obviously the majority of the claims that we've received and.
And the industry has received have not met that.
Net burdens so.
So I don't know that I'm surprised but but it's clearly the trend has been very similar since COVID-19 started.
Right Okay.
And the last question I had was with Kathy kind of going back to what Mark was asking and I'm looking at the accident year loss ratio. Obviously, you had said that at $66 five.
For quite a while and then it came down this fourth quarter down to $64. Three so I think what's also and you figure out what happens next year and it just isn't going to go back up to <unk>.
65, or 65, and a half just to be on the conservative side.
It comes back or where are we or.
Are we thinking and 64 might be where you are.
Yeah, so for the full year.
'twenty 'twenty actually for the prior 21 months up until the fourth quarter, we held the accident year loss ratio at 65, five and then we did lowered at year and we were conservative on throughout the year.
There were so many uncertainties surrounding COVID-19 and and.
And we wanted to be cautious and and <unk>.
Not lower it until we were comfortable to do so and as.
And so we got towards year end and started looking at the loss results felt it was appropriate to lower it will take a similar stance and.
And 2021 to you know looking at our at the claims as they come in and.
And.
And you know and determined what we should book our loss ratio at the at the end of the quarter, Mike do you have anything to add on that.
No I think that's appropriate.
I would hope we'd be able to keep to that level or improve it and 2021, but we haven't it's too early to even see any of the loss activity and where COVID-19 is going to take this so.
We remain hopeful, but we don't have enough data to go by at this stage.
Alright, and then.
And assume that the $64 three you have for the year and 'twenty.
<unk> is still.
You are still making and some sort of conservativism in there that hopefully will develop favourably overtime.
Yes.
Yeah. So we believe that and you know our reserves that we have booked right now are adequate.
But we're carefully watching for any late and claims activity that that might arise from the prior accident years.
As a result of the recession you know that's a trend that we saw on the industry coming out of the great recession, and we want and be prepared if that occurs again.
So if thats what youre, referring to then yes, we're still taking that stance.
Yes, I'd just I meant to imply that you're not taking a bare bones approach for your accident year 2020 view.
Assuming that there could be some niches that are still coming.
Great.
Okay No that's.
That's it for me thank you.
Once again, ladies and gentlemen, if you have a question. Please press star one at this time. Our next question is from Matt <unk> with JMP. Your line is open.
Hey, Thanks, good morning.
Just a high level question I was hoping you might be able to provide us and update on.
On Saturdays progress just as we think longer term about both where employers is headed as well as the kind of the small workers comp business as well.
Yeah. So.
Saturday is beginning to gain some traction we feel like the platform is solid.
So what we're now focused on is is experimenting with the appetite and fine tuning our digital marketing.
And so that we can better understand the types of customers that are that are shopping for workers' compensation online.
You know we continue to feel that this is an important distribution channel that deserves our attention.
On.
One of the key ingredients for success is going to be reducing the cost of lead generation going forward.
And but we you know we feel like <unk> had.
During the fourth quarter.
And they they began to gain some traction like I said so.
Yeah.
Great. Thank you and Kathy welcome and look forward to working together and Doug and Steve Congrats and and nothing but enjoyable working with you over the years and best of luck.
Thank you thank you Matt.
I am showing no further questions at this time I would now like to turn the conference back to Mr. John <unk>.
Thank you and thank you everyone for joining us today again, my my personal thanks to all of you.
And I believe the company is very well positioned for what I think is going to be a strong finish this year.
And.
And I'm very optimistic about that and I think you all should be as well. So thank you all very much appreciated and Mike and Kathy will be back and a couple of months to report on the first quarter results. So thank you all and have a great day.
And.
Ladies and gentlemen. This concludes today's conference call. Thank you for your participation you may now disconnect have a great day and thanks again.
And the new loans.
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