Q1 2021 Employers Holdings Inc Earnings Call
Yes.
Good afternoon, ladies and gentlemen, and welcome to the Q1, 2021 and employers Holdings, Inc Conference call.
At this time, all participants are on a listen only mode.
And we will conduct a question answer session and instructions will follow at that time, if anyone should require assistance. During the conference. Please press Star then zero on your Touchtone telephone.
As a reminder, this conference is being recorded and now.
I'd like to turn the conference over to your host Laurie Brown. Please go ahead.
Thank you Angela and good morning, and welcome everyone to the first quarter 2021 earnings call for employers today's call is being recorded and webcast from the investors section of our website, where a replay will be available following the call.
Presenting today on the call will be Kathy Antonello, our Chief Executive Officer, and Mike Paquette, Our Chief Financial Officer statements made during this conference call that are not based on historical facts are considered forward looking statements. These statements are made and reliance on the safe Harbor provision of the private securities.
The 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 the 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. In addition to the following in 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 materials available in the investors section on our website now I will turn the call over to Kathy.
Thank you Laurie and thanks to everyone for joining us today.
On today's call, Mike and I will outline our financial results for the first quarter of 2021 and discuss our observations of the current workers' compensation market.
Employers has performed well throughout the COVID-19 pandemic and the first quarter of 2021 was no exception, while our topline was adversely impacted early in the first quarter by a meaningful year over year decrease and new business premiums were very encouraged by the strength of our writings in March.
And April including those of theory.
The recent improvement and submissions quotes and bonds is directly correlated with increased hiring and expanded reopening across most states.
Yeah.
With respect to our renewal book our policy retention rate remained very strong at 94 per cent for the quarter.
This was offset to some degree by lower average policy sizes and modest rate decreases and overall, our renewal premium was down 11% on a year over year basis.
Yeah.
We closed the quarter with another record number of policies in force, which demonstrates that our policyholders are enduring the pandemic and small businesses are shopping for workers' compensation coverage.
As widespread vaccination continues and the labor market improves we are optimistic that rising payrolls will serve to increase premiums.
And supported the anticipated recovery, we have continued to pursue and advance the significant investments, we've made and delivering a superior customer experience for agents.
Due to declines in both frequency and severity for lost time claims we lowered our current accident year loss and LAE ratio on voluntary business to 63, 6% down from $65 five per cent a year ago and 64, 3% at year end.
In addition.
And we continue to experience favorable loss reserve development and nearly every prior accident year.
Excuse me.
Regarding our expenses several first quarter events are worth, noting we under we underwent a reduction in force, which impacted approximately 7% of our work force. We also said fond farewell to a few of our executives, including our former CEO and subsequently realign the org.
Innovation to increase efficiency and generate cost savings.
As a result, our first quarter underwriting and general administrative expenses of $46 6 million will be the high watermark for 2020, one and you will see immediate and significant expense reductions for the remainder of the year.
With that Mike will now provide a further discussion of our financial results and then I'll return to provide my closing remarks, Mike.
Thank you Kathy.
During the quarter, we delivered a four 8% annualized return on adjusted equity and the combined ratio of 93, 9% within our largest operating segment employers.
However, these favorable operating results were somewhat muted by our lower top line and net unrealized investment losses on our fixed maturity investments.
Our net premiums earned were $134 million, a decrease of 20% year over year.
The decrease was due to lower written premiums as Kathy mentioned as well as a reduction in our estimated final audit accruals to reflect the premium that we expect to return to our policyholders as a result of lower payrolls.
Our losses and loss adjustment expenses were $70 million a decrease of 33%.
The company recognized $13 million of favorable prior year loss reserve development on its voluntary business during the quarter, which related primarily to accident years, 2017, and pryor versus $3 million of favorable prior year loss reserve development a year ago.
Commission expenses were $17 million, a decrease of 21% that decrease was primarily due to lower earned premiums.
Underwriting and general and administrative expenses were $47 million largely unchanged from a year ago.
During the first quarter, we recognized a one time $2 $3 million acceleration and share based compensation and connection with the retirement of our former CEO Doug Dirks.
Also as Kathy mentioned previously future quarters will reflect an immediate reduction and expenses from actions taken and completed during the first quarter.
Our other expenses were $2 $9 million, representing employee severance costs associated.
With our first quarter 2021 reduction in force.
And this action was taken to better align our expenses with our current levels of revenue.
From a reporting segment perspective, our employers segment had underwriting income of $8 million for the quarter versus the $1 million a year ago and its combined ratios were 93, 9% and 99, 5% respectively.
Our <unk> segment and of the underwriting loss of $4 million for the quarter consistent with its underwriting loss a year ago. However, Saturdays premium writings have increased in recent months, which Cathy will address and her final remarks.
Turning to investments our net investment income was $18 million for the quarter down 8%. The decrease was primarily due to lower interest rates year over year, which impacted bond yields.
At quarter, and our fixed maturities had a duration of three eight and and average credit quality of a plus and our equity securities and other investments represented 10% of our total investment portfolio.
Our net income this quarter was favorably impacted by $8 million of after tax unrealized gains from equity securities and other investments, which are reflected on our income statement.
Conversely, our shareholders' equity and book value per share of this quarter, where each unfavorably impacted by $36 million of after tax unrealized losses from fixed maturity securities, which are reflected on our balance sheet.
And finally during the quarter, we repurchased $10 million of our common stock at an average price of $32 21 per share and our remaining share repurchase authority currently stands at just under $19 million.
And now I'll turn the call back to Kathy.
Thank you Mike.
Mike mentioned, our Saturday operating segment, which offers digital workers compensation insurance solutions directly to consumers is gaining traction and it's written of half a million dollars and premium thus far and 2021, while the low to medium hazard direct to consumer market is relatively immature.
And Saturday is and early entrants in the space, we believe that its technological and intellectual capabilities will support our future growth initiatives and provide immediate access to workers' compensation insurance for those customers seeking and online experience.
I'm excited and proud to lead this remarkable organization and my primary goal for the company and 2021 remains unchanged.
As we prepare to fully capitalize on the upcoming labor market improvement, we will continue to maintain underwriting discipline and actively manage our expenses are.
Our balance sheet and capital position are very strong and are highly supportive of these initiatives.
Employers and a unique spot as the Monoline workers' compensation writer specializing and America's small businesses, we can react to these trends appropriately and efficiently and are confident that we are well positioned for continued success.
And with that operator, we will now take questions.
Ladies and gentlemen, if you have a question at this time. Please press the star and the number one key on your touch tone telephone. If your question has been answered or you wish to remove yourself from the queue. Please press the pound key.
Our first question is from the line of Mark Hughes with the true true. Please go ahead.
Yeah. Thank you good morning.
The other.
The improvement and new business through the quarter of January and February so the.
The recovery in the March and April.
It seems like the theres been opening but but the.
But I'm not sure of how dramatic it's been do you feel like Theres. Some other factors that are contributing to the strength you've seen here lately.
Yeah, good morning I.
I would say another factor that might be contributing to that is the rate decrease that we took and California and February and California is about a 45% of our book currently so that's remained flat since year end.
And we reduced rates as I said effective February <unk>, and we also lowered our minimum premiums.
And I think the combination of lower rates and also less restrictions on businesses and California, that's beginning to have an impact and.
Like you said, we did have a tough January but then a milder February and California, but year over year, new submissions quotes and buys were all up in March with policies bound up around 35% and new business premium was up over 40 per cent for the month of March so that was.
Definitely another contributor.
Right and then.
That continued into April.
That has continued into April yes.
Okay.
The hub pricing overall.
And we're putting your kind of price actions and California out of the slide.
I think the.
Last year.
Understanding of properly your renewal pricing was the other boat.
The mid single digits, Inc.
Q1, similar it seems like.
Some flow through suggesting pricing of the workers' comp is one of their maybe up slightly but.
And just sort of curious how are you.
Yeah the overall.
Yeah, So mark from from our vantage point, the environment remains pretty competitive and the <unk>.
Thing that we're seeing country wide.
10 used to be pretty soft for both small and middle market accounts, and we really have and observed any material signs of market hardening as the result of the pandemic, yet and feel that on both national and that both national and.
Regional competitors are fairly aggressive and pursuing new business.
You know I've seen what you are seeing.
And so seeing some data from some of the rating surveys that show that work comp rates are increasing.
And ever so slightly.
But our average pricing across our renewal book showed an overall price decrease and like you were saying it into the first quarter and to the the lower you know the single digits.
Versus the rate level that we had in effect.
For the same businesses of your early earlier, but we are watching closely for any signals of the hardening market, but have really yet to see anything and comp that's even remotely comparable to what we're seeing.
And what to what others are seeing and other lines and and what they are experiencing there.
Yeah, how do you how do you think the.
The loss costs will come out for 2021.
The the.
And CCI and the it's been down high single digits. These last few years, how do you think it'll look for this year.
Yeah.
Yeah, it's hard to say.
What we're seeing so far for the filings that were effective early this year and they are.
Still still negative filing for reduced loss costs, but not to the same degree that that they were filing and in the past. So it's possible that those will continue to moderate but it's it's hard to tell at this point.
Yeah, and then one final question Mike.
And the audit premiums.
And that's about the.
Two Q.
And I think he pointed out that the.
Folks who had not done the mid midterm endorsements or.
I'm looking at the other premium and Theyre getting refund.
Is that kind of on the only going to continue into <unk> and just trying to think of it.
Timing of when those policies expire and when you have kind of exposure to the phenomenon.
Is it.
Is it in the <unk> mid year.
Well Mark we were we are and a negative position right now to the tune of about $2 $7 million.
I don't think it's unreasonable to expect that.
To occur for the for the next for the next quarter or so to some extent, but we won't know until we get into the the audit premiums that will occur which is what we'll base. Our estimate on so we have very little information for the second quarter of thus far in terms of the premium on it but the $2 seven.
And that we have at March 31 is designed to take into account the audit premium return, we're expecting for those those pre.
Premiums for those policies.
And that have earned through that date, so a little too early to tell but.
You'll have to stay tuned.
And is that something that's sort of an accrual for.
Your Oh all of the two expect because I assume you know other policies will be expiring incrementally even though over the next few months and.
They might have the same phenomena or do you.
You said you accrue for that or do you just wait and.
The what happens.
Well, it's not so much of a forward looking accrual, it's really designed to the extent of <unk>.
And what the pickup or the the amounts owed would be for the premium that has earned through the balance sheet Inc.
Okay Alright.
Alright, very good thank you.
And once again, if you would like to ask the audio question. Please press star one on your Touchtone telephone. Our next question is from the line of of Bob Farman with Boenning Scattergood. Please go ahead.
Hi, there and good morning.
A couple of questions. One is on the the accident year loss ratio and now it sounds like you saw a continuation of.
Favorable claims trends and the first quarter.
My thought is as businesses start to open and the economy expands and what's going to happen to claims trends going forward and debt loss ratio likely to tick up over time.
Yeah, Good morning, Bob.
And yeah, you're absolutely right I mean that would not be any different from what we've seen and and prior recession C&I of win the.
Frequency has dropped during that period, and then as as things start to pick up again, there. There is a chance the well I mean, it's likely that frequency of what were turned back to normal levels, which were normal levels were decreases in frequency on a year over year basis.
But I would not expect that the levels of decrease that we're seeing now will continue into the future.
How do you how would you characterize the severity of trend these days and as and as the the opening of the comedy impact severity or is that just more of a frequency.
Sure.
Yeah. That's a good question and there's a lot of uncertainty around that right now so the severity of itself. We did see this quarter severity.
Was was negative just like frequency.
But you would expect that to perhaps a turnaround just like the frequency and.
And when things start to open up again, I think the the major uncertainty there is whether or not and <unk>.
<unk> will continue to work from home or whether they'll be coming back into the to the office you know well will they be driving as much in the past. There's so much uncertainty there that it's hard to predict.
But I can assure you that it will be different from what it is right now.
Okay.
I agree with you there.
So in terms of your policy size is declining.
Does that.
Does that make them more.
More business the flowing through the alternative distribution channels rather than the traditional.
And.
And my question is basically regarding the commission rate there because they have a higher commission rate and the and the alternative distribution channel. So do you see that continuing to grow because of the the smaller policy size of that have an impact.
Yeah.
Hum.
And I.
I'm, sorry, do you want to take that.
The question.
Yeah, Yeah, you were breaking up there a little bit I think the question was do you do you think we're going to continue to grow and the alternative distribution space was that the question Bob Yes.
And it was in light of the fact that your policies are smaller and I wasn't quite sure of if the alternative distribution channel was ward.
More directed towards the smaller risks or is that not true.
Yeah, and generally speaking I would say that that is true and and that business is is growing and we.
We are seeing some business that wasn't alternative distribution before moving into that space. So yeah, I would expect that that that channel to grow and the future.
Okay.
And again, so if that if that channel grows your commission rates for the alternatives there should be and are slightly higher than your core book. So you would think that the commission rate would go off of it.
It could it could slightly yes, okay.
And last question for me it sounds like you your non renewed and accounts and this quarter. Just can you give us some details as to what was going on there.
Yeah. So we did have one.
Okay. It was an account that was underperforming.
All written through the same group and we've decided to non renew that because they were they were on per foot underperforming.
Underperforming.
We're on that account for about three years, and and decided that that that was and our best interest.
Was it underperforming last year and the every four two or is that something that the start.
Coming out of this year.
It was underperforming for several years and increases and pricing had not had not.
Improve that situation. So we just we have non renewed that.
Great. Thank you.
Again, ladies and gentlemen, if you have a question at this time. Please press. The Star then the number one key on your tests tone telephone.
And we have a question from the line of Mark Hughes of choice. Please go ahead.
Okay. Thank you and I Wonder if you could just expand a little bit more on what Youre seeing is Saturday I think you've described having a bit more success. The premium levels are still pretty modest and I wonder if you could talk about the.
Any.
Observations you might have on the marketing of pay.
Good surge that sort of thinking of where you might be seeing.
Some of some movement.
Yeah, Mark So Saturday does continue to gain some traction as we said.
This year, we're going to be focused on expanding our underwriting market and to some some some more classes and enhancing the backend capabilities. So that we can handle increasing policy flows at Saturday and then we're going to continue to experiment with our digital marketing.
Most of the competitors in this space.
Quickly pivoted to utilize and agent distribution channel to increase the revenue, but Saturday has really stayed true.
And to its original vision and it's it's remained up sure of direct to consumer platform. So a lot of testing a lot of experimenting on and the marketing there and.
And we're going to refine our marketing towards with an eye towards reducing the costs of lead generation, which is the key and the space and.
You know I hope that we can continue to see improvement there I can.
Sure the one of the areas, where they they seen successes and the janitorial space.
So we're going to continue to try to find markets that are are quickly growing and emerging.
And they are kind of focusing in on a on a micro level on their marketing.
Yeah.
The other classes expanding and more classes any others that you would the.
You mentioned, how meaningful do you think that'll be.
Well well day, but what I can say is the the when I say they are expanding their their underwriting appetite to broaden and they went out with a pretty narrow underwriting appetite and when they broaden it it's to be more like the employers segment appetite so they will.
We remain focused on hazard groups a through G.
Likely not getting into a lot of riskier class codes, yet, which is quite frankly, where a lot of online shoppers are are looking to buy and coverages and contracting and some of the heavier classes, but right now they are still focused on on the lower hazard.
Classes.
Thank you very much.
Thank you.
And once again, if you would like to ask a question. Please press star one.
Yeah.
And we have a question from the line of Bob Farnam with Boenning Scattergood. Please go ahead.
Yes, just one question on the share repurchases because I notice the stock has appreciated quite a bit over the quarter and it looks like you didn't really.
Repurchase shares.
During the quarter I know you had some of the beginning of the quarter, but not towards the and so I'm just kind of curious what your thoughts are and the share repurchase going forward.
Sure Bob I'll take that so.
We did have a pretty dramatic increase and our stock price and the last quarter and we did have of tend to be five out there to buy back some shares but we underestimated how much of the stock would appreciate so that did not perform we still view share repurchases as attractive we do think.
And that it's in our best interest to manage our capital base.
And we do expect to continue to buy back shares although not at the pace that you saw for last year last year, we spent about $100 million.
Don't see that for this year, but I am definitely interested and and continuing the share repurchase plan throughout the year.
Okay very good thanks.
Yeah.
And I'm showing no further questions at this time I would like to turn the call back to Kathy.
Okay.
Thank you Angela and thank you everyone for joining us this morning.
And we look forward to speaking with you again next quarter.
Ladies and gentlemen. This concludes today's conference call. Thank you for your participation and have a wonderful day you may all disconnect.
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