Q2 2021 Employers Holdings Inc Earnings Call
Good day, ladies and gentlemen, and welcome to the second quarter 2021 employers Holdings, Inc. Earnings Conference call. At this time all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time, Inc.
Final 1 should require assistance during the conference. Please press Star then zero on your Touchtone telephone as a reminder, this conference call is being recorded.
I'd now like to turn the conference over to your host Ms. Lori Brown General counsel.
Yeah.
Thank you Katrina good morning, and welcome everyone to the second 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 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 are current only at the time of the call and will not be up.
Data to reflect subsequent developments.
The company also uses its website as a means of disclosing material nonpublic information and for complying with disclosure obligation.
Under SEC's regulation FD, such disclosures will be included in the investors 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 SEC filings public conference call and webcast.
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, 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 second quarter of 2021 and discuss our observations of the current workers' compensation market.
Employers continues to perform well given the challenges faced by our policyholders throughout the pandemic.
<unk> business is now reopened and restrictions largely lifted we're experiencing year over year increases in new business submissions quotes and buying and are encouraged by the rebound we experienced during the second quarter of 2021.
Our second quarter gross written premiums were up 5% year over year, and we closed the period with yet another record number of policies in force.
More so than ever we remain confident that rising paywalls and new business opportunities will bring further growth to our top line.
Our year over year, new business premiums for the first half of 2021 is down slightly driven by pandemic related shutdowns in January and February however.
However, our second quarter, new business premiums was up over 40% relative to 2020 as both the labor force participation rate and unemployment rate continued to improve.
The policy retention rate on our renewal book remains very strong at 94 per cent year to day. Although this strength was offset to some degree by lower average policy sizes and modest rate decreases.
Overall, our year over year renewal premium was down 10 per cent for the first half of 2021 and 8% for the second quarter.
We continue to see declines in frequency for lost time claims and have maintained our current accident year loss and LAE ratio on voluntary business at 63, 6% down from 65, and a half per cent a year ago and 64.3 per cent at year end.
While we experienced favorable loss reserve development of $10 million on accident years 2017, and prior our second quarter results were tempered by 8 million of adverse loss reserve development associated with 2 catastrophic non COVID-19 claims that occurred in late 2020.
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Our second quarter expenses decreased by 21% from those of the first quarter of 2021 and are down 17% year over year in line with our expectation.
The decrease on our expenses was primarily a result of targeted expense savings employee departures and lower variable expenses that fluctuate directly with earned premiums.
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 second quarter, we delivered a 3.8% annualized return on adjusted equity and a combined ratio of 98, 8% within our largest operating segment employers.
These modest operating results were largely the result of lower earned premium and net investment income as well as 2 unusual prior year large loss adjustments.
For the quarter, our net premiums earned were $137 million, a decrease of 10% year over year.
While our written premiums for the first half were down 9%, our second quarter premium writings were up 5%, which demonstrates that our policyholders have endured the pandemic and small businesses are actively shopping for workers' compensation coverage.
Our losses and loss adjustment expenses were $84 million, an increase of 15% we recognized $2 million of net favorable prior year loss reserve development on voluntary business during the current period versus $24 million a year ago. The.
The increase in losses and loss adjustment expenses was primarily due to the 2 catastrophic non COVID-19 claims that we've previously mentioned.
Commission expenses were $18 million a decrease of 6%. The decrease was primarily due to lower earned premiums.
Underwriting and general administrative expenses were $37 million, a decrease of 17% year over year decreases in our fixed expenses, such as compensation and professional fees resulted from targeted expense savings and employee reductions in departures and decreases in our very.
<unk> expenses, such as premium taxes assessments and bad debt expense resulted from decreases in earned premium.
From a reporting segment perspective, our employers segment had underwriting income of $2 million for the quarter versus $18 million a year ago and its combined ratios were 98, 8% and 88% respectively.
Our surety segment had an underwriting loss of just over $2 million for the quarter down from an underwriting loss of $4 million a year ago.
We are enthusiastic about saturday's premium writings, which have consistently increased over the past several months.
Turning to investments our net investment income was $18 million for the quarter consistent with that of the first quarter, but down 9% year over year.
The decrease year over year was primarily due to lower interest rates impacting bond yield.
At quarter end, our fixed maturities had a duration of 3.7 and an average credit quality of a plus and our equity securities and other investments represented 11% of the total investment portfolio.
Our net income this quarter was favorably impacted by $11 million of net after tax unrealized gains from equity securities and other investments, which are reflected on our income statement and our stockholders equity and our book value per share. This quarter were each favorably impacted by $10 million of App.
Tax unrealized gains 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 $41.72 per share and on July 20, <unk>, Our board authorized a new share repurchase authority in the amount of $50 million.
And now I'll turn the call back to Kathy.
Thanks, Mike.
Our Saturday operating segment, which offers digital workers compensation insurance solutions directly to consumers continues to gather momentum and now has a million dollars of in force premium all within our targeted low hazard groups a through D. We're encouraged by Saturday's success during the first half on.
<unk> 2021 and continue to believe that its technological and intellectual capabilities will support our future growth initiatives and provide direct access to workers' compensation insurance for businesses seeking an online experience.
For the remainder of the year, we will be focused on improving our economies of scale by capitalizing on emerging labor market improvements, while continuing to maintain underwriting discipline and actively managing our expenses are.
Our balance sheet and capital position are very strong and are highly supportive of these key initiatives.
As a mono line workers' compensation writer specializing in America's small businesses, we can react to the favorable trends, we're seeing appropriately and efficiently and remain 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 then the number 1 key on a 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 Mark Hughes from tourist your line is open.
Yes, thank you very much.
Hi, Mark.
Yes.
The reserve development in the quarter could you talk about what's happening on the what.
Just the general nature of those claims and how are you.
On the firsthand.
Jonathan.
Okay.
Yeah can you just repeat the very last part I I missed the first instance of what.
Yes.
Are you originally set the rules.
Sure.
Thanks.
What was the reason for that.
Okay. Yeah sure. Thanks for that question. So these were 2 very different and unrelated accidents that were not in any way related to COVID-19.
They happened near the end of 'twenty, 'twenty and with any as with any claims of of this nature and size. It does take time to analyze the claim and understand what the lifetime value of of claims of this nature can be I'll say that you know claims at this.
Size for us are very infrequent, but when they do occur.
We try to be very diligent in increasing our reserves as soon as possible as soon as we have enough information to do that to reflect the lifetime value of the claim and that way. We're in a great position. So that we don't expect any impact on future periods.
Where these accounts.
In hindsight it was higher than you Might've, Inc.
Sure.
Free cash flow.
Not at all these were yeah I would use your words freak accidents. They were not expected they were not work from home accidents as we've mentioned already they're non COVID-19 related.
Very difficult to underwrite for these types of claims and we you know you're going to have to expect to see these every so often but like I said, they're very infrequent.
And then could you talk about the new business.
Definitely up year over year.
To your base.
How do you see the trajectory progressing from here.
Is it continuing to get better or just a little body language there.
No. It's it's definitely continuing to get better in our in force policy Count grew during the second quarter on.
About 2 and a half per cent or 2500 claims you know country.
And that's on a countrywide basis. We also saw an increase in California, and I can tell you that the growth that we saw in policies was across most policy size bands where.
We're also starting to see the average policy size increase.
Increase and we're seeing growth across all you know a lot of States, Florida, Georgia, New Jersey, Illinois, California, So its not so much in pockets anymore like we were saying during the pandemic.
So we are very encouraged by the continued increase in policies and and.
We're seeing some increases in average policy sizes.
And then on frequency you mentioned the frequency was still down can you give us guidance.
Yeah.
All frequencies looking now versus earlier in the year versus last year roughly speaking.
Yeah, So last year's frequency it was.
Sort of an anomaly right with the shutdowns that occurred and we saw some from some very significant on frequency decreases we're continuing to see frequency mm drop on both our premium and payroll basis, and we are look and I can tell you we've.
Looked at it even relative to 2019, and it's down relative to 2019, so looking at it.
You know from from that perspective frequency is definitely continuing to drop.
And then.
And I apologize for going on there.
Yes.
The expense run rate you, obviously had very good improvements this quarter does that fully reflect the process.
Do you.
And then secondly.
Pricing in California.
Or what are you seeing there.
Mike do you want to take the expense question and then I'll jump back with the California.
So whether it's with the expenses Mark we're at $37 million for the quarter on the.
The fixed aspect of that should should be constant going forward for the balance of the year, but the variable component, which is again premium taxes policyholder dividends bad debt assessments will fluctuate with the level of earned premiums. So when you take a look at what happened from the first quarter of this year to the SEC.
It was about a decrease of $9.7 million of which about 6 of that was the decrease in fixed expenses.
And $3.7 was the decrease in variable by virtue of that change in earned premiums. So the 37 is an appropriate run rate at that level of earned premium that we had in the second quarter, but it will fluctuate a bit by virtue of the variable expenses.
Yeah, and and in regard to California, California remains at 2.
Net about 45 per cent of our book I'm on the last earnings call I did mentioned that we reduced rates in California on effective February 1st and then again in certain territories. We made further reductions effective June 1st so the combination of that the lower rates.
And the less restrictions on business that are happening in California, right now we've seen significant increases in our submissions quotes and bind and in the second quarter, California, New business relative to the second quarter of 2020 was up.
By about 80% so we're seeing some significant increases there in California.
Yes.
Thank you very much.
Thank you.
Again, ladies and gentlemen, if you have a question at this time. Please press the star and then the number 1 key on your Touchtone phone.
Our next question is from Bob Farnam from Tony NAV Scattergood. Your line is open.
Yeah, Hey, good morning.
So with the small business customers that you have could you give us an idea of.
Staffing and what kind of what percentage there at relative to where they were the full run rate.
You hear a lot of anecdotes about small businesses, having trouble hiring people. So I'm just kind of curious what kind of payroll.
Synergy wise, they've gotten back to relative to last year or the year before.
Yeah. So you know.
We're hearing on all the same anecdotal information that you are smart and and you can see it when you're out and about small businesses are having trouble hiring and so you know you would expect that that would impact their payrolls in the in the short run.
When it comes to what we're seeing from an audit perspective, you know our audit premiums.
Our on average still coming in.
On average as as return premiums so that would indicate that our our audits of small businesses that their payrolls are down relative to what we wrote the policy at originally and that would be just for those small businesses that are.
Net we're not in a position to endorse the policies down during the period, which a lot of them did but.
But we would expect with everything that we're seeing that that is going to change businesses are going to open up you know where I'm hopeful that this fall on the small businesses will start to to staff up and definitely not a hockey stick, but we are seeing.
So I would say month over month, its getting better and better.
Okay and then.
Weighted to that loss trends so as the employees come back and you may have some loss experienced employees getting hired.
Your current accident your loss rate is around 60 that loss ratio is around 64% what are what impact do you have what impact do you see going forward as the economy opens on that expense ratio on that on that loss ratio.
Yeah, I mean that has definitely been a concern coming out of prior recessions, we saw it back.
Back end and 2009 and 2010 am and we we have are incorporating that into our into our estimates.
And so it's it's but right now we're not seeing anything.
That gives us pause or gives us any concern as far as frequency increasing.
As a result of new hires and so forth, but it's something that we're keeping an eye on.
Okay fair enough.
I have a couple of questions on Saturday.
Given that you're excited about the top line I wanted to talk about the expenses at Saturday, you had about $15 million of expenses over the last 12 months.
Is that a million dollars or so of premium.
With your original plan for Saturday, how long did you foresee.
<unk> is taking to breakeven.
So Bob I'll take that.
Because <unk> is a new concept, it's very difficult to accurately produce the breakeven and you can see that and ensure text today you know I'm not aware of any insure tech that has broken even in the few years in which they've operated but we're seeing.
Steady progress we're staying in our lane, we're not reaching outside of the hazard classes that we seek the amount of premium that we've written in the first 6 months of this as a big multiple of the inception to date premium we wrote through through the beginning of this year. So we're focused more on manage.
King the expenses not starving the engine staying in our lane and showing consistent stable growth that that keeps a reasonable loss ratio and the expense ratio will fix itself in time.
Again very difficult to.
To predict when that will breakeven, but keep in mind, we did not go out and buy a 50 $70.500 million ensure tech that would not have been perfect for our business would have required us to tweak that a little bit and that also wouldn't have been profitable for some time. So we're very enthused by what we see we're going to stay the course.
We're trying to make it as efficient as possible, but I don't have a current estimate is to breakeven.
So how about on the in terms of the expenses. So your 15 billion of expenses over the last 12 months.
Going forward, how much I'm trying to figure out how much of that startup cost versus how much of that is just kind of continuing fixed costs for the business.
I understand you probably don't have a whole lot of variable costs in there right now because the premiums still kind of small relative to the expense base, but but just maybe give us an idea of what that expense what what type of expenses, we should be looking for going forward.
As this thing starts to settle in.
Sure and that's a difficult question you're right on the variable expenses, there's there's not a lot you know adverts.
Advertising and marketing are probably 1 of the ones that you could call kind of semi variable because you you you get for what you give but we.
No we have platform costs, we have and those will run out and just a couple of years, but the the the true expense and by the way, we're not running at $15 million right now on a on a run rate for 'twenty 'twenty 1.
It's it's it's much less than that.
But.
It's difficult for us to do that we may have an opportunity to plug Saturday into another another entity to provide the the easy workers' comp solution for that and that May mean more expense going forward on.
All I can say is we're being very diligent about our expense a lot of that is fixed not variable. Some will run off in just a couple of years and we're not at $15 million for right now, we're probably running at about $12 million for this year and that's down from last year.
Okay Yeah.
So I'm just trying to figure out like how long this is gonna be a drag on earnings because it's you know.
So it's it's a it.
You've got the premium up to a million dollars, but still trying to cover the cost of.
$12 million coming up in the next day.
This year, it's a long way to go so I'm just trying to get an idea of what you can tell shareholders in terms of.
You know at some point this is going to be starting to either start making money you're going to have to pull the plug on it. So I don't know if you've had thoughts on either either every day.
Thoughts on pulling the plug out at all.
But right now we're very encouraged by what we see we knew this was not 1 of them yeah on overnight thing and as long as we have solid consistent growth and we stay on our lane.
We're we're enthused.
Okay.
Alright, thanks for that line.
Once again, ladies and gentlemen, if you have a question at this time. Please press. The Star then the number 1 key on your Touchtone telephone.
We have a follow up from my cues from true Lewis Your line is open.
Okay.
Yes. Thank you.
The audit premiums this quarter can you say what that was it sounds like there was a net return.
And then I'll just refresh me on what it was in the first quarter.
Yeah.
Yeah, So I'm, just a little bit of background, so and in the first quarter of 2021, we reduced our audit accruals. It was at zero and we brought it down to a negative 262.7 million and then for the second quarter of 2021, we brought that accrual backup to zero. So.
That added $2.6 million in premiums written and earned during the quarter as I mentioned earlier, we're continuing to see a mix of positive and negative audit pick up but they're still weighted more towards the audit returns.
You know, we feel pretty strongly that indications are that this trend is going to reverse in the coming months as employment and wages and payroll increase.
But in the second quarter of 2021, our audit pick up was about negative $6 million I'm, you know I do want to point out too that since the accrual represents the audit premium net earned there is gonna be a lag between.
When when the economy strengthens and then they the increases that we see in both audit pick up and are cool.
And I'm, sorry, I didn't quite follow the differentiation differentiation between the negative.
Plus $2.6 changes on the accrual could you explain that again.
Yeah. So during the quarter, we brought our auditor pool up from negative.
$2.6 million to zero.
So that was a positive and then our audit pickup was a negative $6 million.
So as I just stated net was what 3.4 to.
Force that's right.
Yeah.
And then in Q1, if we look at at the moment net basis as well.
What was that number shows a negative $2.6 accrual and then what was the.
I guess the underlying number.
I don't have that in front of me, but we can get back with you on that.
Okay.
And then Mike just mentioned is talking about the clarity that you might explore that in with another.
What were you referring to there.
So all I'm, saying is that you know.
Both employers and Saturday can be the workers' comp solution with another carrier on.
Offering a full business suite and that Optionality exists within 30 as well as employers.
2.
<unk> taken that Youre talking about just the value per platform.
So the idea of shutting it down.
You would have thought about a new life.
It would be able to offer that platform so that flow.
Okay.
Sure.
It provides another way that's reported.
I am not saying that at all.
What I'm, saying is that we have opportunities from time to time for employers to provide the workers comp to another carrier's full business offering and we absolutely have that optionality womens Saturday as well that has nothing to do with shutting it down and it has nothing to do with offering it for sale it's <unk>.
<unk> the workers comp solution to another carrier is more fulsome offering.
Okay.
On the clarification.
What do we think about those 3 skus may not be a fair question, but you've got.
Comparable year over year growth number you're looking at balance 2020.1 in terms of written premiums.
On this quarter your written premiums was up about 5 minutes on that.
The headwind from.
On the credit Union.
Eddie.
Uh huh.
Direction, you'd like to share with <unk>.
Growth will be similar in terms of written premiums little faster a little slower.
Excuse me.
We can't predict that mark.
We see right now is very encouraging California is now opened for business.
But we can't make those type of projections right now we like what we see right now.
The January and February new business opportunities this year, where were below our expectations and we've been on a good trajectory since where we're very much hoping and expecting that continued trajectory for the balance of the year.
Thank you.
Okay.
Okay.
I am showing no further questions at this time I would now like to turn the conference back to MS. Kathy Antonello C E O.
Thank you could train on thank you all for joining us this morning, and enjoy the weekend and I look forward to meeting with you again next quarter.
Ladies and gentlemen. This concludes today's conference. Thank you for your participation and have a wonderful day you may all disconnect.
Uh huh.
Hum.
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