Q4 2022 Employers Holdings Inc Earnings Call
Thank you for standing by and welcome to the employers Holdings fourth quarter 2022 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 depressed.
One one on your telephone if your question has been answered and you'd like to remove yourself from the queue simply press star one again.
As a reminder, today's program is being recorded and now I'd like to introduce your host for today's program Laurie Brown Executive Vice President General Counsel. Please go ahead.
Thank you Jonathan Good morning, and welcome everyone to the fourth quarter 2022 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 capped 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 19 nine.
Five 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 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 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 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, 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 good morning to everyone and thank you for joining us today.
Lets start the discussion I'll provide some insights.
Our fourth quarter and full year 2022 financial results and then I'll hand, it over to Mike for more details on our financials.
Prior to the Q&A I'll share some insights into our into the current workers' compensation market and then talk a little about our focus for 2023.
And I am really pleased with what we are with what we achieved in 2022.
We closed the year with strong revenue growth driven by sharp increases in both premium writings and net investment income.
Our written premiums were up 22% for the quarter and 21% for the year. This strong growth was the result of higher new renewal and final audit premiums.
Our thoughtful and disciplined expansion within the low to medium hazard group classes increased submissions quotes and buying across most of the states, where we operate and was the primary driver of new business premium growth.
We also increased our final final audit premium accruals and recognize strong audit premium pick up as our payroll expert suppose you agree with the strong labor market and rising wages.
Finally, our renewal premium benefited from continued solid retention rates throughout the year, we were at $707 million of net written premium in 2022.
Here than any other year since 2018 in the third highest in our history as a publicly traded company.
Our net investment income was up 53% for the quarter and 24% for the year. The sharp increase was primarily due to higher market interest rates impacting bond yields and higher invested balances our fixed maturity securities we.
We are $90 million of net investment income in 2022 higher than any other year since 2009, and the second highest in our history as a publicly traded company.
With respect to losses employers in CRD each maintained our current accident year loss and LAE ratio on voluntary business of 64% versus the 63.5% recorded throughout 2021.
During the quarter employers in CRD, each recognized net favorable prior year loss reserve development, which amounted to $23 million in the aggregate.
Diligent fixed expense management helped to lower our consolidated underwriting and general and administrative expense ratio to 24, 7% for the year, which was far lower than any other year since 2018.
Saturday, which we launched in 2019 increased its premium writings by 350% this year from a million and a half a year ago to $6 7 million Saturday continues to develop additional partnership opportunities to attract small business customers seeking an online experience when purchasing workers.
Compensation.
Finally, I want to thank our dedicated employees for an outstanding 2022.
Unwavering service you provide our agents, our policyholders and their injured workers drive our continued success.
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.
Gross premiums written were $174 million versus $142 million a year ago, an increase of 22%. The increase was due to higher new and renewal premiums and higher final audit premiums.
Net premiums earned were $181 million versus $156 million, a year ago, an increase of 16%.
Our losses and loss adjustment expenses were $91 million versus $71 million a year ago. The increase was due to our higher earned premium.
Lower favorable prior year loss reserve development.
We recognized $23 million of favorable prior year prior year loss reserve development during the current quarter predominantly related to accident years, 2017, and pryor versus $24 million a year ago.
Commission expenses were $26 million versus $21 million a year ago. The increase was primarily due to higher earned premiums higher 2022 agency incentive accruals.
And an increase in new business writings, which are generally subject to higher commission rates.
Yes.
Underwriting and general administrative expenses were $47 million versus $39 million a year ago. The increase was primarily due to higher premium taxes assessments and bad debt expense each of which vary with our earned premium.
Income tax expense was $9 million, a 16% effective rate versus $14 million, a year ago or 20% effective rate the effective rates in each of those periods included tax benefits and exclusions associated with our tax advantaged investment income and the LPT deferred.
<unk> amortization.
The effective rate in the current quarter further benefited from pre privatization favorable prior year loss reserve development and a nonrecurring tax benefit attributable to the repeal of IRC code section 847.
From a reporting segment perspective, our employer segment had underwriting income of $24 million versus underwriting income of $28 million a year ago, and its resulting calendar year combined ratios were 87% and 82% respectively.
Our <unk> segment had an underwriting loss of $3 million for the quarter consistent with its underwriting loss of a year ago.
As Kathy mentioned, we remain very enthusiastic about Saturday as premium writings, which have significantly increased over the past several quarters.
Turning to investments our net investment income was $27 million for the quarter versus $18 million a year ago, an increase of more than 50%. The increase was due to higher bond yields and higher invested asset balances as measured by amortized cost.
Largely resulting from our federal home loan bank leveraged investment strategy.
Assume it to this strategy our insurance subsidiaries have received advances of $183 million from the federal home loan bank and the proceeds from those advances were used to purchase a similar amount of high quality collateralized loan obligation securities.
Our fixed maturities currently have a duration of three nine and an average credit quality of a R.
Our weighted average ending book yield was three 9% at year end, which is up sharply from the 3% a year ago and our new money rate today is near 6%.
Our net income this quarter was favorite favourably impacted by $11 million of net after tax unrealized gains from equity securities and other investments.
And those are reflected on our income statement and our stockholders equity and book value per share further benefited by $20 million of net after tax unrealized gains from fixed maturity securities, which are reflected on our balance sheet.
And finally during the quarter, we repurchased one $7 million of our common stock at an average price of $42 15 per share and since year end, we have bought a further $4 $2 million of our stock at an average price of $42 75 per share.
Our remaining share repurchase authority currently stands at $43 $2 million and now I will turn the call back to Kathy.
Thanks, Mike.
We expanded our capital management strategy and 2022 to include the proactive return of excess capital to our shareholders via special dividends.
During 2022, we returned over $120 million of capital to our shareholders comprised of $30 million of share repurchases 29 million of regular quarterly dividends and $62 million of special dividends.
As a unique specialist in small business workers' compensation, we are both well positioned and well capitalized to further react to the favorable trends and opportunities that we're seeing.
While workers' compensation pricing remains competitive the line also remains profitable tailwind from increasing hiring and wages, especially in the leisure and hospitality industry, where we've always had a strong presence are benefiting workers' comp and medical inflation has remained moderate relative to other cat.
<unk>.
Throughout 2023, our focus will be on continuing to identify new and profitable segments of the workers' compensation market to grow our top line, while maintaining our fixed expense structure, we're investing in improvements to both our workforce and customer experience, which will yield efficiencies and the lidar.
Growing customer base.
We remain highly confident in our continued success.
And with that operator, we will now take questions.
Certainly ladies and gentlemen, if you have a question at this time. Please press star one one on your telephone one moment for our first question.
And our first question comes from the line of Mark Hughes from <unk>. Your question. Please.
Yes. Thank you good morning.
Good morning, Mark.
Kathy.
The capital situation as it stands today.
No.
Topline opportunities seem to be pretty good you've got something to do with your capital but.
So your leverage is still moderate how do you see that.
So opportunity for capital return with what you've got in front of you.
Yes, I do believe so I will let Mike discuss them more of the details you know, but I'd just say that that we've always been and will continue to be committed to managing our capital.
In a way that that's in the best interest of the company and and its shareholders and and to do that we're going to use every tool in our toolbox, which is what we did in 2022.
You know, we do feel the company's in a very strong capital position and you know, it's it's highly supportive of our growth and the technology initiatives that I mentioned earlier, and we do not see that changing.
And yes, I do feel like we have more potential going forward, but I will let I will let Mike give you some more details on that.
So great question, Mark and one of the reasons why we were able to affect $62 million of special dividends. This year as we did extract.
A special distribution of $120 million from our one of our larger insurance companies.
That still leaves about $100 million at the parent today, which is which is in a good place but.
The result of that special dividend was very helpful to us because it helps serve to increase our premium to surplus ratio from about 54% at the end of 2021 to <unk>, 75%, where we stand today and that's a function both of reducing the underwriting capital and.
The premium growth that we saw this year I think cathie and I would both like to see that number even higher than the 75%. It's at right now are.
Perhaps to the to the low to mid Ninety's. So we're on our way towards more efficiency in that regard with respect to further special dividends.
We'll make a determination in the second half of this year as to whether that's appropriate for 2023 or not we'll make that determination based on where our capital at the insurance company stands what our capital position at the holding company looks like and what our opportunities for 2024 look like.
Theres no guarantees, but we won't be able to make that determination until that time, but it is important to for you to understand that we are comfortable in making special dividends when they are appropriate.
I appreciate the detail.
30 really had a good.
Fourth quarter for written premium.
Anything in particular going on there is that.
Theres some seasonal component to it.
A.
New run rate.
And look to build on.
Yeah.
I do think that Saturday will little continue to grow at a strong clip.
For.
The fourth quarter Saturday increased its premium year over year by about 275% I'd like to see a continued growth of that size somewhere between 200 and 300% in the future you know we're pretty cautious with.
The direct to consumer space and don't want to grow too fast, where we're obviously very well.
Focused on profitability also and always have been and that's why we've been cautious in that area.
The appetite expansion has helped CRD and enhancing some of their backend capabilities and some of the partnerships that we announced and 2022, where are also adding to that growth and we fully expect more partnerships in the future.
Okay.
And then your broader push to expand I think you talked about low to mid or.
Our medium hazard class.
Driving submission.
How much more is there to go with us.
How far along in that process are you.
Well, it's an it's an ongoing process I don't I don't know that we will be done anytime soon what I can tell you is we.
The onset of our appetite expansion, which has been a little over 18 months now we've written about $50 million of premium and those expanded class codes.
And we're continuing to you know that that group is is continuing to function and look for opportunities, where we see that there's unprofitable growth. There. So haven't haven't shut down that expansion will continue into the future to find growth where we can.
There's plenty of opportunity there.
Yes.
A couple more.
Current accident year outlook.
Any reason for that to be higher or lower.
<unk> III.
I don't expect a material change in the current accident year, you know, we're 45 days in but we didn't see anything that would cause alarm when we were looking.
Looking at 2023, and and trying to project what that might be so I think it will be very similar to what you've seen in the prior two accident years.
And then finally wonder.
Wonder Kathy would you have any broad comments about the.
Central ore reserve development.
Based on the magnitude of the reserves.
How much you've got in some of these accident years.
More productive on that from.
I think I don't know that you dipped into 'twenty or 2021, but maybe just the.
High level thoughts about.
There's obviously been a great run for you.
Good one anticipated.
How is it looking.
The award.
Yeah, So and as you know about a year ago, we decided to do full studies of reserves twice a year and so that will continue into 2023.
The one the one area, where we've spent a lot of time looking at our reserves is in regard to inflation.
And our reserves are always included a provision for inflation.
But our current booked reserves recognized the possibility of an increase in over the implicit inflation that is has always been buried in our reserve triangles.
So we did do a deep dive when we looked at several scenarios and increased.
Our booking two.
To reflect something over and above the implicit inflation.
And so I feel like we're in a good spot and there's nothing that I'm seeing that is concerning about our reserves as you know, we we recognized $23 million of favorable prior year reserve development that came predominantly from accident years 2017 and prior.
Our reserve philosophy tends to hold on to more current accident years until there is a compelling reason to adjust those and at the moment, we have not felt that there was a need to do that.
Thank you for all the answers.
Thanks Mark.
Thank you once again, ladies and gentlemen, if you have a question at this time. Please press star one on your telephone.
One moment for our next question.
Our next question comes from the line of Paul Newsome from a O L. Dot com for your question. Please.
[laughter].
Piper Sandler.
<unk>.
Thanks for the call.
Congrats on the year.
I didn't hear anything about it I would like to have some more detail just about the competitive.
<unk> in general.
Any signs that.
These are shifting from a competitive perspective.
Not in a significant way mm for the business sectors in the premium sizes that we are writing I would continue to characterize the environment is competitive.
You know there have been pockets that that I've heard chatter about where they ensure tax are either pulling out or kind of tightening their pricing to achieve some profitability and that could be opening up some opportunities for us to participate in areas, where we felt like pricing was somewhat inadequate.
For.
Our our renewal book.
When we adjust for changes in exposure I can tell you that our Q4 2022 average pricing did show the smallest year over year rate decrease that we've seen in many many years, it's almost approaching flat.
But I would say you know kind of in a nutshell, it's still not a hard market, but there could be some fundamental changes going on.
So what might be the drivers of that.
Or is it just simply less frequency benefit or is there.
Something else that you think is maybe helping us a little bit on the margin.
I don't think it's anything going on with frequency I can talk about that for a second.
When we look at frequency, we like we're currently comparing our current accident year, which I'm still referring to accident year 2022, if we compare that to accident year 2019 to remove sort of any interim distortions from the pandemic. So.
So far our accident year 2022 frequency and this is based on our level premium is really emerging well below the accident year 2019 level.
So pretty significant decreases in frequency is still coming through.
On the severity side, you know I think we will have to keep an eye on that.
Don't think medical inflation is causing any kind of problem right now.
But you know, we're seeing a tiny up tick in severity, but it's still too early I would say end for accident year 2022 to really know where that's going to land.
Nothing concerning that I'm, saying, but thus far.
Great well thank you.
The answer's really appreciate it.
Thank you Paul.
Thank you one moment for our next question.
And our next question is a follow up from the line Mark Hughes from tourists.
Okay.
Kathy I just wanted to clarify when you said the frequency is down did you pay on a premium basis. So.
Yeah go ahead here, but relative to premium.
Yeah, we like to look at them at frequency relative to on leveled premium, which puts all of the years on the same premium level.
So so that you are truly just measuring the pure frequency decline and we are continuing to see pretty significant decreases in frequency and our comp book and I don't know.
Go ahead.
No I'm, sorry, I cut you off.
Got it.
We're going to take that.
Thinking of it in terms of exposures.
Yes, we're seeing we're seeing it decrease across the line whether you look at it on an exposure basis on.
Not on level premium basis or on an on level premium basis. So yes.
Payroll versus payroll or premium it's decreasing.
Yeah.
Latest youre seeing if you look at the J.
Data on like in CCI loss costs is there a particular trend and what there.
Putting out in the market.
Last conference last fall.
Loss costs are continuing to.
Decline in most of the N CCI states.
In California, the WC IRB filed for a pure premium increase of seven 6% last fall that the commissioner approved no change.
You know I guess I would say I'm, a little surprised at some of the sizable decreases that are being <unk>.
File.
But you know.
These are just the loss costs in every carrier can file what is appropriate for for them and it's good that carriers have that flexibility.
You know I have a lot of faith in our team of actuaries and feel like they're best in class and we always complete our own analysis and make filings that represent what we feel is appropriate rate adequacy for both employers and Saturday.
But yes, that's kind of that the overall trend I'm, saying as WC IRB tends to be seeing some upward pressure in California, and CCI states are still drifting down for the most part.
Mike.
Federal home loan bank.
Strategy you view.
Seemingly very successful.
When does that paper.
Uh huh.
What's the impact.
The potential movement in that.
Other than that.
612 months.
So that trade is probably going to end in the third maybe fourth quarter of this year and the reason for that is that the close track LIBOR today that will change when LIBOR goes away July one and the federal home loan bank borrowings are done at sofa.
And it's the difference between those two rates, that's that's helping us with the arbitrage today, So again thats going to a race as the year goes to put it into perspective with respect to our our activities in 2022, we had about a $6 3 million dollar net investment impact increase.
As a result of that trade and that is just the yield on the additional clo's, but also going the other way was $3 million worth of interest so that trade had a $3 3 million dollar.
Pretax benefit to us in 2022, and we'll have to wait to see what that effect is going to be into 2023, but we will continue to have some.
Some benefit from that but it will be dwindling as the year goes by.
Okay, that'd be pretty modest number.
I would think.
And then on the expense ratio anything.
Okay commissions are up a little bit about your growth has been pretty strong so that.
That all makes sense.
The expense ratio overall, though.
The 2023.
So keep in mind that the fourth quarter expense ratio was up a little bit and thats largely because of the success. We had with net investment income and the development that we took so that meant that we had to adjust some compensation accruals and that adjustment related to the entire year. So.
Fourth quarter is a little bit of an anomaly based on the additional revenue that we saw.
Going into next year, Kathy and I are doing everything we can to hold the line on our fixed expenses as you know the variable expenses are largely outside of our control because those vary with our premium and can't be avoided.
Theres, probably not we can't make the significant splash and a reduction to the fixed expenses as we have been able to accomplish since the first quarter of 2021, but the continued premium growth and the the catching up of the earned to where the written is will continue to benefit that that ratio.
To the extent that we're successful in holding to our fixed expenses.
Can you say.
Say roughly what the.
Ben.
The accrual catch up was.
What that impact was in the fourth quarter.
It's it's tough for me to say, we're talking short term long term this that but it was a few million dollars.
Let's let III.
Okay.
Makes sense compared to a year.
Recent trend.
Okay.
Alright, thanks for taking all my questions.
Okay.
Thank you. This does conclude the question and answer session of today's program I'd like to hand, the program back to Kathy Antonello for any further remarks.
So thank you all for joining us. This morning, I look forward to meeting with you again in April and thank you Jonathan.
Have a great weekend.
Yes.
Thank you and thank you, ladies and gentlemen for your participation in todays conference. This does conclude the program you may now disconnect good day.
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