Q2 2023 Employers Holdings Inc Earnings Call
Hello, and welcome to the employers Holdings, Inc. Second quarter 2023 earnings conference call and webcast. If anyone should require operator assistance. Please press star zero on your telephone keypad.
Sure and answer session will follow the formal presentation you May press star one at any time to be placed in the question queue. As a reminder, this conference is being recorded its now my pleasure to turn the call over to your host Laurie Brown Executive Vice President CLO General Counsel and Secretary. Please go ahead Lori.
Thank you Kevin Good morning, and welcome everyone to the second quarter 2023 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 caffeine to Melo, 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.
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 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 and.
In addition to following the company's press releases SEC filings public conference calls and Webcasts 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'll turn the call over to Kathy.
Thank you Laurie good morning to everyone and thanks for joining us today to start this morning, I will provide some highlights of our second quarter 2023 financial results and then I'll hand, it over to Mike for further details on our financials prior to Q&A I'll touch on some of our recent accomplishments that I'm, particularly proud of.
Our second quarter results were excellent significant premium growth strong net investment income and net investment gains drove a 59% increase in revenue year over year.
Our net written and earned premiums were up 10% and 7% respectively.
Wage increases a strong labor market, our thoughtful appetite expansion program and our new sales and underwriting operating model each contributed to this growth.
As a result of these efforts we ended the quarter with yet another record number of policies in force and just last week, we celebrated achieving over 125000 policies in force.
Our net investment income was up 34%. The sharp increase was primarily due to higher market interest rates impacting bond yields and higher invested balances our fixed maturity securities.
We earned $27 million of net investment income during the quarter and I'm out highly consistent with that at the last quarter with each being meaningfully higher than any other quarter in our history as a publicly traded company.
Our income statement further benefited from 11 million of net investment gains are welcome swing from the $50 million in losses, we experienced a year ago.
[noise] from an underwriting standpoint, our mid year full reserve study.
Led to the recognition of 20 million of net favorable prior year loss reserve development from our voluntary business.
That action, coupled with our continual focus on commissions and other underwriting expenses yielded a consolidated combined ratio of 92%, which is a terrific result.
Lastly, we recently terminated the lease associated with our former corporate headquarters in Reno, Nevada, which Mike will speak to in more detail.
This action will serve to continue our meaningful reduction in underwriting expenses.
With that I'll now turn the call over to Mike and I'll return to provide my closing remarks, Mike. Thank.
Thank you Kathy.
Gross premiums written were $198 million versus $179 million, a year ago, an increase of 11%.
The increase was primarily due to higher new and renewal business writings and an increase in final audit premiums.
Net premiums earned were $177 million versus $165 million, a year ago, an increase of 7%.
Our losses and loss adjustment expenses were $91 million versus $93 million a year ago. The decrease was primarily the result of net favorable prior year loss Reserve development recorded in connection with our mid year Reserve study.
We recognized $20 million of net favorable development during the quarter versus recognizing $10 million of net favorable development a year ago.
Commission expenses were $24 million, which were largely consistent with our commission expenses of a year ago. As a result of the increase in our earned premium our consolidated commission ratio was 13% this period down from 14% a year ago.
Underwriting and general administrative expenses were $46 million versus $39 million a year ago, an increase of 17%. The increase was primarily due to higher payroll related expenses as well as higher policyholder dividends and bad debt expense.
As a result of the increases in these expenses, which were partially offset by the increase in our earned premium our consolidated underwriting and general administrative expenses ratio was 26% up 24% from a year ago.
During the quarter, we incurred a $9 million pretax nonrecurring charge in connection with the early termination of the lease associated with our former corporate headquarters in Reno, Nevada. This previously announced action was undertaken as part of our ongoing review of our facility needs and is attribute to the success of <unk>.
Our work from home model.
From a reporting segment perspective, our employer segment had pretax income of $47 million versus a loss of $12 million a year ago, and its resulting calendar year combined ratios were 87% and 92% respectively.
Our <unk> segment had a pretax loss of $2 million for the quarter versus a loss of $3 million a year ago.
Turning to investments our net investment income was $27 million for the quarter versus $20 million a year ago, an increase of 34%. The increase was due to higher bond yields and a higher invested asset balances as measured by amortize cost.
Our fixed maturities currently have a duration of three nine and an average credit quality of an a.
Our weighted average book yield was four 1% at quarter end, which is up sharply from three 3% a year ago and our new money rate today is north of 5%.
Our net income this quarter was favorably impacted by $9 million of net after tax unrealized gains from equity securities and other investments.
Which are reflected on our income statement and our stockholders' equity was unfavorably impacted by $15 million of net after tax unrealized losses from fixed maturity securities, which are reflected on our balance sheet.
Since the end of the first quarter, we had repurchased $36 million of our common stock at an average price of $37 89 per share which served to exhaust our prior stock repurchase authorization.
In response, our board authorized a new stock repurchase program yesterday to allow for repurchases of up to $50 million of our common stock from July 31 of this year through December 31 of 2024.
And finally yesterday, our board of directors declared a third quarter 2023 regular quarterly dividend of 28 per share. The dividend is payable on August 20, <unk> to stockholders of record on August nine.
And with that I'll turn the call back to Kathy.
Thank you Mike.
I'm pleased to say that with our current levels of written premium our focus on expense management and our prudent capital management, we've significantly improved our key operating metrics in recent quarters today, our premium to surplus ratio is 80% and climbing up from just 55% when I took the.
In early 2021, and our consolidated underwriting and general and administrative expense ratio has been at a steady 26% are below down from 30%.
During my tenure as CEO , we've also lowered our current accident year loss and LAE ratio by one percentage point.
In closing as a unique specialist in small business workers' compensation, we've never been better positioned to further benefit from the favorable trends and opportunities that we're seeing and we remain highly confident in our continued success.
And with that operator, we will now take questions.
Certainly we will now be conducting a question and answer session if you'd like to be placed in the question queue. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if you'd like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing star one.
One moment. Please what would you poll for questions. Our first question today is coming from Mark Hughes from <unk> Securities. Your line is now live.
Yeah. Thank you good morning, Kathy anything.
New or interesting when you look at the at the mid year study.
They had a.
My reserve gain anything he noticed about how losses are developing.
Yeah, Hi, Mark and thank you for the question.
So in terms of the favorable prior year loss development that we recognized this quarter most of that development arose from accident years 2019 and prior.
You know we have a very conservative.
Reserving philosophy.
And our current provision does recognize the possibility of an increase in the implicit inflation that's built into our triangles.
So so we've continued to hold that explicit.
That explicit inflation provision them, we looked at several scenarios and and have reflected that in our booked reserves for over a year now, but we complete another phone loss reserve study at year end.
And so you know we'll be taking a look then and and seeing how the losses emerge over the second half of the year.
Anything on the economic front I think your audit premiums continued to be pretty good.
Are you seeing any sort of.
Changes in payroll any oh midterm adjustments or anything like that that might bear on the economic health.
As we sit here today.
Yeah. So you know.
Our audit premium pickup continues to be.
Really healthy we kept our audit accrual flat this quarter at around 39 million.
We had almost $8 million in audit pick up so that was that was really strong for the quarter and we're continuing to see that into July of this year.
We also recognized about $12 million and endorsements.
And Ah another about one and a happen noncompliance premium where we're continuing to see.
Some strong wage increases come through.
As a result of employment levels, and especially in the leisure and hospitality industry and.
So we do think we will continue to see the strong tailwind.
In the future and the unemployment rate is hovering at about three 6%. So that's really positive for workers' compensation.
And yeah, I mean, I'm too I'm feeling pretty good about the next few quarters when it comes to.
The potential for audit pick up.
Any observations on the competitive environment.
Well in terms of pricing the environment hasn't changed too terribly much.
For the business sectors in the premium sizes that we write them I continue to characterize the environment is competitive and especially for the small its policy sizes.
We are having more success binding policies that are that are slightly larger than our average policy size, which is still around $5200.
And we're attributing that success to our new sales and underwriting operating model.
The rate decreases that we're seeing them tend to be more moderate for the policy sizes over 10000 right now.
When we looked at our renewal book, we saw an average rate decrease of slightly below 2%.
And and that was made up of a premium increase of about 7% and exposure of about 9%.
Thank you for that and then on the expense front.
Any.
The other initiatives to bring that down actually bad trend over the next few quarters.
Yeah, we continue.
To work to bring our expense ratio down I do feel like there's more we can do them you know we announced this this month.
The reevaluation of our real estate footprint and the exit of our Reno, Nevada headquarters.
So you know that will be an improvement in our ratio going forward.
But at this point there are a couple of things that need to happen and that we're focused on and that's increasing our premium without sacrificing profitability.
And then a lot of digital initiatives that we're working on that aren't going to allow for automation and scalability.
And those two things together are what's going to drive our expense ratio improvement going forward.
Thank you.
Mhm.
Thank you next question today is coming from Matthew <unk> from JMP Securities. Your line is now live.
Yes, Hi, good morning, this is Carl calling in for Matt.
And my first question is really just regarding the Saturday topline.
Can you comment on the growth.
Yeah sure so sturdy chugging along.
And at the end of the second quarter premium it increased about 166% year over year was up to $7 2 million.
We are attributing that grows to our appetite expansion effort.
Saturday's enhanced backend capabilities.
So they continue to generate increasing policy flows and we're seeing significant interest from companies that are looking to collaborate with CRT like our recent simply business partnership that we announced.
Perfect and then.
To just go back briefly into the prior period development I know, it's a it's it's it's multiple years, but is there is there a certain claim aspect that's maybe driving it is it a medical drives or is it the indemnity dry.
Are you seeing.
Yeah.
It's mostly being driven by low lower medical development that is emerging.
And as I mentioned earlier, it's coming from accident years, 2019, and prior and it's pretty widespread across those accident years.
In regard to the more recent accident years, we we have sort of set it and forget it philosophy for a few years because of the long tail nature of workers' compensation and we'd like to see those losses emerge for a little bit in saddle and before before we move on the more recent.
Ers that.
Yeah, that's high level, what we're seeing in and it is mostly coming from the medical side.
Perfect. Thank you that's all for me.
Thank you.
As a reminder, that star one to be placed in the question queue. Our next question is coming from Bob Farnam from Janney. Your line is now live.
Yeah, Hi, there and good morning, so on the expense side, you know what the what your expenses for the headquarters down.
I mean, you still need to have office space. So I'm just curious how much of an impact that's going to have any underwriting expenses going forward.
With the nine plus million of savings in that side, but what should we expect nik for savings going forward.
So Bob I'll take that and.
The exit of our Reno space all in is going to save us about $3 million per year from here on out. However, we are going to or we plan to move into much smaller.
Platform in Reno in probably December of this year that amount of space will be about a 10th of what we had previously and will cost about a 10th of what we had previously so I think going forward.
Starting in December the run rate would be about two and a half to $2 $7 million of annual savings associated with that real estate swap.
Okay, great great.
And while you're while you were answering questions that I have another question for you.
<unk> net investment income kind of as you unwind your F H L B investment strategy.
And what do you offset it with the new money yield still north of just kind of curious what investment income is going to look like over the next six months and year.
Well right now, we're we're between 26 and $27 million I'd like to I'd like to think we can we can try to get close to that next quarter, knowing that we have as much as $100 million of clo's coming off of our books.
Winding down that federal home loan bank.
Trade that we had but we are again seeing higher yields we're looking to see if theres a way in which we can substitute and benefit from a future plan along the lines of what we did with the CLO program, but I'm, hoping that we can come in at or close to between 26.
And $27 million next quarter, it's all going to depend on timing of the reinvestment of lower yielding securities that are coming off and how quickly we take down the remaining CLO is associated with the federal home loan Bank trade. So I wish I could give you more information, but we very much like to maintain where we are right now I don't think that will.
Increase our net investment income next quarter right.
Alright got it there you basically thinking they should offset each other going forward. That's what the that's what the plan is.
On Saturday I know every quarter I ask you about Saturday. So you know what lessons have you learned steroid he gets up to speed or thinking it another way what would you have done differently. If you were creating Saturday today.
Yes.
So I think looking at Syria, where our focus is right now is in integrating a lot of the backend capabilities.
On the employer with employers so that we can bring that expense ratio down for CRD a and.
Over the course of the next year or so so that's where our focus is now I think in hindsight looking at you know there there was a concern about channel conflict and I think in hindsight one of the lessons learned is that.
It's not.
As prevalent as we thought it would be so we could have integrated some of these back end capabilities sooner.
Interesting okay good for that.
And last question for me is I know it may be too soon to know, but your expansion classes of business just kind of curious how they're performing relative to expectations or their loss ratios are different from your established book as the competition different just kind of get a feel for what those expansion lines or how they're performing.
Yeah. It's a great question and you know we do look at them separately, we're not seeing those classes emerge any differently from a loss ratio standpoint, they're highly highly consistent with.
Our other classes that we've been in for you know for quite some time.
And where you know still as I've mentioned earlier attributing a lot of our growth to those expanded expanded classes. So.
Yeah, right now no concerns from a loss ratio standpoint on that business, Okay, and then the capital.
Participate basically from the same.
I'm peers Vinny.
For these types of risks.
Yeah, largely I would agree with that.
Okay, great. Thanks.
Thanks for the color.
Sure.
Thank you we reached end of our question and answer session I would like to turn the floor back over to Kathy for any further closing comments.
Okay. Thank you Kevin and thank you all for joining US. This morning, we look forward to meeting with you again in October .
Thank you that does conclude today's teleconference and webcast you may disconnect. Your line at the assignment of a wonderful day, we thank you for your participation today.