Q4 2024 Employers Holdings Inc Earnings Call
and Zach Gardner.
Good day and thank you for standing by. Welcome to the fourth quarter 2024 Employers Holdings 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.
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.
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Speaker Change: Now I'll turn the call over to our Chief Executive Officer, Kathy Antonello.
Kathy Antonello: Thank you Lori good morning, everyone and thank you for joining us today.
Kathy Antonello: On the call with me is Mike Paquette, our retiring Chief financial Officer, and I would like to welcome Mike to draw our incoming Chief Financial Officer.
Kathy Antonello: During the call we will follow our typical agenda, where I will deliver my opening comments and then hand it over to Mike to provide the details on our financials.
Kathy Antonello: I'll close with a few additional thoughts and then we'll open it up for questions comments and discussion.
Kathy Antonello: The fourth quarter contributed nicely to a very successful year for employers.
Kathy Antonello: We finished the year with the highest levels of written and earned premium ending enforced premium and policies and net investment income in our history.
Kathy Antonello: We achieved solid growth in new and renewal premium throughout 2024, which was offset by lower final audit premiums endorsements.
Kathy Antonello: Our gross written premium excluding both final audit premiums and the change in audit accruals increased 3% in the fourth quarter and 6% for the full year with all major distribution channels contributing to the court.
Kathy Antonello: Our investment performance was also a boost to our revenue throughout 2024 with strong net investment income and net unrealized gains from our common stocks and other investments.
Kathy Antonello: From an underwriting standpoint, our yearend full reserve study led to the recognition of $9 million of net favorable prior year loss reserve development from our voluntary business.
Kathy Antonello: That action, coupled with meaningfully lower underwriting expenses yielded yielded a combined ratio of 95, 5%, excluding the Ltte for the fourth quarter.
Kathy Antonello: For the full year, we had a combined ratio of 98, 6%, excluding the LPG, which represents our 10th straight year of achieving an underwriting profit in our long tail line of business.
Kathy Antonello: I am, particularly pleased with the reductions we achieved throughout the year in our underwriting and general and administrative expense ratio.
Kathy Antonello: That ratio for the fourth quarter was 23, 2% versus 24, 6% a year ago and was 23, 5% for the full year versus 24, 9% a year ago.
Kathy Antonello: <unk>.
Kathy Antonello: The decreases were primarily the result of cost savings achieved through the Saturday integration plan that we executed in the fourth quarter of 2023, and we remain laser focused on achieving further reductions to that ratio going forward.
Kathy Antonello: As you are aware, we do not provide specific guidance, but in light of the ongoing competitive rate environment for workers' compensation. We currently anticipate increasing our 2025 accident year loss and LAE ratio for voluntary business.
Kathy Antonello: The increase is consistent with both our prudent reserving philosophy and the current trends in the workers' compensation industry.
Kathy Antonello: We expect this to mitigate the impact of our continued focus on reducing the expense ratio.
Kathy Antonello: Finally, I want to thank our talented and dedicated employees for all they achieved in 2024.
Kathy Antonello: Our most valued asset and have successfully positioned the company for even better results in the coming years.
Kathy Antonello: With that Mike will now provide a deeper dive into our 2024 financial results and.
Kathy Antonello: I'll return to provide my closing remarks, Mike.
Mike Paquette: Thank you Kathy gross premiums written were $176 million for the fourth quarter and $776 million for the full year with both being highly consistent with the premium levels that we wrote a year ago.
Mike Paquette: In each period higher new and renewal premiums were offset by lower final audit premiums and endorsements.
Net premiums earned were $190 million for the quarter and $750 million for the year, representing increases of 1% and 4% respectively.
Mike Paquette: Our fourth quarter and full year loss and LAE ratios, excluding the impact of the LPT were 59, 5% and 61, 6%, respectively versus 52% and 57, 2%, respectively a year ago.
Mike Paquette: The increases in each period were the result of lower favorable prior year loss reserve development and a slightly higher current accident year loss and LAE estimate.
Mike Paquette: We recognized $9 million and $18 million of favorable prior year loss reserve development during the fourth quarter and full year on our voluntary business respectively.
Mike Paquette: Versus $25 million and $45 million, respectively, a year ago.
Mike Paquette: Throughout 2024, we continued to settle claims on an accelerated basis to both mitigate our overall tail risk and generate additional reserve salvage.
Mike Paquette: As mentioned in our earnings release within the 2024 periods presented we refined our presentation of certain expenses associated with our involuntary premium.
Mike Paquette: This revision, which was immaterial as the effect of reducing both our fourth quarter and full year 2020 for commission expense ratios by approximately three percentage points and increasing our respective underwriting and general administrative expense ratios by the same amount this revision had.
Mike Paquette: No effect on our total underwriting expenses or net income.
Mike Paquette: Our fourth quarter and full year Commission expense ratios were 12, 8% and 13, 5%, respectively versus 14% and 13, 9%, respectively a year ago.
Mike Paquette: The decrease in our commission expense ratio for the quarter was primarily due to a nonrecurring adjustment to our commission expenses, which served to reduce this ratio by approximately six percentage points as well as the previously mentioned and voluntary premium refinement.
Mike Paquette: Our commission expense ratio for the full year was highly consistent with that a year ago, when considering the involuntary premium refinements.
Mike Paquette: Our fourth quarter and full year underwriting and general administrative expense ratios were 23, 2% and 23, 5%, respectively versus 24, 6% and 24, 9%, respectively a year ago the.
Mike Paquette: The decreases in each period were primarily related to lower professional fees and information technology expenses, resulting from our <unk> integration plan that we executed in the fourth quarter of last year, partially offset by higher bad debt expense and the involuntary premium refinement.
Mike Paquette: Net investment income for the fourth quarter was $27 million.
Mike Paquette: Versus $26 million a year ago. The increase was due to higher bond yields partially offset by a lower average investment balance as measured by the amortized cost.
Mike Paquette: Our net investment income for the full year was $107 million, which was highly consistent with that of a year ago.
Mike Paquette: Note that the net investment income in 2023 benefitted from our former federal home loan bank leverage investment strategy, which we unwound in the fourth quarter of last year.
Mike Paquette: Our fixed maturities currently have a duration of four 5% and an average credit quality of a plus.
Mike Paquette: Our weighted average ending book yield was four 5%, which is up from four 3% a year ago.
Mike Paquette: Net realized and unrealized losses on investments.
Mike Paquette: Through the income statement were less than $1 million for the quarter versus net gains of $12 million a year ago.
Mike Paquette: For the full year, our net realized and unrealized gains were $24 million versus.
Mike Paquette: Versus $23 million experienced a year ago.
Mike Paquette: Our interest and financing expenses were both down sharply in the fourth quarter and the full year versus those of a year ago. The decrease in each period were due to the repayment of our federal home loan bank advances during the fourth quarter of 2023 as previously mentioned.
Mike Paquette: Income tax for the quarter was $6 million and up 18% effective tax rate versus $13 million or 22% effective tax rate a year ago.
Mike Paquette: The effective tax rates in each period reflect applicable income tax benefits and inclusions and exclusions.
Mike Paquette: Associated with tax advantaged investment income LPT adjustments pre privatization loss in LAE reserve adjustments and deferred gain amortization.
Mike Paquette: Our income tax expense for the full year was $28 million.
Mike Paquette: Our 19% effective tax rate versus $30 million or an effective tax rate of 20% a year ago.
Mike Paquette: Our book value per share, including the deferred gain of $47 35 increased by 10, 6% during 2024 and our adjusted book value per share of <unk> $50 71 increase.
Mike Paquette: <unk> increased by nine 8% during 2024, each including dividends declared.
Mike Paquette: These measures were favorably impacted by $24 million of net after tax unrealized gains arising from our equity securities and other investments.
Mike Paquette: During the fourth quarter, we repurchased $10 million of our common stock at an average price of $51 20 per share and since year end, we bought a further $11 million of our stock at an average price of $49 38 per share.
Mike Paquette: Our remaining share repurchase authorization currently stands at $18 7 million.
Mike Paquette: Earlier this week, our board of directors declared a first quarter 2025 regular quarterly dividend of <unk> 30 per share.
Mike Paquette: This dividend is payable on March 19 to shareholders of record as of March 5th.
Catherine: And now I'll turn the call back to Catherine.
Mike Paquette: Okay.
Speaker Change: Okay. Thank you, Mike we met our capital management objectives in 2024 by returning $72 million.
Speaker Change: To our stockholders through share repurchases and regular quarterly dividends.
Speaker Change: Our success in Opportunistically repurchasing our shares throughout 2024 allowed us to meet these objectives in the best possible way, thereby improving several of our current and future key metrics without the need to declare any special dividends.
Speaker Change: Beyond our financial results, we recently announced that a M best upgraded the financial strength ratings of each of our insurance companies.
Speaker Change: This upgrade reinforces our ability to provide reliable trusted high quality coverage to small businesses across the nation.
Speaker Change: Looking ahead to the remainder of 2025, we will continue to vigorously pursue profitable growth opportunities.
Speaker Change: Focusing on disciplined underwriting and claims management cultivating and maintaining strong long term relationships with both traditional traditional and specialty insurance agencies.
Speaker Change: <unk>, expanding our appetite to new risk segments.
Speaker Change: They're developing important alternative distribution channels and offering insurance solutions directly to customers.
Speaker Change: We are confident that our strong capital position will support both our growth and innovation initiatives and we look forward to the year ahead.
Speaker Change: And with that Kevin we will now take questions.
Speaker Change: Thank you ladies and gentlemen, if you have a question or comment at this time. Please press star one on your telephone.
Question has been answered or you wish to remove yourself from the queue. Please press star one again.
Speaker Change: We'll pause for a moment, while we compile our Q&A roster.
Mark Hughes: Our first question comes from Mark Hughes with <unk>. Your line is open.
Speaker Change: Yes. Thank you good morning.
Mark Hughes: Good morning, Mark.
Mark Hughes: Kathy can you give us a sense of the magnitude of the change in the loss pick for current accident year.
Mark Hughes: And then.
Mark Hughes: You've been holding steady at 64 for a while.
Mark Hughes: A lot of the same dynamics seemingly had been at play.
Mark Hughes: Lower loss costs.
Mark Hughes: The medical inflation et cetera.
Speaker Change: Why now what what do you see in the marketplace.
Motivate you to.
Mark Hughes: Sure.
Mark Hughes: The loss pick.
Mark Hughes: Yeah. So.
Mark Hughes: Mark our current accident year loss and LAE ratio is determined annually by our actuaries.
Mark Hughes: And they consider the pricing environment.
Mark Hughes: Each of our states and the growth prospects that we have in those states. They also look at the trends in frequency and severity and any initiatives that we might be implementing.
Mark Hughes: Within the year that we feel could impact our results.
Mark Hughes: No.
Mark Hughes: I'd say that our philosophy, our approach has not changed we generally like to choose the ratio at the beginning of the year and that's based on the current environment and we'd like to leave it there until there is a compelling reason to change it.
Speaker Change: As you said, our prudent reserving philosophy and the continued competitive rate environment led us to select a.
Speaker Change: 2024 accident year loss and LAE ratio of 64% that was slightly higher than what we chose for 2023, which was 63.
Speaker Change: 3% and that has been consistent for a while we have the same loss pick in 2022.
When I mentioned that we do expect to increase our accident year loss and LAE ratio in 2025. The primary drivers there are some higher actuarial trend selections and as I mentioned, the ongoing competitive rate environment.
Speaker Change: I would say is we do see.
Speaker Change: Also improvement in our expense ratio.
Speaker Change: But that will be mitigated to some extent by the change in the loss in LAE ratio that we're expecting.
Speaker Change: I'd just also add that the change that we have.
Speaker Change: We're expecting will be directionally consistent with the work comp industry, which has been increasing the current accident year loss pick for several years and we've been coming in below that.
Speaker Change: Understood.
Speaker Change: To thank the 70 basis point uptick in 2024 is that a good.
Speaker Change: Starting point to think about 2025.
Because we don't give guidance I can't I can't give you any indication at this point as to how high it will be.
Speaker Change: Except for the fact that we do expect our <unk>.
Speaker Change: Decrease in the expense ratio.
Speaker Change: To be an offset in a mitigating impact.
Speaker Change: To be.
Speaker Change: Fully offset do you think or just.
Speaker Change: Partially offset or no specifics at this point.
No specifics at this point, but we expect the offset to be meaningful.
Speaker Change: Yes.
Speaker Change: Higher actuarial trend selection.
Speaker Change:
Speaker Change: That trades carries a lot of weight can you maybe say what trends are driving the frequency severity medical.
Speaker Change: Yes.
Speaker Change: Yeah. So.
Speaker Change: Look at freight by saying, we always say that based on our on level premium. Our lost time claim frequency continued to trend downward over the last several years, we do not expect that trend to.
Speaker Change: <unk>.
Speaker Change: To change.
Speaker Change: When we adjust for the change in wages. Our overall claims severity values have really held fairly steady in the most recent years.
Speaker Change: And they remain generally speaking below the pre pandemic levels.
Speaker Change: And that's been driven by lower medical severity.
Speaker Change: And Jim <unk> severity I would say, it's trending about the same as wage inflation.
Speaker Change: And up to this point medical inflation and the economic data has remained relatively mild.
Speaker Change: Especially when you look at it.
Speaker Change: In relation to other sectors like energy and our housing our food. So that's good news.
Speaker Change: <unk>.
Speaker Change: So the pressure is really just coming from a little bit more conservatism and what we're seeing.
Speaker Change: Broadly in the industry.
Speaker Change: I will add that the accident year loss and LAE ratio picks for 2023 that we saw coming out of last year's state of the line was 69 I'm not suggesting that that's what we are collecting in any way shape or form, but I'm, just saying that we have been well below the industry.
Speaker Change: For many many years.
Speaker Change: Yes.
Speaker Change: The wage inflation that you might've seen in earlier years, I think ended up being beneficial medical inflation was benign it was essentially.
Speaker Change: Kind of.
Speaker Change: Well say hidden but.
Speaker Change: An extra amount of premiums.
Speaker Change: That might have offset any kind of <unk>.
Speaker Change: Inflation.
Speaker Change: Any trends around severity.
Speaker Change: I guess, maybe the fact that youre not seeing as much wage inflation does that then put a little more pressure on the current accident year is that.
Speaker Change: Does that make sense for that.
Speaker Change: Off base.
Speaker Change: No.
Speaker Change: Thanks, Dan So I'll tell you when.
Speaker Change: When I look at the BLS numbers.
Speaker Change: As of December the annual change in employment in hourly wages.
Speaker Change: Was five 3% for all sectors, and five 5% for leisure and hospitality, which is where we have a big concentration.
Speaker Change: Those numbers compare to six 1%, an eight 1% a year ago.
Speaker Change: So it's that reduction is the acceleration of employment and wages.
Speaker Change: Impacting our book of business and its impacting it by decreasing the audit pickups in the audit accrual that we have and that's putting a bit of pressure on our net written premiums so you're spot on that.
Speaker Change: Some of the it's really the reduction in the acceleration.
Speaker Change: Employment and wages that we're seeing that's putting pressure on the net written premiums. They are still very strong increases, but not to the extent that we saw coming out of COVID-19.
Speaker Change: Yeah, and then maybe just one final question.
Speaker Change: You've been talking about expansion your appetite that's helped to drive the topline how should we think about that going into 2025.
Speaker Change: Yeah.
Speaker Change: We're going to continue to.
Speaker Change: Expand our appetite and we're actually accelerating our effort there because it has been a very successful program for us that segment of business is operating at a loss and LAE ratio Thats very similar if not slightly better than.
Speaker Change: Our traditional target classes.
Speaker Change: It's really contributing to our overall growth in.
Speaker Change: In the fourth quarter, just to give you some numbers the appetite expansion classes generated $35 million or 20% of our new and renewal premium.
Speaker Change:
Speaker Change: The other area that where we're focused on is what I've mentioned in the past is this continued.
Speaker Change: Shifts towards API utilization for submissions quotes and binds.
Speaker Change: And that's coming through digital agents and digital marketplaces.
Speaker Change: So we've.
Speaker Change: We're focusing our efforts on increasing those digital partnerships, but we will see quite a bit of that going on in 2025.
Speaker Change: Thank you very much.
Mark Hughes: Thank you Mark.
Speaker Change: One moment for our next question.
Speaker Change: Okay.
Bob Farnam: Our next question comes from Bob Farnam with Janney Montgomery Scott Your line is open.
Speaker Change: Yes, hi, there good morning.
Speaker Change: Mike a question for you.
Speaker Change:
Speaker Change: The it looks like it may be transitioned to a bunch of your investments into mortgage backed securities during the quarter and just kind of wanted to know what your thought process was there.
Speaker Change: Sure what Youll see when we file our 10-K is that we increased our letter of credit.
Speaker Change: Issued.
Speaker Change: By about $100 million through the federal home loan bank, and we use that to satisfy deposit requirements in California, which permitted us to liberate some of the lower yielding assets that we that we had on deposit with California, and we sold those in the quarter and recognized a small realized loss on those of just over.
Speaker Change: $2 million, but what that allowed us to do is to go along with residential mortgage backed securities that were yielding near 6% a pretty a pretty big increase over what we were getting with these deposits with the federal home loan bank, we only have to pay a 15 basis point letter of credit fee.
Speaker Change: We'll have a little bit of an uplift in our net investment income for next year. Those trades were accomplished in December since youre not seeing that in the net investment income that we printed for the quarter and the year.
Speaker Change: So.
Speaker Change: So it sounds like the differential between your kind of your book yield and your new money yield is.
Speaker Change: Band It should expand in Texas.
Speaker Change: Next year is that right without worry about that.
Speaker Change: What we show that the ending the four five is the ending as of December 31, but some of that increase from the prior period is a result of that trade.
Speaker Change: Okay Alright.
Speaker Change: And my second question.
Speaker Change: Not sure if you're going to have the data available, but I wanted to talk about kind of the increase in the higher hazard.
Speaker Change: Groups kind of percentage of in force now for years that was kind of low single digits.
Speaker Change: I think in 2022.
Speaker Change: Into the higher single digits in 2023 may have been in the.
Speaker Change: Mid teens, let's just kind of wanted to have an idea of where you see that maybe in 2024.
Speaker Change: I know that probably will come in the 10-K, but didn't know if you wanted to talk about that right now.
Speaker Change: Are the what are the claims trends for the higher hazard business has a longer tail is it is.
Speaker Change: It just kind of maybe describe what types of risks you're taking out the books, there and how that might impact profitability.
Speaker Change: Yes so.
Speaker Change: Our shift into some of the higher hazard groups has been.
Speaker Change: And that is all part well not all but some of that has been tied to the appetite expansion effort and that's been a very thoughtful expansion and.
Speaker Change: We have intentionally moved into some of those higher hazard groups.
While our class codes that we are writing maybe in the higher hazard groups. We're selecting risks that are in the lower hazard range.
Speaker Change: Hazard groups.
Speaker Change: Another cause of that shift.
Speaker Change: Was from a change in CCI made about three or four years ago now.
Speaker Change: That re mapped hazard groups. So some of the classes that we have been in for years shifted upwards into higher hazard groups. So it's a combination of those two things that's caused that shift over time.
Speaker Change: I can't tell you exactly what numbers.
Where will land on the percentage in all of the hazard groups are where we're ultimately headed.
Speaker Change: Except that we are being very cautious when we expand into that and we're looking to cherry pick the best risks and not change who we are as a carrier in terms of.
Our risk appetite.
Speaker Change: Yes.
It was kind of the just the question because I know you've always been noticed kind of the low hazard.
Speaker Change: Workers' comp writers so.
Speaker Change: As you continue to write more of the higher hazard groups.
Speaker Change: Might change.
Speaker Change: That might change your actual kind of company identity there.
Speaker Change: But it doesn't sound like it's still.
Speaker Change: The huge portion of your overall target profile.
Speaker Change: No not a huge portion so Bob what I can what I can add is in the last couple of quarters, we've been hovering between kind of 91% to 92% in categories eight through E.
Speaker Change: And thats been pretty consistent for the last couple of quarters.
Speaker Change: Okay alright. Thanks.
Speaker Change: That's good color.
Speaker Change: One last question for you.
Speaker Change: Yes.
Just.
Speaker Change: The $9 million or so of favorable development was that related to any particular accident years or is it.
Speaker Change: Old Stuffers, new stuff or what.
Speaker Change: It was predominantly in accident years 2020 and prior.
Speaker Change: And Youll see that when when the 10-K comes out and we file our statutory.
Speaker Change: So.
Speaker Change: You will see you will see a little bit of strengthening in 2023 and 2021.
Speaker Change: But.
We'll address that in the K and.
Speaker Change: Some large losses that.
Speaker Change: That we experienced in those years, but.
Speaker Change: You'll see it you'll see it all very soon and happy to have a conversation with you once that published.
Speaker Change: Very good thanks for the answers.
Speaker Change: Thank you.
Speaker Change: Again, ladies and gentlemen, if you have a question or a comment at this time. Please press star one on your telephone.
Speaker Change: I'm not showing any further questions at this time I'd like to turn the call back over to Kathy Antonella for any closing remarks.
Kathy Antonello: Okay. Thank you Kevin and thank you all for joining US. This morning, I look forward to meeting with you again in April.
Kathy Antonello: Thank you ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.
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