Employers Holdings, Inc. (EIG) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the First Quarter 2025 Employers Holdings Earnings Conference Call. [Operator Instructions] Please be advised today's conference is being recorded. I would now like to hand the conference over to your speaker today, Lori Brown, Chief Legal Officer. Please proceed.

Thank you, Kevin. Good morning, and welcome, everyone, to the First Quarter 2025 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 are Kathy Antonello, our Chief Executive Officer; and Mike Pedraja, 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 updated to reflect subsequent developments. The company also uses its website as a means of disclosing material nonpublic information and for complying with disclosure obligations under the SEC's Regulation FD. Such disclosures will be included in the Investors section on our website. Accordingly, investors should monitor that portion of our website in addition to the following -- to following our 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 measures. Reconciliations of these non-GAAP measures 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 of our website. Now I'll turn the call over to Kathy.

Thank you, Lori. Good morning, everyone, and welcome to our first quarter 2025 earnings call. Today, we will follow our typical agenda where I will begin by providing highlights of our first quarter 2025 financial results. I will then hand it over to Mike for more details on our financials. And prior Q&A, I will come back to you with some additional commentary. Our first quarter net premium earned was relatively flat compared to 2024. This result was driven by higher renewal premium offset by lower new business and audit premium. Rate increases and underwriting actions taken to maintain our underwriting profitability targets in certain states impacted our new business premium, while final audit premium pickup and audit accrual decreased in line with the moderation of employment and wage growth. Despite these headwinds, employers ended the period with another record number of policies in-force, with a year-over-year growth rate of 4%. We earned $32 million of net investment income during the quarter, an increase of 20% and meaningfully higher than any other quarter in our history as a publicly traded company. Our current accident year loss and LAE ratio on voluntary business was 66% versus the 64% we maintained throughout 2024. This increase is consistent with our conservative reserving philosophy and the recent loss ratio and pricing trends experienced both at Employers and within our industry. Consistent with our normal practice, we did not perform a full loss reserve assessment as full assessments are performed twice a year in the second and fourth quarters. We'll provide you with details of this analysis and any associated impact on prior year reserves next quarter. I'm pleased with the reductions we achieved in our underwriting expense ratio, which was 23.4% this quarter, down from 25% a year ago. We believe we'll achieve further expense ratio improvement throughout 2025. With that, Mike will now provide a deeper dive into our financial results, and then I'll return to provide my closing remarks. Mike?

Thank you, Kathy. As this is my first official call, I'd like to thank Kathy, Lori and the broader Employers team for welcoming me to this fantastic franchise. I'm very excited about our prospects. For everyone on the call, I look forward to meeting and working with you in the coming weeks. For the quarter, gross premiums written were $212 million, an increase of 1%. The increase was due to higher renewal business, partially offset by lower new business and final audit premiums. As Kathy mentioned, prudent pricing actions and targeted underwriting changes implemented in certain states impacted our new business production, while final audit premiums decreased. Net premiums earned were $183 million, a decrease of 1%. During the period, our losses and loss adjustment expenses were $121 million versus $117 million a year ago. The increase was primarily due to higher current accident year loss and loss adjustment expense ratio, which we increased from 64% to 66%. Commission expense was $23 million versus $25 million a year ago, and our commission expense ratio was 12.6% versus 13.6%. The decreases were primarily related to the release of commissions payable associated with nonperforming policies sent to collections. Underwriting expenses were $43 million versus $46 million, and our underwriting expense ratio was 23.4% versus 25%. The reduction in this ratio was primarily the result of decreases in bad debt expense and compensation-related expenses. Our net investment income was $32 million versus $27 million a year ago, an increase of 20%. The increase was primarily due to returns from our investments in private equity limited partnerships along with higher yields on our fixed maturity securities. These fixed maturity investments currently have a duration of 4.3 years and an average credit quality of A+. Our weighted average book yield was 4.5% at quarter end, which is up nicely from 4.3% a year ago. Our quarterly net income of $12.8 million was unfavorably impacted by $9 million of net after-tax unrealized investment losses generated from equity securities and other investment holdings due to the recent U.S. capital market fluctuations. Our stockholders' equity was favorably impacted by $21 million of net after-tax unrealized gains generated from our fixed maturity investments. Our adjusted net income, which excludes unrealized investment gains and losses and the benefit of our LPT deferred gain amortization, totaled $21.3 million, a 24% increase from last year's $17.2 million. During the first quarter, we repurchased $21 million of our common stock at an average price of $49.69 per share. And thus far, in the second quarter, we have repurchased an additional 170,000 shares of our common stock at an average price of $48.35 per share. On Wednesday, our Board of Directors authorized a new stock repurchase program to allow for repurchase of up to $125 million of our common stock over the 20-month period from May 6, 2025 to December 31, 2026. This new program replaces our existing program that was scheduled to expire on July 31, 2025, but has been exhausted. Also on Wednesday, our Board of Directors declared a 7% increase in our quarterly dividend to $0.32 per share. The dividend is payable on May 28 to stockholders of record on May 14. We believe both actions, the increase in our quarterly dividend and the new stock repurchase program, are reflections of our confidence in employers' financial strength and financial prospects. And now I'll turn the call back to Kathy.

Thank you, Mike. We continue to value profitability over growth and have identified a number of refinements in our underwriting and pricing approach that we believe will allow us to maintain our underwriting discipline while returning to moderate new business growth levels. Our appetite expansion effort continues to identify areas of opportunity for profitable growth, and our success has given us the confidence to accelerate this effort going forward. To date, we have not experienced negative impacts from the tariff discussions, but we intend to closely monitor the cost of prescription drugs and medical services for potential changes. If any recessionary headwinds emerge, we are cautiously optimistic that our deep relationships with our customers and agents, our product and service value proposition and our geographic and industry segment diversification will allow us to maintain our strong customer base and weather the storm. I'm very pleased with the team's continued focus on expense management and our prudent capital management. We continue to improve our key operating metrics, which is a clear indication of our success. After considering dividends declared, our book value per share, including the deferred gain, increased 14% to $48.25 and our adjusted book value per share increased by 9% to $50.75 over the last 12 months. And finally, we returned $27.5 million to our shareholders this quarter through a combination of regularly -- of regular quarterly dividends and share repurchases at an average price that was accretive to our adjusted book value per share. As Mike mentioned, we're pleased to be in a strong financial position, which allows us to declare a dividend increase and a new share repurchase authorization. And with that, Kevin, we will now take questions.

[Operator Instructions] Our first question comes from Mark Hughes with Truist.

Kathy, could you talk about any specifics you might be able to share regarding those loss trends? You've taken some meaningful action here to protect the balance sheet and as you say, focus on profitability. What are you seeing? And can you characterize how broad that is in terms of geography?

Sure. So you're referring, I assume to the increase in our accident year loss and LAE ratio from 64% to 66% in 2025?

Exactly.

Okay. Yes. So the higher 2025 ratio reflects a few things that we're seeing. The first is the ongoing competitive rate environment. That's first and foremost. But we're also seeing some pressure on accident years 2023 and 2024. We've also, along with the California Bureau seen a rise in cumulative trauma claims in California in the more recent accident years. And then we -- finally, it's some of the overall decrease in favorable development that the industry has seen in recent years, we're factoring that in. So those 4 things together made us feel that we should increase our current accident year loss ratio. Having said all that, the increase is directionally consistent with what we're seeing across the entire work comp industry. And overall selection of 66% is below what we've seen as an industry average, which has been in the range of 69% to 70% in recent years. So we have taken -- I mentioned in our prepared remarks that we've taken some targeted pricing and underwriting actions in Q1. We're still refining those. So that's part of this effort. But high level, those are the things that we're seeing.

Yes. How about underlying medical inflation, if you look at frequency, severity, cost of treatments, you name it? Is there any change there? I hear you on the cumulative trauma, but how about the other drivers of medical expenses?

Yes. We keep an eye on frequency and severity. When we look at our -- based on on-level premium as we do in rate making. Our lost time claim frequencies have really continued to generally speaking, now it varies by state, but they generally continue to trend downward over the last several years. Although -- and I say it varies by state, in California, we did see an uptick in the latest accident year and that is almost all attributable to the cumulative trauma claims that we're seeing similar to what the bureau is seeing. Our overall severity values have pretty much held steady in the more recent years and are below what we saw pre-pandemic level, and that's driven by lower medical severity. And then on the indemnity side, it's trending about the same as wage inflation.

Yes. And when I hear cumulative trauma, my radar goes up a little bit, and I wonder whether that's maybe caused by the macro conditions. Somebody is looking for wage replacement? Do you -- I know you cover cumulative trauma and there's plenty of support within the system for that, but it always sounds to me like it's a little aggressive on the part of the claimants. Can you talk me out of that or address whether there might be some macroeconomic contribution to those claims?

Yes. It's an interesting question because these are arising from accident year 2024 is what we're seeing now and what we're reacting to. And so I can't point to anything in the macro environment in 2024 that would have caused this. So it sort of is an interesting phenomenon. I can say that it is only in California, and we know that there are provisions in California that allow cumulative trauma claims to be filed post termination of an employee. California is the only state to my knowledge that allows that. And so as you mentioned, these claims on post -- that come in post term, there's no return to work potential. They have high PD, some cumulative work stress usually associated with them. They usually come in the door with an attorney. So it's just a California phenomenon. It would be great to see that remedied. But yes, that's -- I don't see -- I mean, back to your original question, I don't see anything in the 2024 macro environment that has caused this.

Is that -- we'll put it under the social inflation, the attorneys are getting more aggressive and getting the word out. And so as you say, they usually show up with an attorney with the -- yes...

Yes. I would say that that's an accurate representation. I mean the one thing I would add to that is you've probably seen the WCIRB has recommended an 11.2% increase in their pure premium rates effective 9/1 of 2025. And while there were many things going on that caused that 11.2% increase to be filed, one of them that was called out in the filing was the cumulative trauma claims.

Yes. And am I still right in thinking the rate filings are advisory that may influence the behavior of carriers that if they're looking for references, if the state says up 11%, then maybe that will move the benchmark competitive level up a bit, but it's not binding by any means? Is that a fair way to describe it?

That is correct. In California, their advisory, any individual carrier is going to look at their own book of business, and it's going to vary dramatically both from each other and the statewide data. And so I believe California has plus or minus 50% schedule rating. And so we do have a lot of flexibility in California, and we'll do what's right for our book of business.

Yes. Very good. I'll just ask one more, and I apologize for going on, but the -- what do you think is going to show up on the NCCI? Does the state of the line -- how do you see kind of redundancy across the industry? I was interested on the Gallagher call, they said the workers' comp rates that they had said were up 1% in Q4, were up 5% in Q1. I thought that was kind of striking, not the usual description of what's going on, but what do you think NCCI is going to say about the industry fundamentals?

We'll know in a couple of weeks. But I would say, generally speaking, what we have been seeing is it seems like the reserve redundancies, while there are still significant redundancies in the industry, it seems like carriers are reducing a little bit less and maybe that's just cautionary. And from a rate environment, when we look at our own internal rates year-over-year, a rolling 12 months, we were flat. But when I looked at 6 months over 6 months, we were up between 4% and 5%.

So on a rolling 12 months, you're flat. Rolling 6 months, you're up 4% to 5%?

Correct. Yes. So not too different from what you were -- you said you saw in a recent report.

Yes. Yes, that was Gallagher's feedback on their conference call, I think.

[Operator Instructions] I'm not showing any further questions at this time. I'd like to turn the call back over to Kathy Antonello for any further remarks.

Okay. Thanks, Kevin, and thank you, everyone, for joining us this morning, and we look forward to meeting with you again in July when we report our second quarter numbers.

Thank you, ladies and gentlemen. This does conclude today's presentation. You may now disconnect, and have a wonderful day.