Employers Holdings, Inc. Q4 FY2021 Earnings Call

Good day and thank you for standing by. Welcome to the Q4, 2021 Employers Holdings, Inc. 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. I will now, like to hand the conference over to your speaker today. Ms. Lori Brown, General Counsel, Ms. Brown the floor is yours.

Thank you, Chris. Good morning and welcome everyone to the Fourth 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 updated to reflect subsequent developments. The company also uses its website as a means of disclosing material non-public 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, Lori. And thanks to everyone for joining us today. On today's call, Mike and I will outline our financial results for the fourth quarter of 2021 and discuss our observations of the current workers' compensation market. 2021 was a very successful year for Employers. I want to take this opportunity to acknowledge and thank our employees and business partners, who have continued to deliver through difficult and rapidly changing times. Their hard work and persistence have gotten us to this point and allowed us to emerge stronger and more resilient. My primary goal for the company in 2021 was to fully capitalize on the upcoming labor market improvements while continuing to maintain underwriting discipline and actively manage our expenses. I am happy to report that we achieved that goal. In terms of capitalizing on improving conditions, our gross written premiums in 2021 were up 2% versus those of a year ago. While pandemic-related shutdowns negatively affected our premium writings during the first half of the year, we turned a corner during the second half of 2021, and our gross written premiums were up 15% year-over-year. This strong rebound primarily resulted from improved labor market conditions and our appetite expansion into new markets still within our established Low Hazard groups, including landscaping, residential janitorial, and several artisan contracting classes. We ended the year providing coverage to a record number of in-force policies. The significant growth in policy count positions us well for premium growth as wages rise and employment levels improve. These dual forces are expected to bring further improvement to our top line. In support of this expectation, we remain committed to providing a seamless customer experience for our independent and digital agents. Throughout the year, we maintained our underwriting discipline and observed consistent declines in frequency for loss-related claims. As a result, we maintained our current accident year loss and LAE ratio on voluntary business at 63.5%, down from 64.3% for all of 2020. We also reduced our loss reserves for prior accident years by $24 million this quarter, which related to nearly every accident year prior to 2018. Additionally, I am pleased to report that our commitment to actively managing our expenses resulted in a 10% year-over-year reduction in fourth quarter expenses. This meaningful decrease was primarily due to targeted fixed expense savings, employee reductions in departures, and a reduction in assessments. As a result of the growth in written premium and reduction in expenses, we began 2022 with a significantly lower expense ratio. With that, Mike will now provide a further discussion of our financial results, and then I'll return to provide my closing remarks.

Thank you, Kathy. During the fourth quarter, we delivered a 9.5% annualized return on adjusted equity and a combined ratio of 82.4% within our largest operating segment, Employers. For the quarter, our net premiums earned were $156 million versus $152 million a year ago. This marked the second consecutive quarter in which our earned premium increased year-over-year. Our strong premium writings during the second half of the year were due to appetite expansion efforts, continued strong new business writings, particularly in California, and further audit premium recognition. Our losses and loss adjustment expenses were $71 million versus $48 million a year ago. The increase was primarily the result of less loss reserve development recognized during the current period. We reduced our prior year loss reserves by $24 million during the fourth quarter, down from a reduction of $46 million in the past quarter. Commission expenses were $21 million versus $19 million a year ago, which was a result of increased commissions on new business writing and a greater amount of earned premium. Underwriting and general administrative expenses were $39 million versus $43 million a year ago. The decrease resulted from targeted expense savings, employee reductions in departures, and a reduction in assessments. Our Employers segment had underwriting income of $28 million for the quarter versus $45 million a year ago. Its combined ratios were 82.4% and 70.2% respectively. Our Cerity segment had an underwriting loss of $3.2 million for the quarter, down from an underwriting loss of $4.6 million a year ago. We remain very enthusiastic about Cerity's premium writings, which have consistently increased over the past several months and also into 2022 to date. Turning to investments, our net investment income was $18 million for the quarter, consistent with that of the fourth quarter of last year, and our average book yield was 3% at year-end. Also at year-end, our fixed maturities had a duration of 3.4 and an average credit quality of A+, and our equity securities and other investments represented 14% of our total investment portfolio. Our net income this quarter was favorably impacted by $25 million of net after-tax unrealized gains from equity securities and other investments, while our stockholders' equity and book value per share were each unfavorably impacted by $22 million of after-tax unrealized losses from fixed maturity securities. During the quarter, we repurchased $8.9 million of our common stock at an average price per share of $39.63. Since year-end, we bought a further $3.4 million of stock at an average price of $38.33 per share. Our remaining share repurchase authorization currently stands at $24.5 million. Yesterday, our Board of Directors declared a first quarter 2022 dividend of $0.25 per share, payable on March 15th to shareholders of record on March 1st. Now I will turn it back to Kathy.

Thanks, Mike. My primary goal for the company in 2022 is to achieve greater economies of scale by growing the top line for both Employers and Cerity while maintaining the underwriting and expense discipline we achieved in 2021. Our balance sheet and capital position are very strong and are highly supportive of these key initiatives. As a specialist in small business workers' compensation, we are well positioned to react to the favorable trends we're seeing and remain confident in our continued success. With that operator, we will now take questions.

Standby as we compile the Q&A. Our first question comes from Matt Carletti of JMP. Your line is open.

Okay. Thanks, good morning.

Good morning, Matt.

Kathy, I was hoping you might be able to help us better understand the composition of the top-line growth. I know California reopened later part of the year, so I'd assume a bit of that attached to that. But more specifically, how should we think about that 14%, 15%? And what new policies in your business, what is existing customers adding employees or hours? Are you seeing anything in terms of just straight wage inflation yet? And I'm, of course, making the assumption that it's not yet pricing, but if it is, please correct me.

Yes. Sure. So you mentioned California. California remains at 45% of our book. While we are seeing growth in California, we're also seeing growth in other states to an extent that we're maintaining that balance as California is in our book in total. I think I have mentioned in the past, we've reduced rates in California effective February 1st. So that combination of lower rates, appetite expansion, and a reduction in restrictions on business has increased our California submissions, quotes, and binds, leading to a significant increase in Q4 California new business premium relative to Q4 of 2020. As far as what we're seeing from other sources of premium growth, we did increase our audit accrual in the fourth quarter, going from $4.7 million to $12.3 million. This is part of the growth that you're seeing. We're continuing to see a favorable shift from audit returns to audit pickups. In the third quarter, we had about $4 million of audit returns, but for the fourth quarter, it was approximately $1.5 million of audit pickups.

Okay. That's helpful. Great. And then just one other question. This one more around the current labor market. It seems to be tight in a lot of places. What are you seeing or do you have any concerns about your insureds hiring people who may not be qualified for skilled positions? Is the labor market that tight, or are you not observing that or not concerned about it?

We're not seeing anything as of yet in terms of unskilled hires increasing or having an impact on our frequency or severity. We believe that the upward shift in employment levels and wages should impact our policies, especially in the restaurant and hospitality sectors as the economy continues to improve, just as we were impacted to a greater extent when the economy deteriorated. The January jobs report was favorable, and there was a material revision to the November and December job numbers. The signals indicate that the recovery may have been a bit steadier in the fourth quarter than experts originally believed, and that dovetails with what we're observing regarding audit pickups versus audit returns. At this point, we're not seeing anything from an economic standpoint or hiring events skilled labor that would be impacting our frequency or severity.

Great. Well, thank you for the color and congrats on a nice end of the year.

Thank you.

Thank you. Our next question comes from Mark Hughes of Truist. Your line is open.

Thank you. Good morning.

Good morning.

Kathy, could you elaborate on the current state of competition and how it compares to what you observed 3 or 6 months ago?

From a pricing standpoint, we would continue to characterize the environment as fairly competitive. As I mentioned last quarter, there is some irrational competitive behavior in the market from a few actors, and that is continuing into the fourth quarter. Some of the market surveys report that fourth quarter pricing was flat, with very small decreases of less than 1%. However, our average pricing across our renewal book in the fourth quarter showed an overall rate decrease of about 5% for the three months ended December 31st.

Okay. And then I think you've mentioned in the release that January was strong. You mentioned that on the call as well. It sounds like a good chunk of your growth in the fourth quarter came from audit. How do you think Q1 is shaping up? Maybe I'll ask you this: How's new business growth looking in January? Is Q1 going to be another double-digit quarter? That's going a little too far, but I'm just trying to see what you might be able to share.

We do feel like we had a strong January. We're continuing to see some of the trends we observed in the fourth quarter regarding favorable audit pickups and so forth. The market reopening seems to be showing positive results from new business written premium.

Okay. And then what's your sense of when we think about NCCI loss costs? How do you think those will progress as the year goes forward?

When we look back over the last 12 months, the impact of changes for the industries has reflected a decrease of about what I was saying we've seen in our pricing, which was about 5%. Those filings are reflecting the decrease in frequency, which is a long history of decline. Adjustments are being made for the recent points where we saw a significant decrease in frequency during 2020, which continued into 2021, but it's hard for me to say what the filings will look like this year.

Yeah. And then relative to 2021, is the frequency down from 2020 or is that down from 2019 when you say it is down?

When looking at frequency for 2021, we've been comparing our accident year '21 numbers to accident year 2019 to remove any distortions from COVID. We've been seeing frequency relative to payroll down more than 20% and relative to premium down about 15%, but those numbers are over two years. So they're not annualized. That's a two-year change.

Pretty substantial. And then severity, I think you implied moderately. Can you count the numbers at the severity?

I don't really have any numbers to share. What I can say is that on the severity side, we're not seeing anything to suggest severity concerns in our California book. For non-California, we are watching it more closely because it's showing some upward movement, but we don't feel like we have enough information to call it a trend.

If I'm thinking about it properly, your frequency to premium is down 15%. I assume that's why you are leading into the market and getting good growth. Is that a fair way to look at it?

Yes, absolutely.

Okay. So. And maybe the competition that you're seeing, even if it's a little aggressive, maybe rational with frequency. But who knows how frequency will turn out this year.

I would have to assume at some point frequency will return to normal levels, but those normal levels have been a decrease in frequency for quite some time now.

Okay. All right. Thank you very much.

Thank you.

Thank you. Our next question comes from Bob Farnam of Boenning & Scattergood. Your line is open.

Thanks and good morning. Mike, I know you've been working on lowering expenses for the last couple of years. I'm curious about your expectations for expenses in 2022. Are you mostly done with the expense savings, or is there still more to come?

Bob, we did give you a little bit of guidance last year. I think the guidance was basically that the first quarter of last year was going to be our high watermark, and that turned out to be correct. Second, third, and fourth quarters were pretty stable. We're watching our fixed expenses carefully, and our goal is to try to maintain or reduce those in light of the additional premium writings. Variable expenses are things we can't control, such as premium taxes, assessments, bad debts, and policyholder dividends. As we go into 2022, as Kathy mentioned, we've got a much lower base of fixed expenses, and we're going to do our best to maintain that or even reduce it. The expense ratio for 2022 will be largely dependent on the increase in earned premium, where you'll see the majority of the decrease for this year.

Right. So thinking in terms of expense ratio, if your fixed expenses are consistent and you're growing the top line, you would think that the expense ratio can still tick down a bit.

We believe we will start to benefit from economies of scale associated with that increase in earned premium.

Right. Okay. And second question, I know I probably ask you every quarter, but Cerity still $3.5 million, $3.3 million of expenses. It seems flat with the third quarter. Are there continued expense savings there or have you reached the position where you wanted to be? I'm just curious how far you think it will go before you can actually turn a profit there.

We're not going to determine when we break even; that's a complicated exercise and it's a little early for that. In terms of expenses, we're integrating Cerity more into the Employers world for cost savings. That's been the big driver for the reduced expenses. For 2022, I think you can expect similar or the same, with one exception: depending on our satisfaction with our advertising budget for this year, we may very well choose to spend more or less than what we've done in prior years. If we choose to spend more, and our expenses become higher in 2022 than in '21 for Cerity, we believe we'll do it discretionarily and only upon seeing value.

And I'm assuming that your advertising thus far has been one of the reasons why you're seeing the growth there?

We specifically went a little heavier on advertising than planned in the first half of last year, and based on the success that we saw, we maintained that. That amount, which was a significant reduction in Cerity's expenses from 2020 to 2021, did include a higher advertising budget and spend. We've been successful in January and February to date. The nice thing about advertising is it's discretionary; we’ll only spend it to the extent we see value.

Okay. You mentioned Cerity's platforms sharing some resources. Can you just give us an idea of what synergies you are getting between Cerity and Employers and what you expect going forward?

I'm not going to get into what to expect going forward. We are looking at their technology, which is ahead of ours, and we're in the process of reevaluating our technology based on what we're seeing there. We’re looking at back-office and platform-related operations to see how we can streamline things as a group versus handling them separately for direct versus agency business.

Okay. Great. Thanks for the answers.

Thank you. I'm seeing no further questions in the queue. I will turn the call back to Kathy Antonello for closing remarks.

Well, thank you all for joining us this morning, and I look forward to meeting with you again in April.

This concludes today's conference call. Thank you all for participating. You may now disconnect and have a pleasant day.