Good day, and thank you for standing by. Welcome to the Second Quarter 2025 Employers Holdings, Inc. Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Lori Brown, Chief Legal Officer. Please go ahead.

Thank you, Marvin. Good morning, and welcome, everyone, to the Second 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. 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 the disclosure obligations under the SEC's Regulation FD. Such disclosures will be included in the Investors section of our website. Accordingly, investors should monitor that portion of our website in addition 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 on our website. And now I'll turn the call over to Kathy Antonello, our Chief Executive Officer.

Thank you, Lori. Good morning, everyone, and welcome to our second quarter 2025 earnings call. Joining me today is Mike Pedraja, our Chief Financial Officer. During today's call, I'll begin by providing highlights of our second quarter 2025 financial results and then hand it over to Mike for more details on our financials. Prior to Q&A, I'll come back to you with some additional thoughts. Our second quarter gross written premium decreased by 2.2% compared to 2024 due to a decrease in new business written premium within the middle market. Our focus on profitability over growth led to targeted underwriting actions and improved risk selection, which impacted our ability and desire to grow at the same pace in certain classes and jurisdictions. We are pleased that we continue to grow with our small commercial clients that value our investments in automation and ease of use. Net premiums earned for the quarter increased 5.6%, primarily due to strong increases in net written premium in 2024. We ended the period with a record number of policies in force with a year-over-year growth rate of 4.6%. We earned $27.1 million of net investment income during the quarter, which was slightly higher than the second quarter of 2024. Our current accident year loss and LAE ratio on voluntary business was 69% versus the 66% we recorded in the first quarter of 2025. This increase was a prudent response to the rapid rise in cumulative trauma claims in California in the most recent accident years and the level of uncertainty around this new trend. In addition, while we did not recognize any prior year loss reserve development for voluntary business this quarter, we did reallocate significant favorable loss development from accident years 2020 and prior to accident years 2022 through 2024 to reflect the increased frequency of cumulative trauma claims in California. We intend to perform a full actuarial study in the third quarter. I am pleased with the reductions we achieved in our commission expense ratio, which was 13.2% this quarter, down from 13.9% a year ago. We also achieved reductions in our underwriting expense ratio, which was 21.7% this quarter compared to 22.4% a year ago. We continue to find ways to reduce expenses by automating processes, delivering customer self-service capabilities and utilizing artificial intelligence. With that, Mike will now provide a deeper dive into our financial results, and then I'll return to provide my closing remarks.

Thanks, Kathy. Gross premiums written were $203.3 million compared to $207.9 million for the prior quarter, a decrease of 2.2%. As Kathy previously mentioned, declines in middle market new business offset new business premium growth within our smaller customer segment. Net premiums earned were $198.3 million compared to $187.8 million for the prior quarter, an increase of 5.6%. During the period, our loss and loss adjustment expenses were $104.1 million versus $108.8 million a year ago. As Kathy discussed, we increased our current accident year loss and loss adjustment expense estimates in response to the rapid rise in cumulative trauma claims in California we are experiencing. As a reminder, in our first quarter 2025 reported loss and loss adjustment expenses were based on a loss and LAE ratio of 66%. Accordingly, the current quarter loss and loss adjustment expenses includes a first quarter catch-up adjustment of $5.5 million resulting in a 70.7% loss in LAE ratio. Commission expense of $26.1 million was essentially flat compared to a year ago, and our commission expense ratio was 13.2% versus 13.9% for the prior period. The reduction in the commission expense ratio was primarily due to the proportional increase in renewal premiums, which carry lower commission rates as well as lower agency incentive commissions. Underwriting expenses were $43.1 million for the quarter versus $42.2 million for the prior year. Our underwriting expense ratios for the corresponding quarters were 21.7% and 22.4%, respectively. The underwriting expense increase was primarily related to a reduced internal allocation of underwriting expenses to loss adjustment expenses resulting from a refinement in our internal assumptions. Excluding this allocation, underwriting expenses decreased by $3 million, primarily driven by lower compensation-related expenses and depreciation and amortization costs, offset by higher bad debt expense. Increased net premiums earned contributed to the lower underwriting expense ratio. Net investment income was $27.1 million for the quarter compared to $26.9 million for the prior year. The slight increase was primarily due to higher yields on our fixed maturity investments. The total investment return for the second quarter was $57.5 million compared to $26.5 million for the prior year. The current quarter net income results included after-tax realized and unrealized gains from our investments in equity securities and other invested assets of $14.8 million and $1.8 million, respectively. Our stockholders' equity at June 30, 2025, reflects $7.4 million of net after-tax unrealized gains generated from our fixed maturity investments during the current quarter. Our fixed maturity investments currently have a modified duration of 4.3 and an average credit quality of A+. Our weighted average book yield was 4.5% at quarter end, which is consistent with a year ago. Our adjusted net income, which excludes net realized and unrealized investment gains and losses and the benefit of our LPT deferred gain amortization totaled $11.5 million, a 58.8% decrease compared to prior year's adjusted net income of $27.9 million. During the second quarter, we repurchased $23 million of our common stock at an average price of $48.08 per share and thus far, have repurchased an additional 229,365 shares of our common stock in the third quarter at an average price of $46.44 per share. With that, I'll turn it back to Kathy.

Thank you, Mike. Yesterday, our Board of Directors declared a third quarter 2025 quarterly dividend of $0.32 per share. The dividend is payable on August 27 to stockholders of record on August 13. We are confident in employers' financial strength and financial prospects, and we'll continue to manage our capital strategically. Consistent with my first quarter message, we also continue to identify and implement refinements to our underwriting and pricing approach that we believe will result in profitable growth in new and renewal business. We are pleased that the California Insurance Commissioner, Commissioner Lara, recognized the increased frequency of California cumulative trauma claims through his approval of increased rates and are also encouraged by his call for legislative changes to combat this growing negative trend. We have not experienced direct impacts from the ongoing tariff uncertainties, but we'll continue to closely monitor the cost of prescription drugs and medical services for potential changes. If any necessary 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 am also 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 12.8% to $49.44, and our adjusted book value per share increased by 8.2% to $51.68 over the last 12 months. And finally, we returned $31.4 million to our stockholders this quarter through a combination of regular quarterly dividends and share repurchases at an average price that was highly accretive to our adjusted book value per share. And with that, Marvin, we will now take questions.

Our first question comes from Mark Hughes of Truist Securities.

You clearly talked about this issue last quarter and it impacted your current accident year loss picks. I wonder if you could kind of just reflect on how this has emerged the last few quarters, couple of years and what you saw this quarter that triggered more significant action.

Sure. So let me just back up and kind of give you the backdrop. As you are aware, though, California continues to be about 45% of our book. And our results in California across the last few decades have consistently been more favorable than the industry. And we believe that, that will continue to be true. But overall industry results are worsening in California. So we talked about the increase that Commissioner Lara approved. It was 8.7%. That was effective 9/1. And the drivers of that increase included things like medical loss development, increase in medical costs in 2024 and an increase in frequency, particularly in CT claims. Now for our book of business, we did not see overall frequency in California begin to increase in total until late 2024. So when I say that, I mean across all accident years. So for example, for accident year 2023, the increase in frequency didn't occur until late 2024. And that's when we started taking action on the current accident year. And then as we discussed in the first quarter and then again this quarter, we've had significant favorable development in older accident years that we've pushed forward to the more recent accident years to reflect that.

The increase in frequency for 2023 seems to be primarily related to California's ability to report claims after employment. Is it possible that attorneys are going back further and informing people that even if they separated in 2023, there may still be opportunities? Can this trend be linked to broader developments in the environment? It appears unusual for frequency to be rising across the state, especially since this has only recently become apparent and involves older accident years. Clearly, these events are from some time ago.

Yes, that's a great question. California stands out in how it handles cumulative trauma claims. It permits claims to be filed even after termination, making it the only state that allows cumulative stress claims in workers' compensation. The legislation is written more broadly and liberally compared to other states. This ability to file claims post-termination often results in high attorney involvement, meaning that typically an attorney is part of the claim process right from the beginning. Another trend noted is that attorneys are now able to manage these cases remotely. What used to be primarily an issue in Southern California, particularly in the Los Angeles area, is now extending to the Bay Area and Sacramento thanks to the option of remote hearings.

When did they make that change regarding the ability to hear remotely?

Sometime during and after COVID was sort of the starting point for it, right? Because they wanted to enable hearings to keep things moving along to be remote. So COVID was the start of it, and now it's continued.

Yes. The frequency and severity of these claims are generally not very substantial. Can you discuss this and what trends you've observed over time regarding the severity of these types of claims as they have appeared in your portfolio?

Yes. I would say that's generally true. This is a frequency issue that we're seeing. It is not necessarily a severity issue. Now you can see severe CT claims, particularly legitimate CT claims are oftentimes severe, but there are a lot of nuisance claims that come in too. But yes, it's really a frequency phenomenon. When we look at our book of business across countrywide, our lost time claim frequencies have continued to trend downward over the last several years. California, again, is the outlier. It's increased in the latest accident year again, and that's all driven by the CT claims. If we take the CT claims out of California and look at non-CT, we continue to see a nice decrease in frequency. And in some ways, that can mask what's going on when you put the two together. But when we adjust for wage changes, our overall claim severity values have really held steady in the more recent years, and they're still below pre-pandemic levels. And that's mostly driven by medical severity coming down still.

How confident are you that you've fully reflected the trend in your reserves? I know you alluded to the fact that you don't have quite as much visibility because it's a new phenomenon. But that being said, I think that contributed to your reserve actions in the current accident year increase, how confident are you that you've got this under control?

We have developed a comprehensive strategy over the last six months to navigate this period, and we are optimistic about its effectiveness. This strategy includes a mix of pricing adjustments, risk selection efforts, and claims management techniques. Regarding reserves, our claims management strategies focus on overseeing CT claims as they are received. Given the rapidly evolving situation, we deemed it essential to conduct another thorough study in the third quarter. We are very confident about the status of accident year 2025, and we continue to observe substantial redundancies in older accident years. Therefore, I believe our overall portfolio is in a solid position.

How do you view your book in comparison to the overall performance in California? Based on state data, are your claims aligning more closely with the industry average? Are you still outperforming the industry? Additionally, do you believe there is a more aggressive emergence of these claims across the industry and state? Or do you think there was something about your book that caused a delay, and now you're experiencing a similar trend while the state is already at its established rate? Do you think the state will likely see an acceleration in claims, with you as an early indicator, or are you lagging behind and finally catching up to the state?

I don't think we're a laggard. Going to your first question, our book has consistently been better than the industry-wide average in California, and it continues to be significantly better than the industry-wide average. I don't think we're a laggard. I think these claims are typically very late reported. I think when I look at how they're emerging in some of these older accident years, it's pretty consistent across the accident years, how they're coming in. So the ultimate way to solve this problem is for legislative reform. Commissioner Lara did write a letter to Governor Newsom asking him to work towards reform. And we are actively involved in working towards that also. And I'm fairly confident that that is going to occur. It's been a while since I've seen something kind of come to light and the state jump on it this quickly. And in his letter to the governor, he highlighted the impact on business in California when he was urging them to take action. So I think that's fairly unprecedented, and I'm very, very hopeful that they're going to move on this quickly. But having said that, we're not waiting on any legislative reform to occur. And we've got a well-thought-through plan internally to combat this.

I'm going to be a bit pushy and ask just two more questions, if that's okay. You mentioned that the reserve shift is significant. Can you quantify that or provide any other descriptions regarding the difference between the older redundant accident years and the more recent years where you're observing this trend?

Yes, in the older accident years this quarter, we experienced over $50 million of favorable development. To be prudent and cautious, instead of taking any action, we moved those reserves to the more recent accident years. It's a significant number, and I have no reason to believe that this trend will not continue, as it has been consistent for a long time now.

Very good. And then from a capital management perspective, could you talk about what you see as the kind of excess capital on the balance sheet? How much more conservative might you be in light of this trend that's emerging? And assuming you'd get the opportunity, I'm just looking at the market, it's not that volatile in your experience, it doesn't seem that volatile under the circumstances. But would you push the capital management in order to take advantage of the situation here?

Thanks, Mark. It's Mike. As Kathy mentioned and as widely reported by A.M. Best, we hold the highest level of excess capital, which we are very proud of. This status provides us with significant flexibility. Our primary focus for excess capital is to support our growth investments in technology, both organic and inorganic. Once those needs are met, we will then think about capital management, particularly when the returns on investment greatly exceed our cost of capital. We will base our decisions on strict return on investment criteria and remain disciplined, but we recognize the opportunities available and are exploring all options.

Our next question comes from the line of Matt Carletti of Citizens Capital Markets.

Mark made it easy for me. He covered a few points that I intended to ask about, so I'll keep this brief. I just have a follow-up regarding the CT claims. Looking at your overall portfolio, have you noticed any trends in terms of prevalence based on account size, industry exposure, class code, or geography? You mentioned it started in LA and is now moving north. I'm curious if you have any insights or observations on this.

It's a good question. And the answer is other than the spread from a geographic standpoint, we don't see any other trend occurring. It's not within a specific class code or policy size. It's a broad-based trend other than it's the fact that it used to be highly concentrated in LA, and it has now moved into the Bay Area and Sacramento.

Okay. You mentioned doing an additional reserve study in Q3 that isn't typically scheduled. It seems you're moving quickly to stay ahead of things. Will this reserve study focus specifically on the CT aspect, making it different from the usual Q2 or Q4 studies? Or is it just a matter of maintaining the same approach but conducting it every 90 days to ensure we’re not overlooking anything as the situation progresses?

It will be a very similar approach to what we did in Q2. But in Q2, we did start to look at things differently from a cumulative trauma standpoint. So it will be another point for us to reflect on. But generally speaking, yes, our approach to reserving has not changed and won't for the subsequent quarter.

Our next question comes from the line of Bob Farnam of Janney Montgomery Scott.

I'm going to ask a couple more questions about the cumulative trauma claims, even though Mark and Matt have covered it well. I just want to confirm a couple of things. So you mentioned that there are cumulative trauma claims in other states, but they are more narrowly defined and you don't see a change in frequency. Is that correct?

That's accurate. And the reason the frequency is controlled in other states is because they are defined very narrowly in other states, whereas the opposite is true in California.

Just to confirm, you're not noticing any difference between your legacy classes and your expansion classes. It's still generally applicable to both.

Not at all. We have not seen anything different in our appetite expansion. If you're speaking narrowly to CT claims, we don't see any difference there. However, I will add that our expansion class codes are behaving favorably. They are either very similar to or better than our original target class codes from about four years ago.

Okay. Great. And last question for me, just quickly, just the reserve study, that's internal only, right? You're not getting external actuarial opinions on what's going on?

We do have an external actuarial study that we do from time to time, but that will not be occurring at the end of the third quarter.

I'm showing no further questions at this time. I'll now turn it back to Kathy Antonello for closing remarks.

Okay. Thank you, Marvin, and thank you all for joining us this morning. I look forward to meeting with you again in October.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.