Earnings Call Transcript - EIG Q3 2025

Operator, Operator

Good day, and thank you for standing by. Welcome to the Q3 2025 Employers Holdings, Inc. Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to turn the conference over to your speaker for today, Lori Brown. Please go ahead.

Lori Brown, Speaker

Thank you, Lisa. Good morning, and welcome, everyone, to the Third 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 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.

Katherine Antonello, CEO

Thank you, Lori, and good morning, everyone. And again, welcome to our third 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 third quarter 2025 results, and then I'll hand it over to Mike for more details on our financials. Prior to our Q&A, I'll come back to you with some additional thoughts. I want to begin by discussing the decisive actions we took during the quarter to strengthen our loss in LAE reserves. When we spoke last quarter, I mentioned we had identified significant loss in LAE reserve redundancies in older years, and utilized this favorable development from accident years 2021 and prior to strengthen reserves for accident years 2023 and 2024. We also provided our preliminary view of accident year 2025 and shared that the underlying driver of the need for an off-cycle third quarter reserve review was the increased frequency of California cumulative trauma claims in recent accident years. During the third quarter, we completed a thorough reserve analysis, which included a detailed review of our complete book of business, and we compared our internal selections to those of an external actuarial review performed midyear. Our comprehensive and rigorous analysis indicated the need to increase prior year reserves by $38.2 million or 2.8% of net unpaid loss in LAE. Accident years 2023 and 2024 were the primary contributors of the increase with AY 2024 increasing by $40.5 million, AY 2023 increasing by $16.1 million and accident years 2022 and prior decreasing by $18.4 million in total. In addition, we increased our AY 2025 loss and LAE ratio from 69% to 72%. We strongly believe these adjustments fully address the recent trends we and the industry have seen in California and want to emphasize that these adjustments are not a sign of broad deterioration in our book of business. With the increased frequency of California CT claims, our third quarter 2025 overall reserve position would have developed favorably. As we have discussed, the increased frequency in CT claims is a California-only issue. Frequency in other states continues to show a decreasing trend. I now want to speak to why California CT claims for accident years 2023 and 2024 are impacting our reserves this quarter. In California, older years continue to develop favorably, but more recent years have experienced a meaningful uptick in CT claim frequency. As there is typically a significant delay in CT claim reporting, the increased CT claim frequency trend did not fully emerge until well after the first 12 months of each accident year, making it more challenging to predict or detect the trend in real-time through traditional reserving and pricing analysis. In addition, the continued declining frequency trend of non-CT claims in California initially masked the increasing trend in CT claims and further delayed visibility. Given the uncertainty in the California CT environment and more generally, our desire to utilize a more conservative approach across our complete book of business, this quarter, we implemented refinements to our analysis of prior years. These refinements, which strengthened our reserves across all states were designed to build additional resilience on our balance sheet and significantly reduce future uncertainty. A comparison of our third quarter 2025 reserve selections to reserve estimates prepared midyear by an independent external actuarial firm reinforced our conservative reserve position. Now let's focus on accident year 2025. The increase in our AY 2025 loss and LAE ratio is due solely to the increasing frequency of California CT claims as frequency in the rest of our book continues to decline. Comparing AY 2025 to AY 2024, at 3 months, AY 2025's incurred loss ratio was higher than 2024. But at both 6 and 9 months, AY 2025's loss ratio was lower than 2024's at the same ages of maturity. Other data points on both an accident year and policy year basis point towards AY 2025 performing better than both 2024 and 2023. This suggests the underwriting and pricing actions we've implemented are having a positive impact. While we could have held the AY 2025 loss ratio steady at our second quarter selection, given the more conservative reserving approach mentioned earlier and recognizing the increased frequency in California CT claims, we decided to increase the accident year 2025 loss ratio. We have implemented a four-pronged approach in California to help mitigate the impact that CT claims may have on our book of business going forward. This includes targeted pricing actions, more aggressive claims handling and litigation management, underwriting refinements and continued geographic diversification. We are also actively engaged in California's efforts to pursue meaningful legislative reforms to better align California's CT rules to those throughout the country. Having said that, our commitment to providing best-in-class care to all injured workers, whether their claim arose from cumulative trauma or not, is unwavering. We are confident that the actions we have made are timely, appropriate and prudent and will better position the more recent accident years for the future. We believe that our current reserves are more than adequate. I'll now turn to discuss other highlights from the quarter. Our third quarter gross written premium increased by 1.4% compared to 2024 due to increases in renewal business premiums. As I stated in previous quarters, in this sustained soft workers' compensation market, we are prioritizing underwriting margin over growth, and we've continued to undertake targeted pricing actions and implement enhanced risk selection to maintain underwriting margin. While competitive pressures have impacted our desire to grow at the same pace in certain classes, jurisdictions, and policy sizes, we remain pleased with the continued growth in our Small Commercial business and our strong policy retention as evidenced by our 4% growth in policies in force this quarter. We view the small commercial growth as validation that our clients value the investments we've made in automation and ease of use. Over the last 10 years, we've considerably increased our diversification by expanding geographically into a national carrier and into new distribution channels, while also expanding our appetite into new industries and classes. These initiatives are ongoing. To further that diversification, we're excited to announce our first expansion into a new product. We have commenced the build-out of a new excess workers' compensation offering by hiring a talented experienced underwriter and developing the infrastructure to distribute and manage this new product. We plan to start accepting submissions in early 2026. Our entry into the excess workers' compensation market leverages our existing expertise and systems, capabilities, and customer base and will strengthen our relationships and offerings with our distribution partners. We earned $26.1 million of net investment income during the quarter, which was slightly lower than the third quarter of 2024. Our net realized and unrealized gains on investments increased to $21.2 million for the quarter compared to $10.9 million for the prior quarter. We continue to be committed to delivering operational efficiencies and automation of the entire customer journey. In August, we made the difficult decision to undergo a reorganization, which was designed to better align our resources with our current and future business needs and objectives. As a result of this action and broader expense reduction efforts, we reduced our third quarter underwriting expense ratio significantly compared to the third quarter of 2024. Despite the tremendous progress we've already achieved, we now see further improvement potential as we implement our well-designed AI roadmap. As part of our relentless focus on value creation for our shareholders, yesterday, we announced a $125 million debt-funded recapitalization plan and an associated $125 million increase to our existing share repurchase authorization. This expands our existing share repurchase authority to $250 million. In addition to a meaningful return on investment, we believe the recapitalization plan will reduce our cost of capital, improve our return on equity, and expand our earnings per share and adjusted book value per share. The recapitalization plan highlights our belief that our stock price is undervalued and our confidence in our balance sheet and future prospects. With that, Mike will now provide a deeper dive into our financial results, and then I will return to provide my closing remarks.

Michael Pedraja, CFO

Thank you, Kathy. Gross premiums written were $183.9 million compared to $181.2 million for the prior year, an increase of 1.4% due primarily to renewal business premium growth. Net premiums earned were $192.1 million compared to $186.6 million for the prior year, an increase of 3% due primarily to larger levels of 2024 written premium earning in 2025. During the period, our losses and loss adjustment expenses were $186.6 million versus $117.7 million a year ago. As Kathy just summarized, we increased our current accident year loss and LAE estimates in response to the rapid rise in cumulative trauma claim frequency in California. The current quarter loss in LAE includes a cumulative catch-up adjustment of $11.4 million to the carried 2025 accident year loss and LAE reserves at June 30, 2025, to reflect the 72% current accident year loss and LAE ratio. As a result, the 2025 accident year loss ratio for the quarter was 78.1%. In addition, we strengthened our reserves related to prior accident years by $38.2 million due to the increased frequency of California CT claims and our desire to utilize an even more conservative approach across our complete book of business. Commission expense was $23 million for the quarter versus $25.8 million for the prior year. Our commission expense ratio for the corresponding quarters was 12% and 13.8%, respectively. The commission expense and ratio decreases were primarily related to the increased proportion of renewal business, which has a lower commission rate compared to new business and lower agency incentive accruals. Underwriting expenses were $39.6 million for the quarter versus $43.8 million for the prior year. Our underwriting expense ratios for the corresponding quarters were 20.6% and 23.5%, respectively. The underwriting expense decrease was primarily a result of lower compensation-related expenses, including reductions associated with the August reorganization Kathy mentioned, along with year-over-year declines in policyholder dividends and bad debt expense. Higher net premiums earned also contributed to the lower underwriting expense ratio. Net investment income of $26.1 million for the quarter was relatively flat compared to the prior year despite a lower yield environment. The current quarter net income results included after-tax realized and unrealized gains from our investments in equity securities and other invested assets of $17.8 million, and $6.3 million, respectively. The market value of our fixed maturity holdings has benefited from the lower interest rate environment, reducing our accumulated other comprehensive loss included in our shareholders' equity by $16.6 million. Our fixed maturities currently have a modified duration of 4.4 and an average credit quality of A+. Our weighted average book yield was 4.6% at quarter end compared to 4.4% for the prior year. During the quarter, our average new money investment yield was 5.5% versus 5.7% a year ago. Our adjusted net loss, which excludes net realized and unrealized investment gains and losses and the benefit of our LPT deferred gain amortization was $25.5 million compared to adjusted net income of $20.2 million a year ago. Our 9-month year-to-date adjusted net income was $34 million versus $90 million last year. Due to market opportunities, we increased our level of common stock repurchases to $45.2 million in the quarter. We achieved the repurchases at an average price of $43.09 per share, which represents a 17% and 13% discount for our June 30, 2025, adjusted book value per share and our book value per share plus the LPT gain, respectively. Since September 30, we have repurchased an additional 243,000 shares of our common stock at an average price of $41.77 per share for a total of $10.2 million. As Kathy highlighted, we announced the Board's approval of a recapitalization plan authorizing a $125 million increase to the existing 2025 share repurchase program. Initially, we will utilize a combination of three-year debt funding sources, including our existing borrowing facility at the Federal Home Loan Bank. We ultimately plan to fund the recapitalization with long-term debt.

Katherine Antonello, CEO

Thank you, Mike. Yesterday, our Board of Directors declared a fourth quarter 2025 quarterly dividend of $0.32 per share. The dividend is payable on November 26 to stockholders of record on November 12. As evidenced by the recapitalization plan Mike just discussed, we remain confident in Employer's financial strength and prospects, and we'll continue to manage our capital strategically. After considering dividends declared, our book value per share, including the deferred gain, increased 6.1% to $49.70, and our adjusted book value per share increased by 5.5% to $51.31 over the last 12 months. We returned $52.7 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 book value per share. While our third quarter results were heavily impacted by the California CT claims trends, we believe our current loss and LAE reserves reflect the level of conservatism to which we are accustomed. We are relentlessly pursuing refinements in our underwriting and pricing approaches and seeking new opportunities like excess workers' compensation that will enable us to generate profitable growth in both new and renewal business. I am confident that the steps we've taken this quarter will position employers well into the future. And with that, Lisa, we will now take questions.

Operator, Operator

The first question today will be from Mark Hughes of Truist.

Mark Hughes, Analyst

You mentioned that one of your strategies might be to take a more aggressive stance on litigation. Can you make it more difficult for plaintiffs' attorneys to target you compared to others? Or is it more about managing an administrative process that you can control?

Katherine Antonello, CEO

Yes, that's a great question, Mark. When I refer to our targeted litigation strategies, they are internally driven. We're utilizing analytics to identify the most effective actions based on individual claims. We have established a multi-disciplinary team focused specifically on managing the cumulative trauma exposure. We’ve set aggressive targets to lower the defense costs and litigation expenses because CT claims are significantly more litigated than other types, with about 90% facing litigation. Our goal is also to reduce the average cost per claim. We've devised several defense tactics aimed at specific firms that handle numerous CT claims, many of which lack medical backing. Additionally, as I mentioned previously, we're taking a leadership position in advocating for legislative reform, collaborating with various industry groups to propose significant changes to align California's CT legislation with that of other states. We are addressing this issue from multiple perspectives regarding claims. Importantly, as I expressed earlier, we want the industry to recognize that we are dedicated to supporting legitimate cumulative trauma claims, which is crucial for providing the best service to injured workers.

Mark Hughes, Analyst

Yes. Regarding the trend of those claims, you mentioned the underwriting pricing actions you've taken, which have contributed to improvements for the 2025 accident year. How should we approach the situation as we move into 2026, particularly concerning loss picks? Do you feel confident in your understanding of the trend to the point where it becomes predictable? I apologize for mixing different ideas in my question, but I am trying to determine whether the trend is stable enough and whether the actions you have taken in pricing and underwriting will lead to a more predictable loss pick. What kind of loss pick should we anticipate? Will it remain around 72% from this point? I would appreciate your insights on these topics.

Katherine Antonello, CEO

Sure. On the pricing front, we acted proactively before the California filing that became effective on September 1. We've also made a few targeted adjustments since then. We believe we are in a strong position regarding pricing and have implemented rate increases that exceed what was filed with the bureau. On the underwriting side, we have more underwriters reviewing the incoming risks to assess potential higher exposure to CT claims. We typically have a streamlined quote processing system where underwriters engage mainly with more complex risks, but for California, we've lowered that threshold. This allows for increased underwriting scrutiny. Regarding trends, I believe they are stabilizing, though it remains challenging to predict future developments. I don't anticipate significant changes in our accident year pick until we see the impact of our pricing and underwriting actions, along with any changes in California. We will maintain a conservative approach and aim to stay ahead of the trend.

Mark Hughes, Analyst

On the buyback, what is the interest rate that you expect on the borrowings, I think, of the Federal Home Loan line that you've got. What is the rate on it?

Michael Pedraja, CFO

Yes, Mark, so that's why it's very exciting. The current rate is 3.7%.

Mark Hughes, Analyst

Okay. And is that float or is it...

Michael Pedraja, CFO

No, that number is fixed.

Mark Hughes, Analyst

Okay. How much capital do you have at the holding company at this point?

Michael Pedraja, CFO

So very several times, as you can imagine, we manage the capital effectively through the dividends from our insurance companies, but we have a sufficient level of capital at the holding company. We don't publish that number, but it's plenty to cover a decent portion of our expenses, including repurchases and dividends at the holding company.

Mark Hughes, Analyst

Okay. How much is available under the share repurchases, $250 million in total? How much of that has been used?

Michael Pedraja, CFO

So to date, on the existing plan, we used $65 million.

Mark Hughes, Analyst

Was that $65 million.

Michael Pedraja, CFO

6-5. Yes.

Mark Hughes, Analyst

6-5. Okay. And then what would you anticipate in terms of the pacing on the $125 million was the $45 million this quarter? Is that a preview of things to come until you use the $125 million? Or how would you characterize it?

Michael Pedraja, CFO

I think I mentioned in previous calls that we evaluate share repurchases based on return on investment. We will be very disciplined, and if the stock price decreases further, we may increase our repurchase activity. Our focus remains on executing the $125 million recapitalization plan. This will depend on market conditions, but we are committed to moving forward as soon as possible.

Mark Hughes, Analyst

Yes. And then one final question. The top line growth here kind of steady some puts and takes, obviously, some expansion in excess, but the tighter underwriting your rate increases. Is this kind of steady state for top line dynamics? I mean would we assume maybe flat to up slightly? Would that be consistent with where you were at in terms of taking these actions to help control the loss trajectory here?

Katherine Antonello, CEO

Yes. I mean I think you categorized it well by saying puts and takes. There are areas in which we are wanting to grow. And then there are areas in which we're perfectly fine turning down business, and that varies by state. It varies by policy size. We are having a lot of success on the smaller policy side, and that's why size is, and that's why you're continuing to see the growth and policy count, but it's putting pressure on the top line because of the average policy size that we're writing is lower. So I would not expect tremendous growth over the next 12 months, because, as I said in my prepared remarks, underwriting margin is what we are focusing on right now.

Operator, Operator

And the next question will be coming from the line of Karol Chmiel of Citizens.

Karol Chmiel, Analyst

I've got 2 questions. The first one is really just regarding the cumulative trauma claims, statute of limitations and date of injury that is kind of part of the legal issue here. Can you comment on that?

Katherine Antonello, CEO

Yes. The main issue concerning cumulative trauma claims in California, in my view, is that an injured worker can file such a claim after termination, and this claim can span several years and involve multiple insurance carriers. We are noticing that many of these claims are now being filed after termination and they carry significantly more indemnity than they did previously. In the past, these were primarily medical issues. This situation is the core challenge related to cumulative trauma claims in California.

Karol Chmiel, Analyst

And then just a follow-up question in regard to the buybacks. I'm just looking at the model. And I'm just curious, will your investment leverage technically go up and maintain the investment balance as you buy back the shares?

Michael Pedraja, CFO

Well, because our investment balance should not be impacted, right? Because we're going to fund the repurchases through debt. So the investment leverage will stay. So if that's what you're asking, yes, the investment leverage will increase.

Operator, Operator

Our next question will be from Bob Farman of Janney Montgomery Scott.

Robert Farnam, Analyst

So what happens with the question of whether you will conduct a traditional fourth quarter reserve review, both internal and external? Or is the third quarter review serving as your annual assessment?

Katherine Antonello, CEO

Yes, that's a good question, Bob. We will conduct a comprehensive review of the fourth quarter to ensure we're back on track. The third quarter was atypical, as we normally compare actual results with expectations, but we felt it was important to provide a clear assessment and take a fresh approach. We will realign in the fourth quarter through an internal review. Additionally, since this year we hired an external actuarial firm to evaluate our reserves, they will also carry out a fourth quarter review, though we do not anticipate any impact from that review.

Robert Farnam, Analyst

Right. Is the external firm that's looking at the fourth quarter, are they the same one that looked at them at midyear?

Katherine Antonello, CEO

Yes.

Robert Farnam, Analyst

Okay. I know you've had discussions with AmTrust. What kind of feedback have you received from rating agencies regarding the cumulative trauma situation in California?

Michael Pedraja, CFO

Thanks, Bob. We are actively engaged with our rating agency partners, keeping them informed about our ongoing processes from both operational and capital perspectives. They remain very supportive of our current position and the actions we are taking in these areas.

Robert Farnam, Analyst

Okay. All right. Good. Have you seen any change in medical cost trends? I know you probably asked every quarter about it, but what's going on with medical costs. I know we've been talking a lot about claim frequency, but how about the severity side.

Katherine Antonello, CEO

Yes. The severity side, what we're seeing, our overall claims severity values have generally held steady in the most recent years. They continue to be, generally speaking, below pre-pandemic levels, and that's both indemnity and medical severity in that number that are in that severity that I'm speaking to, but it's driven by lower medical severity. I've talked about in several calls that we monitor our own prescription drug costs. We've seen slight increases in drug costs versus those that were in place pre-pandemic, but nothing that is really alarming on the pharmaceuticals. So severity is not something that we are currently concerned about. We did have some large losses in 2024. Those are more than adequately reserved for. But we're not seeing anything that is concerning to us right now.

Robert Farnam, Analyst

Okay. In a recessionary environment, with an increase in unemployment or terminations, I understand they can file claims in California. But do you anticipate similar issues in other states if unemployment begins to rise?

Katherine Antonello, CEO

It's something that has been researched in the past, and studies indicate that similar situations could and have occurred. The most notable research came after the great recession, which had a significant impact on the economy and unemployment. Therefore, I wouldn't expect anything of that magnitude. Recessions tend to affect specific industries and jobs, making it difficult to answer your question comprehensively. However, it is possible; it just depends on the nature of the recession.

Robert Farnam, Analyst

Yes, I didn't expect a detailed answer to that question. It was more of a broad inquiry. I apologize for taking up so much time with my questions, but I would like to know more about the excess workers' comp product. What is the size of that market, who are the competitors, and how can you provide value in that space?

Katherine Antonello, CEO

Our entry into excess workers' compensation is part of our effort to diversify. This marks our first expansion into a new product. We have been researching potential new products for about a year, and we believe excess workers' compensation is the right starting point for us. It aligns well with our expertise in workers' compensation and is a natural extension of our current operations, utilizing our existing talent and system capabilities. We are developing this efficiently by assembling a team of underwriters and employing Agentic AI to create the underwriting and CRM platforms. We plan to proceed cautiously and do not anticipate significant outcomes in 2026, as we aim to learn along the way. However, we expect to receive submissions by early second quarter and to finalize binding agreements by July 1, 2026. The market lacks many large excess workers' compensation providers with extensive portfolios, making this a promising opportunity for us. We believe the timing is right for our entry, and we are genuinely excited about it.

Robert Farnam, Analyst

And you're saying your producers are basically saying this would be a nice add-on just because placing that type of risk to others. Is that kind of...

Katherine Antonello, CEO

Yes. We feel like there's just an opportunity for another entrant in the market and that we can provide some services that potentially don't exist right now. And we can absolutely leverage our extensive agency plant that we have in place. So there's not a lot of friction there for us to enter the market.

Operator, Operator

I'm not seeing any more questions in the queue. I would like to turn the call back over to Kathy Antonello. Please go ahead.

Katherine Antonello, CEO

Okay. Thank you, Lisa. Thank you all for joining us this morning, and I look forward to meeting with you again in February. Have a good weekend.

Operator, Operator

This concludes today's program. You may all disconnect.