Employers Holdings Inc (EIG) 2008 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the First Quarter 2008 Employers Holdings Incorporated Earnings Conference Call. My name is Shaquana, and I will be your coordinator for today.

(OPERATOR INSTRUCTIONS)

I would now like to turn the presentation over to your host for today's call, Ms. Vicki Erickson, Vice President of Investor Relations. Please proceed, ma'am.

Thank you, Shaquana, and welcome, everyone, to the first quarter 2008 earnings call for Employers Holdings Inc. After the close of market yesterday, we announced our first quarter 2008 earnings results, and filed our form 10-Q with the Securities and Exchange Commission. The press release and form 10-Q are available on the Company's website at www.employers.com.

Today's call is being recorded and webcast from the investor relations section of our website, where a replay will be available following the call. Representing the Company on the call today are Doug Dirks, our Chief Executive Officer, and Ric Yocke, our Chief Financial Officer. Marty Welch, the President and Chief Operating Officer of our insurance subsidiaries is in the room, and will be available for questions following our comments.

Before I turn the call over to Doug, I would like to remind everyone that 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 at the time of the call, and will not be updated to reflect subsequent material developments.

I'd also like to remind you that we use a non-GAAP metric that excludes the impact of the 1999 loss portfolio transfer, or LPT. This metric is defined in our earnings press release available on our website.

Now I will turn the call over to Doug.

Thanks, Vicki. Hello, everyone. Our first quarter net income was $25.5 million in '08, and $27.9 million in '07. Net income before the impact of the LPT was $20.7 million in the first quarter of '08, and $23.3 million in the first quarter of '07.

In the first quarter of this year, we achieved solid earnings of $0.42 per share before the LPT. Our favorable prior accident year reserve development continued. Our combined ratio improved, and our book value adjusted for the impact of the LPT increased to $16.47 per share from $16.21 per share at December 31, 2007.

Our two largest markets, California and Nevada, both continue to experience pressure to the top line, but for different reasons. In California, premium continues to decline as a result of the remaining rate decreases that will work their way through renewals until September of this year, as well as competitive pressures.

In Nevada, the decline in premium results primarily from a substantial contraction in business activity, although there will be impact over the next ten months from previously approved rate decreases.

California remained our largest market in the first quarter, representing 70% of our direct premiums written. While rate decreases have been the key driver of our premium declines in California, we expect stable rates in California for the remainder of the year based on the May 9th statement from the California Insurance Commissioner that for the first time in six years, an interim pure premium rate advisory would not be issued because of market strength.

This marks the second consecutive time the commissioner has not ordered a change in pure premium rates, and points to continued success and apparent sustainability of California reforms. Remember, however, that pure premium rates are only one component of the pricing mechanism, the others being X Mods and scheduled credits.

In California, we continue to see highly competitive conditions through the aggressive use of schedule credits, as well as more recently the use of agency incentive plans by national multi-line carriers. Generally these types of plans by multi-line writers previously excluded workers compensation.

We indicated in our last conference call that competition in California has increased in some geographic areas for some classes of business, most notably restaurants and schools. This has continued into the first quarter with increased competition from select workers compensation only companies, as well as national multi-line carriers targeting specific classes of business.

Not unexpectedly, we also continued to observe a small number of carriers that are pricing risk at levels that cannot generate profit. In our Nevada renewal book of business, we are seeing lower estimated payrolls in 2008 and consequently lower estimated annual premium. In addition, we expect the impact of the March 1, 2008 rate decrease in Nevada to be approximately 5% of annual premium.

Economic activity has slowed considerably in Nevada with employment and consequently payroll declines in many of the classes of business we write, including construction and hospitality. Given our focus on disciplined underwriting and profitability, we have expected some contraction in premium as a result of current market conditions.

At this stage of the P&C cycle with volatile markets and challenges from competitors, we remain committed to writing business at price levels that support profitability, and we will not compete for business with those who seek top line growth at the expense of bottom line profitability.

We are frequently asked by shareholders whether economic slowdowns have an impact on claims activity. The NCCI at its annual issue symposium last week presented data that indicates that claims frequency has fallen in each of the last four periods of economic slowdown, and in fact, declines in frequency may accelerate in such periods. We will continue to monitor our own performance to identify any changes in the claims activity, but to date we have not observed any changes in trends.

Despite the more challenging economic and competitive conditions, we achieved a strong in force policy count growth of 10.7% since March 31, 2007. That includes a 35.1% growth in our in force policies outside California and Nevada.

As part of our expansion strategy, we are working to close our acquisition of AmCOMP Incorporated. Earlier this month, we filed an 8-K that includes pro forma combined financial statements for the year ending December 31, 2007 and I hope you've all had a chance to review that filing.

Once closed, based on the pro forma at year end 2007, our net premiums earned would have been $581 million, approximately two-thirds greater than our net premiums earned on a standalone basis. We anticipate that this transaction will close in the second quarter of this year. We are working with the Florida Office of Insurance Regulation, and expect to receive its consent this month. AmCOMP has filed its definitive proxy statements, and will hold its special shareholder meeting on May 29th.

Now Ric will discuss in a little bit more detail our financial results. Ric?

Thanks, Doug, and good day to everyone. In the first quarter of this year, our combined ratio was 83% on a GAAP basis and 89.3% before the LPT. That compares favorably with 85.4% and 90.5% before the LPT in the first quarter of 2007. Our loss & LAE ratios were 40.3% on a GAAP basis, and 46.7% before the LPT. And that compares with 46.4% and 51.5% before the LPT in the first quarter of last year.

The 6.1% improvement in the GAAP ratio was largely the result of a reduction in the quarterly provision rate which we made beginning in the second quarter of 2007, and which we have applied in subsequent quarters.

Consistent with past quarters, we've completed an actuarial review of our ultimate incurred losses. Based on that review, on a pretax basis, we recognized $11.4 million of continuing favorable prior accident year development, and in the first quarter of 2008, this favorable development represented 15 percentage points on the combined ratio.

While our first quarter current accident year loss estimate is less conservative than the first quarter of last year, our overall reserving philosophy remains conservative, and we expect our carried reserves to continue to be above the consulting actuaries point estimate through 2008.

Our first quarter underwriting and other operating expense ratio was 28.6%. That compares to last year's first quarter underwriting and other operating expenses -- or compared to last year's first quarter underwriting and other operating expenses, decreased by 6.8%, which included reductions in professional and consulting fees, premium taxes, and other general operating expenses.

The total net income from investments decreased 9.3% in the first quarter of 2008, largely because first quarter investment income in 2007 included $1.8 million of one time interest income on the net proceeds related to our initial public offering.

Realized losses on investments of $1.5 million stem from other-than-temporary impairment in the value of 19 equity securities in the technology, telecommunication, and financial service sectors of our portfolio. The impairment represents less than 0.09% of our total portfolio. The portfolio has a fair value of $1.7 billion, which has remained stable throughout the first quarter.

At March 31, 2008, our portfolio consisted of approximately 6% equities. The remaining 94% was fixed maturities, which were not impaired due to their high quality. 51.8% of the total portfolio is tax exempt municipals. In light of recent concerns with financial guarantors, and given that we do have some wraps, I would like to point out that a key strength of our portfolio is the very high credit quality of our municipal holdings, which have an average rating of Aa1 and AA plus.

Underlying ratings on our municipal holdings, which exclude any benefit of monoline credit enhancement, are a very strong Aa3 or AA. In fact, over 90% of the carrying value of our investment portfolio was AA or better.

Subprime was less than $300,000, or less than 0.02% of our total portfolio. Our commercial backed mortgage holdings of $45.1 million are all AAA rated issues with no exposure to issues underwritten in the late 2006 and 2007 period, a period of more lax underwriting standards. The duration of our portfolio has remained stable at 5.81 with a tax equivalent yield of 5.39%.

We are adding debt to our capital structure. We have in place a $50 million secured revolving credit facility from Wells Fargo for general corporate purposes. That facility has a three year term with no current borrowings. In addition, we intend to take on debt in connection with the acquisition of AmCOMP.

We have approval for $200 million in extraordinary dividends from our insurance subsidiaries through December of 2008, and we have distributed approximately $146 million of that amount to the holding company in the first quarter. We have curtailed our new investment activity, and began building cash balances in the fourth quarter of 2007 in anticipation of the acquisition, and for dividends and share repurchases.

The acquisition of AmCOMP, when closed, will be accounted for under the purchase method of accounting. Accordingly, AmCOMP's operating results following the close of the transaction will be included in our operating results.

We have completed an unaudited preliminary purchase price allocation, which is included in our 8-K filed with the SEC on May 2nd. In summary, the adjusted purchase price of $198.5 million includes $4.6 million of estimated merger related costs. And the allocation reflects intangibles of $15 million, and incremental goodwill of $34 million.

That concludes my remarks, and I'll turn it back over to Doug.

Thanks, Ric. In the first quarter, we achieved solid earnings. Our favorable prior accident year reserve development continued, our combined ratio improved, and shareholders equity increased. Going forward, we'll leverage our experience and expertise to pursue opportunities for profitable growth, while maintaining our focus on underwriting discipline to protect the quality and profitability of our book of business.

Thank you all for joining us today. And, operator, if you would please open the line, we're ready for questions.

Thank you.

(OPERATOR INSTRUCTIONS)

At this time we have no questions. I would now like to turn the call over to Mr. Douglas Dirks for closing remarks.

Very good. Thank you, operator. Thank you, everyone, for joining us today. We look forward to talking to you in the next quarter.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect, and have a good day.