Employers Holdings Inc (EIG) 2008 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2008 Employers Holdings Incorporated earnings conference call. My name is Eric and I'll be your coordinator for today. At this time, all participants are in listen-only mode. We will facilitate a question-and-answer session at the end of the conference. (OPERATOR INSTRUCTIONS.) I would now like to turn your presentation over to Ms. Vicki Erickson, Vice President, Investor Relations. Please proceed.

Thank you, Eric, and welcome everyone to the second quarter 2008 earnings call for Employers Holdings, Inc. After the close of market yesterday, we announced our second quarter 2008 earnings results. We will file our Form 10-Q with the Securities and Exchange Commission today. These materials are or will be posted and may be accessed 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, Chief Financial Officer. Marty Welch, the President and Chief Operating Officer of our insurance subsidiaries is not with us today. He's at his son's wedding this weekend, so Doug and Ric will take any questions you may have for Marty.

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 fact 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 would again 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. Thank you for joining us today.

Before we begin our recap of the second quarter and six-month results, I would like to provide you with a status update on our acquisition of AmCOMP Incorporated. In January, we announced the execution of a definitive merger agreement to acquire AmCOMP. The acquisition has been delayed as AmCOMP continues to work with the Florida Office of Insurance Regulation on issues related to accepted processes defined under Florida law.

We believe the rationale for this acquisition remains valid and we believe that the acquisition of AmCOMP is still an excellent strategic fit for us. The acquisition will provide us with financial benefits, including a larger and more diversified earnings base along with new growth opportunities that would extend well beyond our current western region focus. The merger agreement expires on October 31, 2008, unless the date is extended by mutual agreement of the parties.

On May 23, 2008, AmCOMP announced that it had received a notice of intent to issue, order or return excess profit from the FOIR, indicating on a preliminary basis following its review of data submitted by AmCOMP on June 22, 2007 for accident years 2003, 2004, and 2005. Florida excess profits in the amount of $11.7 million had been realized by AmCOMP and are required to be returned to policyholders. On June 9, 2008, AmCOMP announced that its insurance subsidiaries, AmCOMP Insurance Corporation and AmCOMP preferred Insurance Company, filed a petition for administrative hearing involving disputed issues of fact with FOIR challenging the notice.

On June 29, 2008, AmCOMP made its annual filing related to Florida excessive profits with the FOIR for accident years 2004, 2005, and 2006. Completion of the merger is subject to the satisfaction of certain conditions, including without limitation the approval of the Florida Office of Insurance Regulation and the approval of AmCOMP's stockholders. We believe that FOIR approval of our acquisition will not occur unless AmCOMP and the FOIR reach agreement on the amount, if any, of excessive profits realized by AmCOMP for some or all of the 2002 through 2006 accident years.

Now let's turn to a review of the second quarter and six-month results. In the second quarter of this year, we achieved solid earnings of $0.46 per share before the LPT. Our favorable prior accident year reserve development continued, and our book value adjusted for the impact of the LPT, increased to $16.53 per share from $16.47 per share in the first quarter and $16.21 per share at year-end 2007.

Trends we reported in the first quarter continued into the second quarter in our two largest markets, California and Nevada. In California, premium continues to decline, as a result of competitive pressures and prior rate decreases that will work their way through renewals until September of this year. The Workers' Compensation insurance rating bureau will meet this month to discuss their recommendations concerning 2009 rates.

Separately, permanent disability ratings schedule changes may be adopted in California and if adopted as proposed, some benefit levels for injuries occurring on or after January 1, 2009, would increase. In turn, applying upward pressure to overall Workers' Compensation pure premium rates in California. At this point, we cannot determine with precision how these changes would impact our loss cost trends and whether or not we will file higher pure premium rates in 2009.

Also in California, we continue to see competitive conditions characterized by the aggressive use of schedule credits as well as the use of agency incentive plans by national multi-line carriers that previously excluded Workers' Compensation. We also continue to observe a small number of carriers that are pricing risks at levels that we believe will not generate profit.

In Nevada, declines in premium are primarily the result of contractions in business activities, particularly related to tourism and residential construction. We continue to see lower estimated 2008 and 2009 payrolls in our Nevada book of business. Largely as a result of these influences, our average policy size is approximately $8500, down from about $10,700 at June 30 of last year.

Let me point out here that we have a very strong sales and marketing team and we intentionally target small businesses. Part of the decline in our average policy size is a result of our increased marketing efforts aimed at these smaller accounts. Our submissions, quotes, and written policies are up as we are seeing more opportunities.

In fact, despite the more challenging economic and competitive conditions, we achieved a strong in force policy count growth of 10.6% since June 30, 2007. That includes a 37.2% growth in our in-force policies outside California and Nevada. Discipline continues to be central to our underwriting as approximately 90% of our total in force policies at June 30, 2008, were an NCCI hazard groups A through D.

As we've mentioned in our presentations and our visits with some of you, we continually seek new business alliances to increase our points of access to target customers. Very recently we launched a new program with Wells Fargo Business Payroll Services. The program integrates our Workers' Compensation product with Wells Fargo's Business Payroll Services and allows small business banking customers of Wells Fargo to integrate their Workers' Compensation insurance premiums into their payroll cycles. We successfully ran a pilot program in June and July and have recently launched the program in most of our states.

We also entered into an expanded alliance with Granite Insurance Brokers, the producer of our e-checks integrated payroll product, to deliver an integrated payroll solution to an aggregated group of payroll providers nationwide. We are one of three insurance carriers selected for this program. Granite is a leading California insurance brokerage and risk management firm, serving small businesses in such fields as technology, security, automotive, physicians, and financial institutions. We believe our new and expanded alliances will continue to provide increased opportunities to grow policy count and market share in those small business classes we like to write.

Turning to capital management, in the second quarter, we repurchased approximately $6 million of our common stock. In July, we I will purchased another $3.8 million of our common stock in the open market under a 10B5 program that is based on a number of factors including market price. Yesterday, our Board of Directors declared a dividend of $0.06 per share with a record date of August 21st and payable on September 4. Now Ric will further discuss our financial results. Ric?

Thanks, Doug. In the second quarter of this year, our combined ratio was 77% on the GAAP basis and 83.2% before the LPT. Year-to-date, our combined ratio was 80% on a GAAP basis and 86.3% before the LP T. Our quarterly combined ratio increased slightly in 2008, compared with 2007 as our underwriting and other operating expense ratio was pressured by declines in premium. Our six-month GAAP combined ratio was essential flat relative to the same period last year.

Our loss in LAE ratios before the LPT improved in the second quarter and the first six months of this year, compared to the same periods last year. We review and revise our loss reserve estimates quarterly for both prior accident years and the current accident year. Based on new information, changes in estimates are reflected in the period in which the changes are made.

The second quarter's loss in LAE ration before the LPT improved to 38.9% in 2008 from 39.6% in 2007. The period-over-period improvement for the quarter was primarily the result of a reduction in the current year's loss estimate. Favorable development of $16.9 million in this year's second quarter was $3.5 million lower than in the second quarter of last year.

The losses in LAE for the first six months decreased period-over- period due to a reduction in the current year's loss estimate and lower net earned premiums. Favorable development in the first six months of 2008 was $28.3 million, compared with $36 million in the same period in 2007. Favorable prior accident year development in the second quarter represents 23 percentage points on the combined ratio. And in the first six months of the year, 19 points on the combined ratio.

Our second quarter underwriting and other operating expense ratio was 31.1% and 29.9% for the first six months of 2008. Increases in the expense ratios over comparable periods last year were driven by lower net earned premiums. Underwriting and other operating expense was essential flat in the second quarter, and was 2.9% lower in the first six months of this year as we work to contain costs while writing more policies. Investment income decreased $800,000 in the second quarter 2008 and $2.7 million in the first six months of this year relative to the same periods last year, due to decreases in invested assets and small decreases in investment yield.

The decrease in investment income for the first six months of 2008 was largely a result of $1.8 million of one-time interest income received in the first quarter of 2007 on net proceeds related to our initial public offering. $1.7 million of realized losses on investments in the first six months of the year stem from other-than-temporary impairment in the value of equity securities in the telecommunication and financial service sectors of our portfolio.

We continue to be very pleased with the strength and stability of our $1.7 billion portfolio. At June 30, 2008, 5.4% of the portfolio consisted of equities. The remaining 94.6% was fixed maturities which were not impaired due to their high quality. 53.8% of the fixed maturities were tax-exempt municipals with an average rating of AA-1 and AA-plus.

Underlying ratings of our municipal hold which is exclude any benefit of mono-line credit enhancement are a very strong AA-2 or AA. In fact, over 87% of the carrying value of our investment portfolio was rated AA or better. Subprime was just $238,000, or less than 0.02% of our total portfolio. Our commercial backed mortgage holdings of $42.1 million are all AAA-rated issues.

Total exposure to US agencies including Fannie Mae and Freddie Mac was $323 million at June 30, 2008. Our exposure to Fannie Mae and Freddie Mac totaled $247.5 million which included $114.8 million of senior debentures, $132.6 million of mortgage-backed securities and CMOs, and just $147,000 in Fannie Mae equity. We have no subordinated debt or preferred stock in these two entities. The duration of our portfolio is 5.54%, indicating a higher level of short-term investments in anticipation of our acquisition of AmCOMP.

In terms of our cash position, you will recall that last December we received approval from the Nevada Insurance Commissioner for a $200 million extraordinary dividend. This past May, the Commissioner approved an increase of $75 million to the extraordinary dividend. And as of June 30, 2008, $275 million has been distributed to the holding company.

While we currently have no debt, we have in place a $150 million secured revolving credit facility from Wells Fargo available for acquisitions and for general corporate purposes. Employers remains a strong specialty Workers' Compensation provider with a superior balance sheet and significant liquidity. That concludes my remarks and I will turn it back over to Doug.

Thanks, Ric. In summary, while current market dynamics continue to impact premium generation and to a lesser extent our investment income, we are seeing strong results in our in-force policy count growth and continuing, but lower favorable losses are developing. We will continue to leverage our experience and expertise to pursue opportunities for profitable growth while maintaining focus on underwriting discipline to protect the quality and profitability of our book of business.

Thank you for joining us this morning. Please allow me to apologize for the technical difficulties we encountered on our last call that prevented you from posing questions. We have worked out all of the bugs and now Eric, we will take questions.

Thank you. (OPERATOR INSTRUCTIONS.) Your first question comes from the line of Matt Carletti with Fox-Pitt Kelton.

Morning. Couple questions. First is you commented on tourism and construction, hurting payrolls, particularly in Nevada. Do you have or can you provide us payroll in force growth year-over-year?

We can't do that, Matt. The reason why is there's a unique provision of Nevada law that caps payrolls for Workers' Compensation. The best we can do is give you anecdotal information. And our anecdotal information would suggest that within the construction classes, we're seeing declines in payroll, perhaps as much as 50%. In the tourism classes, perhaps 10% to 12%.

That's very helpful. Secondly, just on the topic of capital management and share repurchase. I know there's been a lot going on with AmCOMP. The activity has been slow year-to-date, I think $7 million repurchased year-to-date on a $100 million authorization that covered 18 months. Can you just comment a little -- have you been blocked out of it? Or has that been more of a choice, based on where the stocks trade? Can you just provide a little color?

This is Ric. At that time beginning of -- the first quarter of the year, first three months, we did have some blackout in terms of when we put the program into effect from the authorization. We've also proceeded cautiously under 10B5 given the impending acquisition, and our focus on conserving capital until we're exactly sure what we're going to need.

Okay.

Anything you would like to add to that?

And then just one final question, Doug. If you could just kind of -- on market competition. Have you seen anything change, in particular take a step for the better or for the worse, say since the last time we spoke last quarter?

Let's start with California. I really can't say that we've observed any significant changes in the competitive environment in California. Second largest market, Nevada I think I would say the same thing. The competitors seem to have staked out their territory. Although we've seen maybe a very slight decline in retention, it's difficult to attribute that to significant change in the competitive environment.

Great. Thanks a lot. Congrats on a really nice quarter.

Your next question comes from the line of Eric [Domberg] with Oberlin Capital.

Hey, guys. Nice quarter to echo what Matt just said. Just want greater clarity in terms of what you're doing on the buyback. I don't quite understand why you're not being more aggressive. I understand the blackout earlier this year, but with the $200 million dividend to holding co. And then $75 million additional. That's $275 million, plus you have $150 million at a very attractive rate in the secured. I'm trying to understand why you wouldn't take advantage of the current prices, particularly given how well you're operating, and particularly given that you were buying stock at $20, $21 last summer.

As I mentioned, we've kept a careful eye on our cash flow, as well as our capital. We're looking out -- when we talk about cash flow, we're looking out through almost mid next year, looking at the timing of future dividends coming up from the insurance subsidiaries. We want to make sure, before we expend capital, that we've adequately planned and confirmed that our cash flow is what we believe it will be. I've said we've been conservative, cautious is maybe another way to describe it, but we remain committed to the share repurchase that was authorized. I don't know how to expand beyond that.

Should we expect that with the blackout period probably off for a bit during August that you will reset the 10B5 at potentially more aggressive levels than you've had set the last few months?

I don't think I would comment on that at this point in time.

Does it concern you at all that your ROEs are quite depressed, because of your excess capitalization? Is that something that you'd like to work on to appease some of your share holders?

Eric. I'll take that one. When we initially did the public offering and ever since, there's been really no change in our strategy. Our capital management strategy is to invest in the operation first. We continue to do that. Second to seek opportunistic acquisitions. We have done that. We have not yet been successful in closing our first transaction, but hopefully we'll be able to do that.

Then finally, to manage the capital through dividends and share repurchases. It really is a combination of those three and a combination of the market environment that we find ourselves in, in consideration of what other uses of capital we may have in the future. There really is no change in our strategy, and you shouldn't read anything into the rate at which we're repurchasing shares to suggest something other than those three items.

Is it fair to expect say, post the AmCOMP closure, assuming it does close, that the rate may pick up and that you intend to actually fulfill the authorization by next June?

Eric, I'm going to have to give you the same answer. It's a combination of those three strategies. If and when we make a change in that, you will all be well aware of it.

It appears we have no more audio questions in queue at this time.

Thank you, Eric. Once again, thank you all for joining our call this morning. We look forward to speaking with you again after the close of the third quarter. Thanks.

Thank you for your participation in today's conference. This concludes our presentation. You may now disconnect. Have a good day.