Employers Holdings Inc (EIG) 2009 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Employers Holdings, Incorporated first quarter 2009 earnings conference call. My name is Michelle, and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session toward the end of today's conference. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

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

Thank you, Michelle. And welcome, everyone, to the first quarter 2009 earnings call for Employers Holdings, Inc. Yesterday we announced our earnings results, and today we will file our form 10Q with the Securities and Exchange Commission. Our press release and form 10Q may be accessed on the company's website at employers. com and are accessible through the investors link. Today's call is being recorded and web cast from the investor relations section of our website where replay will be available following the call.

With me today are Doug Dirks, our Chief Executive Officer, Rick Yocke, our Chief Financial Officer, and Marty Welch, the President and Chief Operating Officer of our insurance subsidiaries.

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 development.

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. Welcome, and thank you for joining us as we review our first quarter 2009 financial results. For the first quarter, we reported earnings per share before the LPT of $0.34, compared with $0.42 in last year's 1st quarter. Contributing to the decline were nonrecurring restructuring and integration charges of $3.8 million dollars or $0.08 cents per share. And other than temporary impairment charges of $1.8 million dollars or $0.04 per share, all pretax.

Since our initial public offering in early 2007, we have recognized favorable reserve development of approximately $145 million dollars. In the first quarter, we recognized $13.5 million dollars of favorable prior accident year development, increasing pretax earnings by $0.28 per share. As a result of our acquisition, we recorded substantial increases of 56% in 1st quarter direct premiums written, and 47% in net earned premiums. Premium increased in many of our states, with the largest increases occurring in Wisconsin, Illinois and Georgia.

Since March 31, 2008, in force policies are up 33.2%, an increase of over 11,300 policies, with acquired operations contributing nearly 10,000 policies for that growth. Excluding acquired operations, net earned premiums declined 11.7% as the result of rate decreases, economic contraction, competition and our continued underwriting discipline. This decline is clearly evidenced in three of our largest markets, California, Florida and Nevada. For the balance of 2009, we expect the decline in premium to continue.

We expect the decline will be partially mitigated by premium growth in a number of our states. In particular, those which did not previously have access to our A minus rated paper. As intended, our acquisition brought greater diversification to our operations, with California representing only 40% of our 1st quarter total direct written premium, followed by Florida with 10%, Wisconsin with 9%, and Nevada at 6%. We are now writing business in 30 states.

Pricing appears to be firming in our largest markets. Upward rate pressure in California and Florida stems from court decisions related to previously enacted Workers Compensation reforms. In California, we increased our pure premium rates 10% on February 1. Two weeks ago, the WCIRB recommended a rate increase of 23.7% based on both increasing medical costs, indicated in its latest experience review, and additional claims costs arising from three Workers Comp Appeals Board decisions. The Insurance Commissioners held one hearing on the proposed rate increase, and scheduled a subsequent hearing on June 8. We are reviewing our loss costs independent of the rating bureau's analysis, and we expect we will file a rate increase effective in the 3rd quarter.

In Florida, we increased our rates 6.4% effective April 1. This increase was the direct result of a 2008 Florida Supreme Court decision that materially impacted statutory caps on attorneys' fees that were part of the 2003 reforms. Last week legislation was passed which removed statutory language providing for reasonable attorneys fees in Worker's Compensation cases, and specified that fee awards cannot exceed the amount authorized by the statutory fee schedule in the 2003 reform legislation. The Florida governor has not indicated whether or not he will sign the bill. NCCI has indicated it would make a rate filing to roll back the 6.4% rate increase previously implemented if the bill is enacted.

In Wisconsin, our third largest market, rates were increased 2.9%, effective October 1, 2008.

In the 1st quarter of this year, our operations contributed a combined ratio before the LPT of 103.6% compared with 89.3% in the 1st quarter of last year. Our loss and LAE ratio while higher than last year's first quarter, continued to reflect our disciplined underwriting. Our expense ratio at 46.7% remains high, with restructuring and integration costs in the quarter contributing 3.4 percentage points to the ratio. Ric will discuss these ratios in more detail in a few minutes.

In terms of capital management, yesterday our board of directors declared a dividend of $0.06 per share, with a record date of May 20 and payable on June 3. We appreciate that in recent months our stock price has been below book value. While this is also true for a number of our peers, we feel strongly that our business model has been tested and is sound demonstrated by our consistently solid results. As we have indicated previously, our strategy is focused on investing capitol in business growth, organic or acquired, that will bring long term value to shareholders. When appropriate, we have returned capital to shareholders through dividends and share repurchases.

Given our recent stock price, our continued strong balance sheet, and our belief in our business model, we repurchased $1.6 million of our outstanding shares in the 1st quarter of this year. Our repurchases in the quarter were accretive and resulted in a meaningful increase in book value. Since our initial public offering and as of March 31, 2009, we have repurchased approximately 11.5% of our outstanding common shares at an average price of $16.56 per share. We are encouraged with our first quarter performance in light of challenging economic and investment conditions. Our investment portfolio strategy has been highly successful with limited exposure to equities. Our book value per share grew nearly 5% from $17.43 at December 31, 2008 to $18.26 at March 31, 2009. We have substantially increased our overall market share in both units and premium dollars during one of the more difficult recessionary periods in recent history.

When the economy improves, we believe we will be well positioned to meet the needs of the marketplace. Small businesses have historically led recoveries. Now I'll turn the call over to Ric for more discussion of our financial results. Ric?

Thank you, Doug. At the end of the first quarter, our GAAP combined ratio was 99.8% and 103.6% before the LPT. This compares with 83% and 89.3% before the LPT in 2008. Acquired operations contributed 11.7 of the 16.8 percentage point increase in our GAAP combined ratio, with the remainder primarily a result of lower premium.

Doug has mentioned some of the factors impacting our combined ratio in the quarter. I would like to discuss the contribution of our acquired operations more specifically. Based on footnote three in our form 10Q results of operations, acquired operations contributed premium well in excess of underwriting expenses, excluding integration and restructuring charges. However, the ratio of losses and LAE to premium is higher than our loss and LAE ratio excluding acquired operations. This largely reflects conservatism in establishing reserves for Florida at March 31, due to the potential implications of a State Supreme Court decision, the Murray decision.

Overall, we have had favorable prior year development of $13.5 million dollars in the quarter, compared with $11.4 million dollars in the 1st quarter of 2008. The impact of favorable development on the 1st quarter combined ratio was 12 percentage points compared with 15 in the 1st quarter of 2008. Excluding acquired operations, losses and LAE declined 9.8% year over year but increased on a consolidated basis by $28.5 million dollars. Our current accident quarter loss estimate was 67.9% compared with 61.6% in the 1st quarter of 2008, based largely on declining rate levels. The decline in rate levels exceeded decreases in losses.

First quarter commission expense increased $3 million over last year's 1st quarter, as a result of the acquisition. Excluding acquired operations, commission expense would have decreased $1.5 million dollars.

Excluding acquired operations and one-time restructuring and integration charges of $3.8 million dollars, underwriting and other operating expenses decreased $1.2 million dollars in the quarter. We anticipate incremental integration costs of $5.4 million dollars through the remainder of the year.

Net investment income increased $4.4 million dollars or 23% year over year due to an increase in invested assets. Slightly higher realized losses on investments resulted from $1.8 million dollars of other than temporary impairment charges on certain equity securities.

Our first quarter tax benefit of $1.2 million dollars was the result of lower pretax income, a higher proportion of tax exempt income in 2009, and tax exempt reserve reductions related to periods prior to the year 2000.

The fair market value of our invested assets at the end of the first quarter, including unrealized gains of $18 million dollars, increased nearly 2% to $2.1 billion dollars since year end 2008. Our investment portfolio remains very high quality. Fixed income maturities were rated on average AA plus. 80% of the carrying value of our portfolio was rated AA or better. The duration of the portfolio was 4.97, with a tax equivalent yield of 5.6%. Our investment portfolio continued to perform well under very difficult market conditions. You can find a list of our portfolio securities by CUSIP in our investors section on our website.

The current conditions in capital markets have placed increased emphasis on asset quality, liquidity and capital. I've already noted the high quality of our portfolio. Our liquidity position remains strong. At March 31, 2009, we had approximately $80 million dollars in cash at the holding company. Securities maturing over the next year will provide over $100 million of predictable cash flow, beyond operational cash flow.

We have demonstrated our ability to aggressively pursue dividends from our operating subsidiaries and have upstreamed $355 million dollars last year for our acquisition and for general corporate purposes. This year, we anticipate dividends from our Florida operations, but have no current plans to request dividends from Nevada operations. We intend to continue to keep only the level of capital in our operating companies sufficient to maintain an A minus stable rating from AM Best. With that, I'll turn the call over to Marty.

Thank you, Ric. I will begin by updating you on the progress of our integration efforts. Last quarter, I told you about our actions to achieve expense synergies through consolidation of staff positions, primarily into our Reno headquarters, and the reorganization of our field operations to incorporate the newly acquired states and offices. The impact of these actions is beginning to show in our operating results.

We have successfully rebranded to EMPLOYERS, the 9 acquired offices. We have completed the consolidation of our Florida claims operations into a single office in Maitland, eliminating all claims staff in North Palm Beach, and transferring all Florida claim files to Maitland. We continue the consolidation of corporate functions from North Palm Beach and other acquired offices into our Reno headquarters. Several IT positions have already been staffed in Reno representing headcount reductions, and expense savings from the previous structure.

This week we also opened our new east coast imaging and call center in Charlotte, which will increase operating efficiencies and improve customer service.

Our integration efforts are also generating additional business opportunities in many of our newly acquired territories. Particularly in the Midwest, where first quarter results for new business submissions, quotes and written policies were over 50% higher than the 1st quarter of 2008 for the acquired operations in that territory. We attribute this increased opportunity to more intense marketing and sales efforts in those areas, and the availability of A minus rated paper.

As Doug highlighted, Wisconsin is now our 3rd largest state in terms of direct written premium. There, we have generated a 6% increase in policies in force since December 31, 2008. Across the organization, overall submissions, quotes and written policies were up, compared to the 4th quarter of 2008, although written policies increased only slightly.

Activity varies by state and region. Competitive conditions in California are making new business success more difficult than in the past. In force policy count has increased 9.4% in California since March 31, 2008, but only .3% in the last three months. So while we are still adding business in California, it is occurring at a slower rate than in previous quarters. As we evaluate new business opportunities in both new and existing markets, we will continue to adhere to our disciplined underwriting standards. And while this may affect how quickly we add premium, we believe this discipline will ensure that incremental growth is profitable.

We will continue to leverage our experience and expertise to pursue opportunities for profitable growth, while maintaining our underwriting focus to protect the quality and profitability of our business.

Doug has already discussed premium trends. I will add that even given current economic conditions, retention of existing policyholders continued to hold up well. Overall, retentions were only down slightly. Our strategic partnerships continue to produce retention results consistently higher than our agent produced business. We are seeing a positive sign in our renewal rates. Renewal rate change has continued flattening over the last five consecutive quarters. Further, reported claim counts continued their downward trend in the 1st quarter, both for medical only and indemnity claims. In summary, amid very difficult market conditions, our integration efforts are on track, and our insurance operations are performing well.

I will now turn the call back over to Doug.

Thanks, Marty. In closing, we are beginning to realize the strategic gains expected from our acquisitions. Our acquired operations are an excellent strategic fit with a small business focus. Our operations are more diversified geographically, and we have recorded substantive growth in premium volume. We are beginning to realize financial benefits in terms of synergies and expect to realize successful long-term value creation for our shareholders. That concludes our prepared remarks. Michelle, we're now ready to take questions.

(Operator Instructions). Your first question comes from the line of Mark Hughes with Suntrust.

The renewal rates you say have been flattening, can you share with us what they were in the 1st quarter?

We consider the specifics of that to be competitive information. I just wanted to make a comment on the trend that the renewal rate change on policies renewed in the 1st quarter was, while still a reduction, was a smaller reduction than the preceding quarter which was a smaller reduction than the preceding quarter and so forth. But to get specific about that, we get into competitive information that we would rather we not release.

Asked another way. How soon at this pace would it get to zero?

Soon, but I won't commit whether that's next quarter or the quarter after that, or when. But clearly this has been an ongoing trend. And it's very positive in our perspective.

Got you. How about severity in California. Plenty of discussion of increased inflation, higher loss costs. Could you tell us about your own experience and your slower policy growth there. Is that a function of your increased caution because of the loss picture or is that more a competition.

I think it's a combination of that. I think competition is inhibiting somewhat our ability to write as many new policies as we have in the past. Our view on severity is clearly across the country severity is increasing while frequency has been decreasing. That is particularly acute in California where we have seen closed claim severity increasing a little more than we've seen it in the other states. That will be reflected in our view of the rate indications that are forthcoming and what we do with our filed rates in the 3rd quarter. That will certainly reflect our view of those increasing costs.

Thank you.

Your next question comes from the line of Michael Nannizzi of Oppenheimer, please proceed.

Hi. Thanks. Can you talk a little bit more about capital management and how you're viewing share repurchases in the quarter, and also in terms of your debt structure, do you see the company paying down debt, keeping kind of debt where it is, or borrowing a bit more. Thanks.

Let me take that one. There has been no change in our view of capital management. When we consider capital, required capital for the insurance operations is where we begin. And as Ric indicated that's intended to support our A minus rating which we believe is necessary for our business. We also consider sources and uses of cash, so it's not solely a question of capital, but it's also a question of liquidity and access to cash.

When we see opportunities to repurchase shares, when we believe we have sufficient capital cushion to do that, and sufficient liquidity, you've seen consistently from us our willingness to step into the market and repurchase shares. We have an authorization to repurchase shares that expires on December 31 of this year. That authorization was for $100 million dollars. We still have approximately $75 million dollars remaining within that authority.

Great, thanks. As far as the ADP partnership, have you had an opportunity to experience synergies into the AMCOMP book of business yet. Is that high on the list of priorities of integration? Thanks.

It is high on the list of priorities, we have begun that, it has not been anything very material at this point in time. But clearly, we know there are opportunities in those acquired states with ADP. We have seen an increase in our business with them, existing activity anyway, in the last quarter. We attribute that to just more sales and marketing efforts with them which are being extended into those new states.

To answer the question, yes, that is a priority. We hope that ADP becomes a larger portion of the other than California operations as well.

Just one last question, in terms of acquisition costs, do you foresee any other costs falling into the second quarter that are material? Thank you very much.

As we mentioned, we expect about $5.8 million dollars of additional costs over the remainder of the year. Some of that, of course, will be falling into the second quarter.

Great. Thank you very much. And thanks also for the disclosure on the CUSIP level detail.

(Operator Instructions). And you do have a follow-up from the line of Mark Hughes, please proceed.

Thank you. In the Midwest, how much of that 50% increase in submissions and quotes -- how much is that translating into new policies. And can you take those strategies and apply them elsewhere? Should we see or is it possible to see that kind of increase in other markets?

The increase in activity there. I generalized it as being greater than 50% for all three of those metrics, so our written policies are up over 50%. First quarter 2009 over first quarter 2008 for the acquired operation in that territory. The submissions and the quotes are up more than that. But I won't get into specifics again for competitive reasons.

We see that opportunity really as an awakening, if you will, in those territories of the acquired business where the relationship with the agents was certainly good. But the ability to write a lot of business or even pursue a lot of business was limited by nonrated paper. So as we have increased our sales and marketing efforts in some of those new territories, that one in particular, we're starting to see the benefit of those relationships that existed there that now have access to higher quality paper.

Can we replicate that into other territories? We are certainly doing that in other of our acquired operations as well. We are also seeing increases in activity there. But it was particularly noticeable in some of the Midwest states.

The 3Q filing, will that be for a rate increase in the 4th quarter or is that just the initial filing for next year in California?

The intention is that the rate increase in California will be effective in the 3rd quarter.

Right. Can you say if you're looking for double-digits, possibly?

That's possible. Again, we're still doing our analysis, the bureau is north of 20% indication. We will be looking at an increase that is significant.

Right. You were talking about severity increasing across the country. I think you said a little more in California. Is it perhaps more than a little more, or is it in fact you're just seeing a little more?

I would say it's a little more. I'm not going to quantify it as being a lot more than it is in other states.

Let me add a little piece to that. I think as we talk about our intended rate actions in California. We are trying to be far more strategic in establishing appropriate rate levels, so that we can defend the highest quality parts of our business, and that's why we are taking our time on this, so that we're certain that we are setting rate levels in the best long term interest of the company.

We don't disagree with the direction of the trend lines that the bureau is seeing as to severity in California. Our book of business is not -- doesn't reflect the entire California market. So as you would expect, our numbers will be different, but certainly the trend line in California that the bureau's observing, we believe is correct.

I understand. Thank you.

Your next question comes from the line of Bob Farnam of KBW.

I just had one question on the tax benefits. I wanted to know, maybe a little more detail there, I'm trying to figure out what to do in terms of going-forward -- effective tax rate assumptions, and I'd like to get a little more detail as to what's driving that. You gave three components as to what was driving the benefit. Maybe you could give more information as to what was the largest pieces.

A little background color. The accounting guidance really dictates that we establish the tax rate each quarter based on the actual results to date plus the plan or budget for the remainder of the year. Now, we've historically budgeted conservatively, including this year, and we don't budget reserve releases. I think we previously commented that our historic effective rate is in the high teens or 20%. One way to look at this is, if you were to annualize the first quarter 2009 results, as opposed to using the plan for the remainder of the year, our effective rate would have been somewhere between 15% and 20%.

Okay. All right. It's basically taking a look at what the -- I think I've got that.

Okay. Thanks.

Your next question comes from the line of Chris Sommers of Green Light Capital. Please proceed.

One quick one to follow up on what you guys said. Does that imply that you guys are behind the plan then?

No.

Does it imply --

Actually, the other way around.

Got it. Okay. Great. And on the prior call, you guys talked about a 10% increase in California in February? Has that gone through or is that going through? Or is that what you already referenced for the 3rd quarter.

Whatever we do in the 3rd quarter will be additive to the impact of the increase in February that was an average of 10% across our books. Policies renewing since February are seeing an increase in their rates, their base rates of 10% more than they had on their expiring policy. So whatever we file in the third quarter until February will be added to that 10% for those policies expiring between now and February next year.

Got it. And then in terms of policies in force, you guys used to give out the data in terms of total number of policies in force and the number associated with AMCOMP. What were those for the quarter?

Those will be in the Q, which we'll be releasing later today.

Got it.

I can take you through them if you'd like, but they'll be in the Q.

That's all right. I can look it up in the 10Q.

Great.

Thank you very much, guys.

Your next question comes from the line of Robert Paun of Sidoti and company. Please proceed.

In terms of the favorable reserve development in the quarter, what accident years did those come from?

It's actually hitting a number of years, but primarily 2005. And 2006.

Was there any adjustment for the 2007 accident year?

Very very little.

Okay. And then maybe one other question. Maybe you could comment on the AMCOMP book of business, I think you mentioned they added 12 points to the combined ratio, was that better or worse than what you expected?

I don't know if better or worse than expected, as I had commented earlier, the impact of the State Supreme Court decision, the lack of clarity on how that's going to resolve itself has led us to -- we believe it was prudent to be a little bit more conservative in our review of the reserves. And we've previously mentioned that Employer Preferred and Employers Assurance, what we refer to as EPIC and EAC now have had a history of reserve releases. But in the face of the Supreme Court decision, we view that a little more conservatively this quarter.

Okay. Thanks. And one other -- on the debt. Can you remind us how much the debt is due at the end of the year?

50 million.

Okay, thanks, that's all I have.

Your next question is a follow-up from the line of Michael Nannizzi. Please proceed.

One follow-up on the tax item. I want to make sure I understand how it works. If you're accruing taxes on the investment portfolio which is going to be at a lower yield because of the tax free component, and then the operating business without reserve releases, then did that imply that when you true up at year end if you have reserve releases, that effective tax rate during the 4th quarter will be higher? Or is that factored in before that?

Right, the increase -- any increase other than reserve releases that might impact pre-privatization periods would have the impact of driving the effective tax rate up. Because what you're adding is income that in theory is taxable at 35%.

Right. Okay. So up until the 4th quarter, as you go along, you're taxing your non investment income? Non investment income, operating income at 35%, and then your investment income at some other rate less than that. So whatever the offsetting number between those two is, and then in the 4th quarter you make the adjustment for the reserve. Also, do you make the same adjustment if you have reserve deficiencies in the other direction, or do you recognize that right away.

I want to back up on one point you're making. It's not a 4th quarter true up.

Okay.

Each quarter as we go along. The accounting guidance is saying, you take your actual results to date. And then you look at your plan or budget for the remainder of the year. So at June we'd have 6 months of actual results, and 6 months of budget.

Okay.

The 3rd quarter we have just one quarter of the budget remaining. So it creates this anomaly in the 1st quarter where you have the substantial portion of the year still being calculated on a budget basis, if you will.

And the budget basis is the one without the reserve release?

That's correct.

Okay. Got it. Thank you very much for that clarification.

(Operator Instructions). That appears to conclude the question-and-answer session, I'll now turn it back to Mr. Doug Dirks for closing remarks.

Thanks, Michelle. Once again, thank you all for joining us on our call this morning. Just to let you know, we will be meeting with investors in May and June of this year, at investor conferences. We look forward to seeing all of you and talking with you soon. Thank you for joining us on the call today.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation, you may now disconnect. Have a great day.