Employers Holdings Inc (EIG) 2009 Q2 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the second quarter 2009 Employers Holdings earnings conference call. I'll be your coordinator today. At this time, all participants are in listen only mode. We'll be facilitating a question-and-answer session towards the end of this conference. (Operator Instructions). I would now like to turn the presentation over to your host for today's call, Ms. Vicki Erickson. Please proceed.

Thank you, Karma, and welcome to the second quarter and year-to-date 2009 earnings call for Employers Holdings, Inc. Yesterday we announced our earnings results, and today we will file our Form 10-Q with the Securities and Exchange Commission. Our press release and Form 10-Q 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 webcast from the Investor Relations section of our website, where a replay will be available following the call.

With me are Doug Dirks, Our Chief Executive Officer; Ric Yocke, our Chief Financial Officer; and Marty Welch, the President and Chief Operating Officer of our insurance subsidiaries. Statements made during this 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. 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'll turn the call over to Doug.

Thank you, Vicki. Welcome, and thank you for joining us as we review our second quarter 2009 results. We were pleased to be added to the S&P Small Cap 600 Index this quarter. We believe our inclusion in this index is recognition of our sound fundamentals and our goal to build long term shareholder value. In the second quarter, we earned before the LPT $0.34 per share compared with $0.46 per share in last year's second quarter. We are pleased with these results, given current economic and business conditions.

Our book of business at June 30, 2009, is more diversified relative to last year, with 45% of direct written premium in California; 21% in Florida, Wisconsin, and Nevada; and the remaining 34% in our 26 other states. We grew second quarter net premiums earned 41%. Direct premiums written increased in a number of our states, with the largest increases occurring in Wisconsin, Illinois, and Georgia. Business activity continued to decline in three of our largest markets -- California, Florida, and Nevada. Excluding acquired operations, net premiums earned declined 18% as the result of prior rate decreases, economic contraction, pricing competition, and our continued underwriting discipline. We expect declines in premium will continue throughout the remainder of 2009, consistent with declining payrolls nationwide.

We believe that we will be able to partially mitigate these declines through premium growth in certain of our Midwestern and Southern states, and through our rate increases in California, 10% on February 1 and 10.5% effective August 15th. Since June 30, 2008, our in force policies are up 28.1%, an increase of nearly 10,000 policies. Policy count in the first six months of the year declined most significantly in Nevada and Florida. These declines were almost completely offset by policy count increases in our other states, with in force policy growth in excess of 7% in Wisconsin, Illinois, and Georgia.

Our operations contributed a combined ratio before the LPT of 101.6%, a 2 percentage point improvement over the first quarter, but 18 percentage points higher than last year's second quarter. While improved from the first quarter, our combined ratio is not yet optimal. We are seeing benefits from expense controls and integration activities. In fact, excluding acquired operations and non-recurring integration and restructuring charges, our operating and other expenses were nearly $3 million lower in this year's second quarter than they were last year.

In terms of capital management, yesterday our Board of Directors declared a dividend of $0.06 per share with a record date of August 20 and payable on September 3rd. We repurchased 1.4 million of our outstanding shares in the second quarter. Our repurchases were accretive and contributed about one-third of the book value per share growth in both the quarter and year-to-date, June 30, 2009. Our book value per share grew nearly 9% in the first six months of this year -- from $17.43 at December 31, 2008, to $18.26 at March 31, 2009, and to $18.97 at June 30, 2009.

Our acquisition is providing intended benefits to our combined organization. The acquired portfolio increased our invested assets and our yield increased as of June 30, 2009. We have increased our market share in both units and premium dollars. Our revenues are more diversified. We are integrating successfully as cost savings are beginning to be realized.

We do not know when the economy will improve. However, we feel confident that given our strong balance sheet and disciplined underwriting, we can continue to reinvest capital in our business, satisfy our debt obligations, and provide high quality service to our customers while growing shareholder value in the long term. Now I'll turn the call over to Ric for a discussion of our financial results.

Thank you, Doug. At the end of the second quarter, our GAAP combined ratio is 97.4% and 101.6% before the LPT, compared with 77% and 83.2% before the LPT in 2008. Acquired operations contributed 12 percentage points of the increase in our second quarter GAAP combined ratios, with this 12 point increase primarily driven by conservative reserving related to uncertainties surrounding the ultimate impact of the Murray decision and declining rates and challenging economic conditions in Florida. Consistent with the past six years, we had favorable prior accident year development of $15.7 million in this year's second quarter, compared with $16.9 million in the second quarter of 2008. The impact of favorable development on the second quarter combined ratio was 15 percentage points compared with 23 in the second quarter of 2008.

Doug's already discussed premium trends, so I'll start with losses. Excluding acquired operations, losses in LAE declined 9.9% in the second quarter relative to last year's second quarter, but increased on a consolidated basis by $30 million. Our current accident year quarter loss ratio estimate was 71% compared with 61.8% in the second quarter of 2008, based largely on comparative California rate adequacy. Some uncertainty continues in California, tied to the status of certain court cases that reverse portions of the previous enacted workers compensation reforms.

Second quarter commission expense increased $3.5 million over last year's second quarter as a result of the acquisition. Excluding acquired operations, commission expense decreased $800,000. As Doug mentioned our cost controls and integration efforts are beginning to produce results. Excluding acquired operating expenses of $11.9 million, and one-time restructuring and integration charges of $500,000, underwriting and other operating expenses decreased $2.9 million in the quarter. While our comparative expense ratios appear flat on a quarterly basis year-over-year, our cost per policy as of June 30, 2009, excluding non-recurring integration and restructuring expenses, has declined over 10% since December 31, 2008. Second quarter net investment income increased $4.5 million or 24% over last year's second quarter due primarily to increases in invested assets. Our effective tax rate in the second quarter was 14%.

In the first six months of 2009, our GAAP combined ratio was 98.6% and 102.6% before the LPT, compared with 80% and 86.3% before the LPT in 2008. Acquired operations contributed 11.8 percentage points of the GAAP increase, with the remainder attributable to lower premiums earned, competitive pressures, and overall economic conditions. Year-to-date, at June 30, 2009, restructuring expenses added 2 percentage points to the combined ratio.

Our capital position is the foundation of our business. Doug has already mentioned our growth in book value. Combined statutory surplus at June 30, 2009 was approximately $614 million, an increase of 4.6% since March 31 of this year. At June 30, 2009, we had $67 million in cash at the holding company, and the fair market value of securities at the holding company linked to our Wells Fargo credit facility was approximately $200 million. In July, the holding company received approximately $18 million in dividends from our Florida operations.

Our capital is backed by our invested assets, which are very high quality. The fair market value of our invested assets at June 30, 2009, was $2.1 billion with a net unrealized six-month gain of $31.1 million. Fixed income maturities were rated on average AA plus and 79% of the carrying value of our portfolio was rated AA or better. The duration of our portfolio was 5.11. The tax equivalent yield was 5.6% and the book yield was 4.6%. A list of our portfolio securities by [QSIP] is again available at the Investors section of our website under Calendar of Events, Second Quarter Earnings Call.

In summary, financial discipline remains a top priority for us. Our capital levels remain healthy and provide a stable basis on which we can act confidently to maintain and grow our business. With that, I'll turn the call over to Marty.

Thank you, Rick. Our integration of acquired operations is on track and progressing well. The economic recession continues to impact our business opportunities, though this impact varies by city, state, and region. We saw increased opportunities in the Midwest, with submissions up over 80% in that region compared to the second quarter of 2008. We believe that increases in opportunities in our newer regions are the direct result of two factors. First, our strong agent relationships, and second, the availability of A minus rated paper in our acquired operations, a benefit of the acquisition that is producing results for us. Our Nashville office experienced increased activity similar to the Midwest region, and business activity in Texas remains strong. In Charlotte, we saw moderate declines in business activity driven by banking. In California, we continued to increase sales, even though rate and competitive pressures in that state have made new business success more difficult. Business activity continued to decline in Nevada and Florida. Overall, submissions and quotes are up relative to the second quarter of last year.

Our second quarter retention improved over the first quarter of this year, both in terms of policies and premium. Strategic partnerships continued to produce retention results higher than our agent produced business. Our renewal rate change increased slightly in the second quarter. This is a noteworthy accomplishment. This is the first quarter since 2004 in which we have obtained additional rate on our renewal book on a year-over-year basis. This improvement was driven by our 10% rate increase in California effective February 1, 2009. As Doug mentioned earlier, we will raise average peer premium rates in California an additional 10.5% effective August 15th.

The recessionary economy has not adversely impacted our claim results. In the second quarter, reported claim counts continued their downward trend. In fact, reported losses for each of our four operating companies are lower through the first six months of 2009 compared to the first six months of 2008. However, we also continued to see a slight increase in average claim severity driven primarily by the cost of medical treatment, particularly in California.

In summary, we continued to manage our operations through a very difficult economic cycle and our integration efforts are on track. I will now turn the call back over to Doug.

Thanks, Marty. That concludes our prepared remarks. Operator, we will now take questions.

(Operator Instructions). The first question comes from the line of Mark Hughes from SunTrust. Please proceed.

Thank you very much. The rate improvement you described, was that the first quarter since 2004 did you say?

Yes.

And does that take into account the adjustments or ex mods?

Yes. That is the rate per unit of exposure on a policy that was renewed compared to what that total policy rate was a year ago.

Excellent. Anything you can say about competition in California? Have some of the bigger players stepped up their activity there, have you noticed any change in the competitive dynamics?

I wouldn't say there's been a change in the competitive dynamic. I would say it has continued to be intensely competitive, and we're seeing that from all areas of the marketplace, whether it's the large nationals or whether it's the regional carriers.

And then for investments, do you have the new money yields in the quarter?

I don't have that at my finger tips.

I can pull it up.

New money invested in the quarter. I just have the overall yields for the portfolio.

I'll follow-up with Vicki, thank you.

The next question comes from the line of Lee Feingold from Fox-Pitt Kelton. Please proceed.

Thank you. I just had a few questions. The first one on the growth in top line in the quarter. Can you provide a little color on if that growth was due exclusively to the AmCOMP acquisition or what the split was between legacy EIG and AmCOMP?

We will have a little bit of break out in the Q -- you'll be able to see it. It really varies by office by region. If you recall Marty's comments a few minutes ago, it even varies by city, state, and region. And so it's not consistently or exclusively the result of acquired operations and in fact, we do see some growth in the western office, some of our western offices as well.

Okay, thank you. And then can you provide any more color on the accident year loss ratio? I know it ticked up a little bit in the quarter, if you could provide any color on why you're seeing that?

We're taking a slightly more cautious approach to some issues in Florida and California.

Okay.

California, we have a number of court cases that have the potential to overturn some of the reforms. However, they are being challenged and we don't know the outcome of that. We're not specifically reserving for those, but on the other hand, we're looking at deciding that it's prudent not to be too aggressive in our reserving. And the same with Florida with the Murray case although the legislature has addressed that prospectively, it has not resolved all the retrospective issues that were raised by the Murray decision. So in both of those cases, as I'd say we're just taking a slightly more cautious approach to it and it's resulted in a slight uptick.

Okay. Thanks for your help.

The next question comes from the line of Michael Nannizzi from Oppenheimer. Please proceed.

Thanks. Thank you. Just a couple questions if I could. On the Midwest, the whole Midwest policy growth, what is that -- do you feel like that area is just less exposed right now to the payroll reductions in other areas? Is it more the result of your distribution and the A minus paper being introduced to different markets? Or can you talk about that dynamic and maybe relate it to what's happening and some of the [sand] states and just talk about what you're seeing? Thanks.

Sure. I think that the two reasons I cited in my earlier comments -- primarily we think strong agent relationships in that part of the country in the acquired operations have continued to bring us more new business opportunities, and also just the availability of our A rated paper that the acquired operations did not have access prior to that, we believe is driving an increase in the number of new business submissions as well. From an economic standpoint I'm not an economist, but this clearly is not a monolithic recession that we're in and certain areas of the country are impacted far worse than others and I think the upper midwest particularly is less impacted by unemployment and reduced payrolls than we're seeing to an extreme in states like Nevada and Florida.

Got it. And Martin, just on since we're talking about integration, a little bit, can you talk about whether you've been working to integrate the ADP platform into other non-legacy markets and how that process is? I know there's a push-pull between agents and that distribution channel.

Well, we clearly have a lot going on right now in terms of integrating our companies. One of our tasks is to expand that ADP program into some of the acquired states and we are working on that. But it is not, it has not made a significant impact on our business with ADP at this point in time. So to answer the question that is certainly an intention of ours. We are working that direction, but we also have a whole lot of other things we're working on integrationwise at the same time.

I understand. Okay. And if I could, Ric, as far as you'd mentioned California business, I'm just trying to understand -- so you implemented a rate increase of 10.5% for August 1 and 10% earlier this year. You're writing more new business -- it sounds like you're writing either flat or more new business in California. Are you writing it at that plus 10% rate? And is that coming through your partnerships or is that just straight comp business that you're pulling from other carriers? Thanks. I have just one last one, I promise.

Marty, do you want to answer that?

I think our success in california, Mike, continues to be -- we are increasing policy counts, and our retention has been holding far better than our new business opportunities in California, which have become more and more difficult both due to the economy and the level of competition that we're seeing. The price increases we're getting as I stated earlier in the call are a combination of all of the factors on the policy that are ending up with a slightly higher rate than we had a year ago. I can't sit here and say we're getting 10% more on every one of those policies, but that filed rate increase has helped us to get more.

Got it. Thank you very much, and this is just for Doug. I know Doug, you've spoken in the past about inflation and the portfolio. I just was wondering if you could spend a little bit of time talking about it. I know you've reduced holdings and treasuries and I think agency debt since year-end and since the end of the quarter, the first quarter. Can you just talk about how you're viewing inflation risk and how you're reflecting that in your portfolio? Thanks again for answering all my questions.

Well, if you look at the portfolio, you can see that we have not used the last quarter as an opportunity to lengthen our durations. We've tried to be relatively duration-neutral through the quarter. Obviously, we are watching the same things you are, seeing some volatility in the Treasury recently, and trying to evaluate what we think the impact of potential Fed actions would be. So I think it is best to describe it as maintaining a relatively neutral bias in terms of duration at the moment.

Great. Thank you very much.

(Operator Instructions). The next question comes from the line of Scott Thomas from Morgan Stanley. Please proceed.

Hi, thanks. I was not sure if you have this on hand, but I was hoping I could get a breakout of the accident year combined ratio for the acquired operations and then what it would have been excluding the acquired operations?

I think, I'll make a note of this and we can get that to you.

Do you know, I guess, just second to follow that up -- I might get back into it myself. But of the prior period development, the $15.7 million, how much of that was from acquired versus the old business?

The $15.7 million was all pre-acquisition business.

Perfect, okay, great. Thanks.

The next question comes from the line of Robert Roell from RiverSource Investments. Please proceed.

Hi, thanks, a few questions, please. Back to the organic compares, the growth in the various premium lines, can you actually provide that by state? And what was in total the AmCOMP organic growth?

We haven't quite broken it out that way. We certainly can get access to those numbers and we would be happy to follow-up. We do have a combined total for those. So if I were to -- I don't know if you want it for the three months or the six months?

Well, basically what the question, what I'm really trying to get at here is the total for all states was positive 24.4% year on year. What I'd really like to know is what was the historical employers organic change in premium in total, and also by state if that's possible? And then also what was the historical -- what would have been if AmCOMP was still a separate company, what would have been the change in premium for that collection of businesses?

We don't break it down that way in our disclosure, but we would be happy to be able to provide that information.

Okay. Regarding the commentary around the accident year loss [pick] in the second quarter, what's generally the height of that in terms of assumption of rate and change and loss trend?

Well, I think you've hit on two of the basics. We are looking at the quality of premiums, but we're also looking at the trends in frequency and severity in terms of establishing our loss pick if you will.

And what are you assuming for loss trend, the combination of frequency and severity?

Well, we're seeing that frequency has been dropping, severity has been increasing, and Marty has spoken to that before in terms of what we're seeing in medical inflation. They have tended to offset each other, so it's been essentially neutral for the moment.

So flat loss trend is the assumption?

More or less, right.

And I'm sorry, could you say again what's the average -- what the rate running through the written or the earned premium was currently?

We didn't say what the rate was. We just said that we had seen the first uptick in the net rate since 2004.

On the renewal book.

On the renewal book.

Which is where you would see most of it.

Right, right and what was that change again?

I didn't say how much it was. I just said --

Oh, okay.

First positive renewal rate change we've seen since 2004.

Okay. Regarding the reserves, you had a favorable reserve position for some time now. And I'm just wondering what your thoughts are about the longevity of it, and particularly in light of the fact that you are taking your accident year pick up now. So just if you have any general thoughts on your reserves and the pattern of development and how you think about that at this point in the comp cycle, as you guys look at it?

Well, as we've stated in the past, not only are we making our independent reserve calculations and establishing our pick if you will for provision against the new years, we've constantly measuring ourselves against our independent actuarial consultant and what they're seeing. And we try to maintain a relative position against that third party evaluation to be slightly above it, and we continue to do that. We're not trying to radically increase or decrease that margin. So it does give us, it serves to give us a cross-check on what we believe to be a prudent reserve level, and we haven't moved away from that approach to reserving in our history.

Okay. Final question for me -- can you offer any commentary on what the national carriers are doing in your various markets?

It's not consistent across all the markets. It does vary by region, by state, although I think it's fair to describe some of them as being extremely aggressive in terms of pricing, and also in some instances being very aggressive in commission levels. Again it's not consistently that way everywhere, but we are seeing that in most markets.

Are they mutuals or stock companies or is there any consistency between the two, or not really?

No consistency between the two. I think you've identified most of them though.

All right, thanks. Thanks very much.

The next question comes from the line of Robert Farnam from Sidoti & Company. Please proceed.

Hi, just two questions here. Doug, you made a comment that the combined ratio is not yet optimal. I'm assuming that's mostly on the expense ratio. Can you expand on your comments there? And do you have a target for the expense ratio and how quickly do you think that's achievable?

We set a target in terms of our underwriting objectives that assumes a combined ratio of 100. As you can see from our numbers, we have been able to drive down the absolute level of expenses. But the expense ratio continues to rise, given the decline in payrolls and also somewhat continuing declines in rate levels, although as Ric has indicated and Marty has indicated, we are starting to see a change in that in California. I think that the ultimate way to work out of this will be to continue to support growth in that top line and drive down the expense ratio. The loss ratio really is more a function of the quality of the underwriting, which for us has always been very good, and a function of overall rate adequacy. And as I look at California, as we get more rate, the rate adequacy should be improving. So the ultimate goal based on our underwriting objective is a combined ratio of 100. I think that is challenging to achieve in the short run, given the general economic conditions, but we expect it to improve as payrolls come back and premium rises.

I would reiterate something I said during our prepared remarks, and that is we have focused on expenses and it is beginning to show. Our underwriting costs per policy have dropped in excess of 10% since December of 2008 and we continue to focus on being even more efficient as we go forward.

Okay, thanks, that's helpful. And final question, can you remind us how much is left on the share repurchase program?

There is approximately $50 million left. That is through -- the authorization extends through December 31 of this year.

Okay, thank you very much.

The next question comes from the line of Chris Sommers from Greenlight. Please proceed.

Hi, guys. You said earlier that this was the first quarter where premiums comped positively year-over-year per policy, and you also said the reserves for losses were trending flat. If I look at your accident year losses in LAE excluding the LPT, it locks like relative to net premiums earned, it increased about 1,000 basis points to around 70% from 61% to 62% last year, and up about 200 basis points from the first quarter. What's causing that?

Well, relative to a year ago, the quarter a year ago, it was about mid year of 2008 that we determined that we needed to adjust our provision rate going forward through the remainder of that fiscal year 2008. So you're getting -- the change really goes back to that period in time as opposed to something that's happened in the most recent quarter. And as we say or mentioned earlier today, first quarter to second quarter, we're still being cautious and it's more reflective of a caution -- increased conservatism, if you will -- because California and Florida still have the unresolved issues that I described earlier.

Got it. And what about the couple hundred basis point increase from the first quarter, if pricing went up and reserves for losses were flat?

Well, the uptick that Marty has referred to was not throughout the entire quarter. We're beginning to see it and it hasn't -- so that top line flattening uptick if you will in net rates is not something that has had significant dollar impact on the top line just yet.

Got it. Okay, thanks.

And we have no further questions at this time. I'd like to turn the call back over to Mr. Douglas Dirks, CEO. Please proceed.

Thank you, operator. Thank you, everyone, for joining us today. We appreciate your questions and your interest and your support. We look forward to speaking with you again next quarter.

This concludes the presentation for today, ladies and gentlemen. You may now disconnect. Have a wonderful day.