Employers Holdings Inc (EIG) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter 2013 Employers Holdings Incorporated earnings conference call. At this time, all participants are in a listen-only mode. Later, we will facilitate a question-and-answer session towards the end of this conference. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Vicki Erickson Mills, Vice President of Investor Relations. You may proceed.

Thank you, Francis, and welcome, everyone, to the first-quarter 2013 earnings call for Employers. Yesterday we announced our earnings results, and today we will file our Form 10-Q with the Securities and Exchange Commission. Our press release on 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 today on the call are Doug Dirks, our Chief Executive Officer; and Ric Yocke, our Chief Financial Officer.

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 our current at the time of the call and will not be updated to reflect subsequent 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. A list of our portfolio securities by CUSIP is available in the Investors section of our website under calendar of events, first-quarter earnings call.

Now I will turn the call over to Doug.

Thank you, Vicki. Welcome and thank you for joining us today.

Our performance in the first quarter of this year with strong. Net written premium growth net was 23% higher than last year's first quarter, driven by policy count growth of 22%. This is the fifth consecutive quarter where our premium growth has outpaced our policy count growth quarter over quarter.

We see continuing improvements in our markets, particularly in terms of rates. We started to see improvements in pricing in the fourth quarter of 2011, which accelerated in the first quarter of this year as the overall net rate increased 10.2% year over year.

The net rate change at the end of the first quarter in our five highest in-force premium states was positive, with double-digit increases in four of those states, including California, Illinois, Georgia, and Nevada. Net rate increase just under 5% in Florida, which is an administered pricing state. Our top five states represent 75% of our in-force premium.

Our indemnity claims frequency was relatively unchanged for the first quarter of 2013 compared to the same period of 2012, and our loss experience indicates a downward trend in medical and indemnity costs per claim that are reflected in our current accident year loss estimate. While we experienced a few larger claims in the first quarter, we continued to see downward trends in severity. Also, we continued to see modest increases in frequency and severity in California that are offset by improving loss trends elsewhere.

As a result of these consistent trends in pricing and losses, we lowered our provision rate for losses by nearly 2% in the first quarter. This contributed to a loss ratio before the LPT that was 1.6 points lower than in the first quarter of last year.

The underwriting expense ratio improved 8.7 points in the first quarter year over year. This improvement was largely attributable to increased business scale, resulting from our substantial premium growth and continued cost containment. The overall combined ratio before the LPT improved by 10.4 points.

As expected, as we have sought higher rates on our renewal business, our overall policy retention dropped modestly in the first quarter to 83% compared to 87% in the first quarter of 2012. This indicates that there continues to be price competition in our markets, particularly for policies in excess of $10,000 in annual premium.

Retention for our strategic partner business was stable at 90% compared to 91% in the first quarter of last year. Our strategic partner business generated $127 million or about 23% of our total in-force premium as of the end of the first quarter.

Now I will turn the call over to Ric.

Thank you, Doug. As Doug mentioned, we improved our combined ratio before the LPT 10.4 points in the first quarter year over year. Much of the improvement is attributable to a significant decline of 8.7 points in the underwriting expense ratio and a 1.6 point decline in the loss ratio.

Our provision rate for current accident year losses in the first quarter of this year was 75.1% compared with 76.9% in the first quarter of 2012. We lowered our provision rate for losses as we observed favorable trends in both frequency and severity in our overall book. If the current trends in rates continue to outpace the current trends in loss costs, we expect to incrementally reduce our loss provision rate going forward.

Our reserve analysis in March continued to show modest adverse development in recent accident years, offset by modest favorable development for older accident years. And while industry rating bureaus continue to report concern about Workers' Compensation reserve deficiencies, we believe our overall reserves are adequate.

Net investment income in the first quarter declined to $17.4 million from $18.4 million at the end of the first quarter of 2012 due to a year-over-year decrease in yield. The average pretax book yield of the portfolio at the end of the first quarter was 3.5% compared with 3.8% for the same period last year.

The tax equivalent yield was 4.3% compared with 4.9% in the first quarter of last year. The portfolio yield continued to drop as securities mature and those securities are reinvested in lower-yield instruments. New investments in the first quarter continued to be in the taxable sectors. About three-quarters of the fixed income purchases were corporate bonds with an average rating of A1, A plus. The remainder was secured securities, including agency mortgage-backed securities, asset backed securities, and commercial mortgage-backed securities.

Purchases in the quarter had a duration of 3.9. The duration of fixed maturities in the overall portfolio was relatively short at 4.1. The portfolio was weighted towards short- and intermediate-term bonds to minimize interest rate risk. However, our investment strategy balance is consideration of duration, yield, and credit risk.

Equities represented 6.3% of our total portfolio at the end of the first quarter. Equity purchases and sales were driven by our high-dividend portfolio strategy.

Our income tax benefit was $0.2 million in the first quarter of this year compared with $4.4 million in the first quarter last year. The decreased tax benefit is primarily the result of reductions in actual and projected underwriting losses for the year.

With that, I'll go back to Doug.

Thanks, Ric. We believe we will continue to increase premium and policy count throughout the year, but at growth rates lower than in the recent past. We are pleased with our strong performance in the quarter, and we will continue working to further improve our operating margin.

And with that, operator, we will now take questions, please.

(Operator Instructions). Mark Hughes, SunTrust.

On the loss estimates, you did show some improvement. I guess the combination of the 10% rate hike and declining losses -- would the math get you possibly do something more than 160 basis points?

At this point it's our best estimate of what we believe the difference was between those for the quarter. Certainly, if we continue to see an improving rate environment and a stable loss environment, there is additional opportunity for the loss provision rate to come down.

That may have been more of a rhetorical question. How much leverage still in the overhead? You're showing very good improvement in the operating expenses. Is there some point at which you start to have to add staff if you maintain this top-line growth?

We have already reached that point, and we've approximately doubled the number of policies on the books over the last three years. And as we add those policies, it has required the addition of some staff. But we expect to see continued improvement on the expense ratio as we build more scale into the business and as we introduce technologies that will allow us to achieve greater efficiency.

But I would expect to see that slow. The rate of improvement was slow going forward, because the bulk of it will come from increased scale, not from cost reduction initiatives that we've previously implemented.

Right. But there should be plenty of opportunity for leverage from here.

Yes. Again, the leverage will be the result of the scaling of the business and the rollout of technology that allows us to handle more business more efficiently.

Right. How about in new distribution, you have certainly helped or boosted the top line with some new distribution initiatives. Could you talk about -- add anything else that you have planned? And then, also, kind of anything on the pace of business submissions? Can you maintain this sort of growth in this environment?

So let's start with the distribution channel. We had an initiative a couple of years ago to increase the number of agents representing us, primarily in the Eastern states where we had a lower penetration. But it's something that occurred nationwide.

I would describe it now being more maintenance. We are continually adding agents and terminating relationships with agents that are not achieving their objectives. So there's not an ongoing initiative to continue the growth in the distribution channel that you saw over the last couple of years.

In terms of the submission rates, we have seen a slowdown in the submission rates year over year, but that's not unexpected. Part of that followed the appointment of new agencies. They were able to bring in the business that fit within our underwriting appetite, and unless you appoint additional agents, that will naturally slow, and that's certainly what we have had. But we continue to believe that this is a strategy that is well short of full implementation, and we see continued opportunity for growth throughout all of our markets.

And then was there any favorable development in the quarter? Did you mention that?

It was relatively neutral. We had in single-digit millions, and I mean right down around $1 million, it's more noise than development between older years and some of the years we've spoken about in previous calls -- years 2008, 2009, 2010.

But everything you see in the financial statement, that would be reflected of adverse development as principally related to residual market assessment.

Right. Understand. Okay. Great. Thank you very much.

Matt Carletti, JMP Securities.

Mark asked a few of the questions I had, but I have a couple others, if you would. Doug, on the capital, I noticed it looked like the buybacks either slowed or weren't present in the quarter. Should we think about that differently going forward? Have you reached the point, given the growth, that you feel you need to hold onto all of the capital? Or is that just kind of some circumstance in the quarter, and you still expect to buyback go forward?

Our current share purchase plan has about $50 million -- approximately $50 million of additional authority through June 30 of this year. At this point, we haven't made any decisions yet as to an extension or replacement of that plan.

Previously we have been opportunistic buyers of our stock, and the stock price has performed very well over the quarter. And as we look at potential alternative uses of capital, share repurchases will remain one alternative, but certainly we are looking at opportunities to continue to invest in our operating subsidiaries, given the condition of the market. And, of course, we always are looking for opportunistic acquisition opportunities.

Okay. And then just a numbers question for Ric, and I apologize if I missed it. But what was the new money yield in the quarter?

Let me -- I think it was $3.6 million, if remember saying it.

All right. Great. Thank you.

The average pretax yield on the portfolio is $3.5 million.

I'll grab that one, Matt. The new money is a little difficult to answer, only because it's not just a question of replacing securities that mature, but we're also balancing duration. And so it's -- if you look at it, we are buying corporates. We may be buying some short-term securities with low yields because they are better than alternative cash investments.

So I don't know that it's fair to say exactly what that number was as an indication of what we are getting on new money, because there are a number of things that are happening in a quarter. But, again, three-quarters of the addition to the portfolio was in corporates -- high-grade corporates. So what that yield is is fairly representative of the new money would be deployed at.

Okay. No, that sounds great. Thanks very much for the answers and congrats on the nice start to the year.

(Operator Instructions) Amit Kumar, Macquarie Capital.

This is Emily Gadsden calling for Amit. I was hoping to get a little clarification first on the reserve discussion. You mentioned it was mostly just noise, so is that to say there might have been adverse on more recent years, offset by favorable development on older years? Or generally just sort of small movements in each accident year on their own?

Both of your statements are correct. We had some slight upward in the 2008 through 2010 period. And those individual years were $1 million or less. We consider that more noise in development, but mathematically, that was offset by some like amounts in earlier periods.

Got it. Okay. And then moving on to some of the rate increases that you mentioned in your top five states, I was wondering if you could flesh out what those double-digit increases look like by state as well as some of the payroll exposure. That is the sort of embedded in those increases.

So if you look at the two that had the largest increases, they would be California and Illinois. We took a fairly aggressive stance in terms of rates in Illinois. We have been somewhat surprised with the strength of the retention rate in those states.

In the case of California, year over year it's 15%. In the case of Illinois, year over year it's 16.5%.

And those are the two largest.

Got it.

There's a combination. There is certainly some exposure growth that we are experiencing there, but I don't want to lose sight of the fact that what's happening in those states is a very strong rate environment.

Got it. Thanks for the answers, and that's all I had.

At this time, there are no other questions. I'd like to turn the call back over to Mr. Doug Dirks for your closing remarks.

Very good. Thank you for joining us, everybody, today. We look forward to talking to you again with our second-quarter results. Thank you.

And ladies and gentlemen, this concludes your presentation. You may now disconnect. Have a great day.