Employers Holdings Inc (EIG) 2017 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Employers Holdings, Inc. Q3 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to Lenard Ormsby, Executive Vice President, Chief Legal Officer. Sir, You may begin.

Thank you, Takia. Good morning, and welcome, ladies and gentlemen, to the Third Quarter 2017 earnings call for Employers. I am Lenard Ormsby, Chief Legal Officer and General Counsel with Employers. I am taking over as host of the earnings call for Vicki Mills. Everyone at Employers hopes that she is enjoying her well-deserved retirement.

Yesterday, we announced our earnings results and we will soon file our Form 10-Q with the Securities and Exchange Commission. These materials 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; Mike Paquette, our Chief Financial Officer; and Steve Festa, our Chief Operating Officer.

Statements made during this conference call that are not based on historical facts are considered forward-looking statements. These statements are made in reliance on the safe harbor provision of the Private Securities Litigation Reform Act of 1995. Although we believe the expectations expressed in our forward-looking statements are reasonable, risks and uncertainties could cause actual results to be materially different from our expectations, including the risks set forth in our filings with the Securities and Exchange Commission.

All remarks made during the call are current at the time of the call and will not be updated to reflect subsequent developments. In our earnings press release and in our remarks or responses to questions, we may use non-GAAP financial metrics, including those that exclude the impact of the 1999 Loss Portfolio Transfer, or LPT. Reconciliations of these non-GAAP metrics are included in our new financial supplement as an attachment to our earnings press release, our Investor presentation and any other materials available in the Investors section on our website.

Now, I will turn the call over to Doug.

Thank you, Lenard, and thank you, all, for joining us on our call today. We produced strong operating and underwriting results in the third quarter of this year. Our current quarter operating income increased 16% or $0.08 per diluted share. And our underwriting income increased 21% as a combined ratio before the impact of the LPT improved by 1.2 percentage points. Our book value per share ended the quarter at $33.42 and 9 month increase of 7%, including dividend. In the current quarter, final audit premium was above expectations, and we delivered solid new business growth by actively pursuing opportunities that met our underwriting requirements.

Despite this growth in new business, our topline growth continues to be pressured by declining rates in our renewal book of business, linked to improving underlying loss cost trends. Our policy retention rate in the third quarter remained high, and payroll exposures increased. Overall, renewal premiums declined slightly in the quarter driven by 1 territory in our Southern California market. Our average renewal rate for the first 9 months of the year decreased by 2.8%.

We recently announced that we've entered into an agreement to buy a multi-state insurance Shell Company from PartnerRe. We hope to close on this transaction on or about year-end, and expect the final purchase price to be approximately $46 million. This acquisition will provide us with greater underwriting flexibility in the states in which we currently operate, as well as providing us with licenses in several states where we do not currently conduct business.

As a mono-line workers compensation writer, we believe that we possess deep knowledge of our markets and can quickly react to changing conditions. We have demonstrated this ability over the years and across many economic and market cycles. We consider this a competitive advantage that we intend to maintain and strengthen as we continue to pursue strategically critical technology and data analytic initiatives.

Now with that, I'll turn the call over to Mike for further discussion of our financial results. Mike?

Thank you, Doug. Net premiums written for the third quarter increased by 9% year-over-year, which Steve will address in his remarks. Our third quarter combined ratio before the impact of the LPT of 94%, was lower than the 95.2% reported a year ago, largely as a result of our loss in LAE ratio improving by 1.1 percentage points.

Our commission and other underwriting expense ratios were unchanged from a year ago, in the aggregate. Net investment income for the third quarter increased from a year ago to $18.5 million as a result of a higher pretax book yield.

At quarter end, our fixed maturity portfolio had an average pretax book yield of 3.2% and a tax equivalent book yield of 3.7%. The higher net realized gains on investments for the third quarter was related to sales and maturity of municipal bonds, which were subsequently replaced with taxable fixed maturities.

During the quarter, we wrote off $7.5 million of previously capitalized costs relating to the development of information technology capabilities that had not yet been placed in service. We will continue to develop our data analytics capabilities, integrate those capabilities within our existing information systems and implement technologies that enables an improved customer experience.

Our effective income tax rate was 24% for the quarter, which is largely consistent with that of recent prior quarters. Municipal bond interest, LPT reserve adjustments and deferred gain amortization are the main reasons why our effective tax rate differs from the current U.S. statutory rate of 35%.

As of September 30, 2017, the market value of our investment portfolio was $2.6 billion, an increase of 2% from a year ago. At the end of the third quarter, our fixed maturities had a duration of 4.1 years and an average credit quality of AA-, and our equity securities represented 8% of the total investment portfolio.

And now, I'll turn the call over to Steve.

Thank you, Mike, and good morning. Average premiums for the quarter of $177.6 million were up $14.6 million or 9% from the third quarter of 2016. The drivers for this increase include both increases in final audit premiums as well as increases in new business premium written. We continue to see strong payroll pickup at final audit, which is driven by additional hiring of employees as well as additional hours worked by existing employees.

From a new business production standpoint, we grew our new business revenue quarter-over-quarter by 5.8%. This increase occurred despite a declining rate environment in the majority of the states in which we operate. This is also an improvement over the new business growth we saw in both the first quarter as well as the second quarter of this year.

This growth has occurred not only in the new states that we have recently entered, but has also occurred in several of the states where we have had a long-term presence in. As indicated in prior calls, although we continue to see growth in our independent agent channel, a substantial contributor to our growth both for the quarter as well as for the year has been from our alternative distribution channel partners. This distribution channel currently makes up 26.6% of our in-force premiums.

Our calendar year loss and LAE ratio before the impact of the LPT, improved from 64.6%, during the third quarter of 2016 to 63.5% in the current quarter. These results continue the trends noted in recent quarters and are derivative of the initiative undertaking over the past few years, and discussed on previous calls. Our indemnity claim frequency continued to decrease year-over-year, and we continue to see slight downward movement in medical and indemnity costs per claim. These trends are reflected in our current accident year loss estimate.

And now, I will return the call back to Doug.

Thanks, Steve. While our investment income is impacted by continuing low yields, our underwriting profitability is at record levels. Our strong earnings and positive cash flow have allowed us to continue to invest in our business while returning capital to shareholders most recently through increases in our dividend. We are maintaining the strength of our balance sheet and creating increased value for our shareholders as evidenced by our strong operating income and continued growth in our book value per share.

And with that, operator, we'll now turn the call over for questions.

(Operator Instructions) Our first question comes From Mark Hughes from SunTrust.

The strength at the topline, any dislocation at any particular competitors that might have contributed to that nice growth?

Mark, this is Steve. We're picking up business from not only some of the preexisting partnerships we've had, but we've added some new partners both on the independent channel side -- independent agent side as well as the alternative distribution side as well. So really we're just getting more opportunities through more submissions, more quotes and buyings are picking up as well. Clearly, we're taking that new business from other companies and some of those are regional competitors and some of them are national multi-line competitors.

Anything in the marketplace that ties all that together? I assume it's just as competitive as it was the last couple of quarters, but why do you think you're having more success?

I think just the development of new partnerships, as I alluded to earlier, and over the past year we've actually added some new talent to our sales organization, in particular, on the leadership end, which are bringing to us some relationships that are starting to show in our numbers and I expect that to continue.

The audit premium, are you able to share what the absolute number of audit premium was? Or how much it increased year-over-year?

Yes. For the quarter it increased $9.4 million.

And then what was it on the absolute basis?

Mark, I'm not sure I'm following your question.

I'm sorry. The audit premium itself was that an increase year-over-year of $9.4 million or it was $9.4 million for the quarter?

No, no. It's an increase quarter-over-quarter of $9.4 million.

Okay. On the frequency side, I think you said frequency continues to improve. Is it improving at the same pace as pricing? Your pricing is down, renewal rate is down 3%, is frequency improving at 3% pace? Or is it faster or slower than that?

I don't know that I would break that out quite that way, Mark. I would say that at least at this point, in terms of frequency and severity, we think we are on the favorable side of the trend in terms of pricing.

Right. Understood. The technology write-off in the quarter, is that something you're going to have to try again with some extra spending? Or this doesn't impact your future spending plans?

I would describe it as a continuation. We have quite a few initiatives in mind that are designed to better respond to the changing needs of our customers be they policyholders or agents. So I expect it'll just be continuation.

(Operator Instructions) Our next question comes from Ella Soltz with Buckingham Research.

I'm in for Amit. I just had a quick question for you guys on the rate declines. I wish -- I don't understand how it compares in and out of California? And how it compares between smaller accounts and larger accounts?

So we're seeing a greater decline in that renewal rate that you're referencing in California than we are in other states, it's heightened competition, in particular, in one territory in California. And it's really more of a middle-market phenomenon, our smaller accounts were not seeing that type of decline and our retention rates are very high actually with our smaller market accounts.

Our next question comes from the line of Cliff Gallant with Philadelphia Financial.

First question, in the opening remarks, you mentioned the move from munis to fixed, just curious how far you can go with that? And does that reflect any outlook on the tax outlook for the company?

Cliff, it's Mike. And it's really a variety of things and we haven't suffered on an after-tax basis by getting out of those munis and going into other assets, largely MBS and corporates, but it is a bit of safety as to what happens in the future and because it's unknown it is a source of potential future volatility. But we really aren't going to go any further than that, what we really did was reduce our munis from something close to the top of the permissible range within our investment guidelines to something closer to the minimum within those investment guidelines. But we're now comfortable in a wait-and-see mode with the balance of the munis.

Okay. And on the expense ratio, I mean, it seems like there's a few factors as we go forward. I mean, you've capitalized some costs, but you're also showing a lot of topline for the improving leverage, how should we think about the expense ratio over the next 12 to 18 months?

You know the expense ratio, obviously, is supported by increasing topline, a portion of it's variable. So when you think about the premium tax component, bad debt tends to be somewhat more variable. So those aren't relieved by an increase in the top line, but certainly our objective is to manage the fixed component of other underwriting expense and try to improve that as we grow the topline. I don't -- I wouldn't suggest where run rate is, obviously, a lot of pressure with declining rates and just normal inflationary impacts on the fixed costs. So again, I wouldn't characterize it as run rate, but I think we've got it very well under management.

And just on the growth, it seems like there's a number of factors which are leading to organic growth for you guys now. And seems like as you go into this period where you might see a ramp-up in your growth rate, can you talk a little bit how you're positioned on the back end in terms of claims and loss management?

Yes, we're positioned very well, Cliff. We actually through -- and particularly in the claims area through our accelerated claims initiative that we talked about on prior calls, we reduced our pending claim inventory, I won't give you the exact numbers, but significantly and that's allowed us the ability to be prepared for any uptick in claims we may see as we continue to grow. A lot of our focus on growth though was on the small business, obviously, where the claim frequency is generally less than you'll see in middle-market accounts.

We have a follow-up from the line of Mark Hughes of SunTrust.

Just curious related thoughts on the capital management front, you're getting some growth now, but with your ROE in a high single-digits you're growing your capital base, your balance sheet is obviously very lean, minimal debt. Any updated thoughts on what to do with the capital?

Mark, this is Mike. On the capital side, you need to look at 2 different things. One, we obviously have some excess capital, but I'll remind you that A.M. Best has put some new strength ratios together and we'll be interested to see how we come out under the new regime. But the other thing that you need to consider at this stage is our corporate liquidity. So we've been taking up dividends from our regulated entities to the maximum extent, but our dividend capacity for this year is somewhat impaired versus prior years because of some restructuring that we did at last year-end, which aligns each of the insurance companies directly under the corporate, which will bring us more efficiencies going forward. So what we've done with the liquidity that's available at the holding company this year, is that we've dramatically increased the dividend, we did repurchase some surplus notes earlier in the year and we have announced and are embarking on the closing of the PartnerRe Shell Company for $46 million, and that has been kind of an exhausting of the current liquidity available at the parent. Next year, we'll have some more dividend capacity and it will largely be restored and we can visit it at this time.

The -- refresh me on your process in the evaluating your reserves, is that -- is there extra look in the fourth quarter related to any potential for reserve releases, I know that's not something you forecast, but is there -- is the process in place such that if it was going to happen, it would be more likely to happen in the fourth quarter? Just refresh me on the timing on that.

Yes. I won't comment on the likelihood of that happening in any particular quarter, but we do full analyses midyear and at the end of the year. The off quarters -- and in the off quarters, we do an analysis, but it isn't the full analysis, it's really a comparison of actual to expected. And so I wouldn't say that precludes there ever being an adjustment to reserves favorable or unfavorable in any given period, but the deeper studies are done mid-year and end of year.

And I'm showing no further questions in queue at this time. I would like to turn the conference back over to Douglas Dirks, President and CEO for closing remarks.

Very good. Thank you, all, for joining us today. We appreciate your participation, your support and your questions. We look forward to speaking with you again in February, when we report our full-year 2017 results. Thanks, and everyone, have a great day.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a great day.