Employers Holdings Inc (EIG) 2025 Q4 法說會逐字稿

Good day and thank you for standing by. Welcome to the Q4 2025 Employers Holdings, Inc.'s, earnings conference call. (Operator Instructions) Please be advised that today's conference is being recorded.

I would now like to turn the conference over to your speaker for today, Matthew Hendricksen, Senior Vice President of Treasury and Investment. Please go ahead.

Thank you, operator. Good morning, and welcome, everyone, to the fourth-quarter 2025 earnings call for Employers. Today's call is being recorded and webcast from the Investors section of our website, where a replay will be available following the call.

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 only at the time of the call and will not be updated to reflect subsequent developments.

The company also uses its website as a means of disclosing material nonpublic information and for complying with disclosures, obligations under the SEC's Regulation FD. Such disclosures will be included in the Investors section of our website. Accordingly, investors should monitor that portion of our website in addition to following our press releases, SEC filings, public conference calls, and webcast.

In our earnings press release and in our remarks or responses to questions, we may use non-GAAP financial measures. Reconciliations of these non-GAAP measures to our GAAP results are included in our financial supplement as an attachment to our earnings press release, our investor presentation, and any other materials available in the Investors section of our website.

Now I will turn the call over to Kathy Antonello, our Chief Executive Officer.

Thank you, Matt. Good morning, everyone, and welcome to our fourth-quarter 2025 earnings call. Joining me is Mike Pedraja, our Chief Financial Officer. During today's call, I will begin by providing highlights of our fourth quarter 2025 results and then hand it over to Mike for more details on our financials. Before our Q&A, I'll come back to you with some additional thoughts.

I'd like to begin with how we are actively addressing the elevated frequency of California cumulative trauma claims. To be clear, this remains a California-specific issue. Claim frequency in our other states and within non-CT claims in California continues to trend favorably. We recognized early that the CT environment was creating a hard market in California, and we moved decisively. We have implemented rate increases and tightened underwriting restrictions on several classes of business.

We are not waiting for legislative reform, though we do believe the growing impact on California businesses and public agency budgets will make the case for reform increasingly difficult to ignore. While we're confident that these California pricing and underwriting actions, along with the steps we're taking across the country will strengthen our underwriting profitability, they are also likely to reduce written premium in 2026.

It's worth highlighting that our Small Commercial franchise maintained strong retention rates throughout 2025, a clear sign the investments we've made in automation and ease of use are genuinely resonating.

I'm also pleased to report that our standard fourth quarter full actuarial assessment concluded that no additional reserve strengthening or adjustments to our current accident year loss and LAE ratio was necessary. In addition to our internal analysis, we engaged a market-leading actuarial firm to independently assess our estimated ultimate loss and they concluded that our carried reserves were well within the range of reasonable estimates.

We believe the outcome of these two analyses confirms the actions we took in the third quarter adequately addressed recent workers' compensation trends. I'm excited to discuss our new Excess Workers' Compensation product, which represents a strategic expansion of our capabilities. By leveraging our core workers' compensation expertise into the Excess layer, we're creating new growth avenues while diversifying our risk profile.

Our aggressive adoption of AI tools has accelerated the product's development, and I'm pleased to report that we are now accepting submissions. The early market response has been strong, and we expect this product will deepen our distribution partner relationships while expanding our addressable market.

We continue to execute on our commitment to returning capital to stockholders by delivering $215 million of share repurchases and regular quarterly dividends in 2025. In January, we completed the $125 million capital recapitalization plan that we announced in the third quarter. These capital management steps reflect our continued confidence in our financial position and our commitment to delivering value to shareholders.

Along with our operational performance, these actions increased our book value per share, including the deferred gain by 11% to $51.31. We believe our focus on disciplined underwriting, prudent risk management, and strategic investments continue to position us strongly in the workers' compensation insurance market, which is evidenced by A.M. Best's recent reaffirmation of our insurance company's financial strength rating of A.

With that, Mike will now provide a deeper dive into our fourth quarter financial results, and then I will return to provide my closing remarks. Mike?

Thank you, Kathy. Gross premiums written were $156.8 million compared to $176.3 million for the prior year quarter, a decrease of 11% due primarily to a decrease in new business writings and lower final audit premiums, partially offset by higher renewal business premium.

Our losses in LAE were $134.4 million versus $113.2 million a year ago, an increase of 18.7% due primarily to an increase in the accident year 2025 selected loss and LAE ratio and the absence of favorable developments in the fourth quarter of this year.

Commission expense was $25.8 million for the quarter versus $24.4 million for the prior year, an increase of 5.7%, driven by nonrecurring adjustments. Underwriting expenses were $39.8 million for the quarter versus $44.2 million for the prior year, a decrease of 10%.

The improvement in underwriting expenses for the fourth quarter was due primarily to continued expense management efforts, including reduced personnel costs and other variable costs such as policyholder dividends and bad debt.

Net investment income was $31.4 million for the quarter compared to $26.7 million for the prior year, an increase of 17.6% due mostly to private equity investment return distributions and an overall higher book yield on our fixed income portfolio.

As Kathy mentioned, we executed an investment rebalancing to address several strategic goals, including reducing our equity investment allocation to target levels and increasing our overall portfolio yield. Our equity investments, like most in the market, have appreciated very nicely and reached 16% of our investment portfolio versus a target allocation of approximately 10%.

As part of the investment rebalancing, we also sold low-yielding fixed income securities to offset the associated equity gains and redeploy the proceeds into higher-yielding fixed income investments.

The investment rebalancing accomplished several goals, including reducing our equity investments to target allocation, increasing our overall investment portfolio yield by a net 40 basis points, extracting an estimated net present value gain of $16 million, and reducing our required capital.

The sale of fixed income investments produced an after-tax realized loss of $40 million, which reduced net income and adjusted book value per share during the quarter. Our stockholders' equity and book value per share were not impacted by the investment rebalancing. Our fixed maturities maintain a modified duration of 4.4 with strong average credit quality of A+. Aided by our investment rebalancing, our weighted average book yield increased to 4.9% at quarter end compared to 4.5% for the prior year.

Our adjusted net income, which excludes net realized and unrealized investment gains and losses and the benefit of our LPT deferred gain amortization was $14.5 million for the quarter compared to $28.7 million last year. During the fourth quarter, we repurchased almost 2.4 million shares of our common stock at an average price of $40.94 per share or $97 million.

The average repurchase price represented a 20% discount to our book value per share, including the deferred gain and adjusted book value per share. During the period from January 1 through February 18 of this year, the company repurchased a further 898,594 shares of its common stock at an average price of $44.28 per share. Our remaining share repurchase authorization is $53.1 million.

As we have highlighted, we aim to be good stewards of our shareholders' capital. At current price levels, we are convinced that the employer stock is meaningfully undervalued and executing share repurchases at these price levels produces a significant return on investment and generate significant value for our continuing shareholders.

With that, I'll turn the call back to Kathy.

Thank you, Mike. Yesterday, our Board of Directors declared a first quarter 2026 quarterly dividend of $0.32 per share. The dividend is payable on March 18 to stockholders of record on March 4. As evidenced by the recapitalization plan, we remain confident in Employer's financial strength and financial prospects, and we'll continue to manage our capital strategically. We returned $104.1 million to our stockholders in the fourth quarter through a combination of regular quarterly dividends and share repurchases at an average price that was highly accretive to our book value per share.

Our focus on operational excellence is unwavering. In 2025, we drove our expense ratio down 180 basis points to 21.7%, and we believe it will continue to decline with our enterprise-wide deployment of AI. In addition to our new excess workers' compensation risk management tools, which are comprised of dozens of specialized AI agents, AI has helped us internally develop a significant claims platform enhancement and other new capabilities backed by our Agentic ecosystem. Our mindset around the adoption of AI isn't just about efficiency. It's also about creating a sustainable, competitive advantage for the company.

As we look ahead, we're confident that we're operating from a position of strength, solid reserves validated by independent analysis, improving expense ratios, expanding product capabilities, and a solid balance sheet. We believe we're making deliberate strategic choices to position employers for the future, and we're executing with discipline and urgency. We're absolutely confident in the path that we're on.

Before we take questions, I want to take a moment to thank the entire employers team. This was a demanding year, and the way this team rose to meet it speaks volumes about who we are as a company.

From our underwriting and claims teams navigating the challenging California market, to the technology teams whose AI initiatives are already delivering measurable results, to our finance, operations, and support teams who keep us running efficiently every day, none of what we've accomplished would be possible without you.

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

(Operator Instructions) Mark Hughes, Truist.

Yeah. Thank you. Good morning.

Good morning, Mark.

Kathy, anything about the trajectory of CT claims? It seems like once the lawyers get a new shiny object in front of them, they just keep piling in. Is the -- are you seeing any further acceleration? Is it -- is it on a relatively even keel?

Yeah. That's a great question, Mark. We are seeing throughout 2025 that the acceleration of the frequency that we saw in early '25 and throughout 2024 as those accident years as they emerged late. We're seeing that acceleration slow down and flatten quite a bit. So that has been good news.

Having said that, CT claims as a percentage of overall claims is still quite elevated relative to what we've seen in the past. But what we are seeing now, I'm not ready to claim victory yet, is that the acceleration of the frequency has flattened.

Yeah. And you mentioned in 2026, probably likely to see reduced written premium -- you talked about a hardening market, which implies that others are recognizing the issue, but it seems like there are still competitors taking share. Could you maybe just talk about that dynamic? Again, hardening market, but you're still being cautious about it.

Yeah. I mean, when I talk about a hardening market, I think it's specific mostly to California, where the bureau took a rate increase. We're seeing -- we saw a significant increase that was also filed in Nevada. So most of it's happening in the West. But I would characterize the California market as hardening.

Generally speaking, though, I'd say across the country, the environment is still fairly competitive. We're seeing pockets though, carriers that are exiting certain states or certain classes of business, definitely seeing tightening of risk selection, especially in states where you don't have a lot of flexibility in pricing like Florida.

I wouldn't characterize it as a major trend. I don't believe all companies are as forward-looking as we are in some of these aspects. But we're -- we've decided we're just not going to play in some of the areas where we feel like pricing margins have become too thin.

I can give you just some high-level numbers of what we're seeing in our book. Countrywide in the fourth quarter, payrolls were basically flat for our renewal book, but we're seeing an average rate on renewal increase a little over 5% for our entire book.

How is that California versus non-California?

California is driving quite a bit of that. But we're seeing, like I said, certain states that are pushing rate higher. I mentioned Nevada earlier, but there are other states where it's more -- we're more focused on risk selection than on pricing being the lever that we're pulling.

Yeah. What's your view on buybacks for 2026?

Yeah. We still have quite a bit left in our share repurchase authority that the -- we did quite a bit, right, in the fourth quarter of 2025. And as we just mentioned in our prepared remarks in January and early February, I do expect it will return to a normal level of repurchase authority in 2026, absent some change, but we're trying to be very opportunistic in terms of when we buy our shares back.

And then your expense ratio, if top line is down in 2026, can you still get improvement in the expense ratio?

We are hoping to still get improvement. As I mentioned, we have a lot of AI initiatives that are underway. We put an AI road map in place in 2025 and are setting the stage to get all of our data into Databricks. We started utilizing AI, I don't know, a couple of years ago when we embedded a large language model in our new digital first notice of loss tool. We're rolling out Anthropic's Claude to the entire organization. Our developers are enhancing their productivity by using AI code assistance.

We've started with the claims area where we're incorporating AI into over 40 to 50 identified use cases. But I would say our latest achievement has -- is definitely our excess workers' compensation product that we just rolled out. We used voice transcription that was ingested by Claude to build the tool and it iterated daily for about four weeks, and we were ready to launch months earlier than we initially expected. The results were truly remarkable.

We have more tools going in place in the first quarter that are more claims focused, a caseload summary tool for our claims adjusters that's going to provide better continuity of care when an injured workers claim gets passed from one adjuster to another.

We have an Agentic assistant that we're hoping to put into production for our premium auditors. All of these things we feel like are going to help our expense ratio in the long run. These are real. These are not just tests that we have going on behind the scenes, and that's where we're hopeful we're going to get more expense savings.

Very good. Thank you.

Thanks, Mark.

Karol Chmiel, Citizens.

Yes. Thank you. Hi. Good morning. I got two.

Hi, Karol.

Hey. First question is just regarding the gross written premium. You guys are stating lower new business growth. But if I just target California, is it a combination of lower new business plus nonrenewals? Is that right?

That's correct. That's how I would -- I think you're characterizing it correctly. We're seeing lower new business writings in California, and we've selected some classes of business that we are exiting, not just in California, but countrywide. Offsetting that are some of the rate increases that we've had. But -- and we have been, over the past four or five years, expanding our appetite.

We expect that to offset some of the exiting -- some of the classes that we're exiting. But we do expect what we saw in the fourth quarter to continue throughout 2026.

Excellent. Thank you. And just a follow-up regarding the new products, can you just comment on how you would want to scale this new Excess Workers' Comp and if there's any other products you have in mind for the rest of the year?

Yeah. We do have other products in mind. We're not quite ready to announce those yet, but I think they will be similar to excess comp in nature and in our wheelhouse. In terms of scale, we are thinking we'll write our first business effective July 1. And we are going to take it a little bit slow, be careful like we've done in our appetite expansion effort, learn as we go. But we think over time that this could be a meaningful top-line revenue growth driver for us as a company.

Excellent. Thank you so much.

[Bob Farnham, Green Capital].

Hey, there. Good morning.

Good morning, Bob.

A couple more questions on the Excess Workers' Comp. Can you still here me?

Yes.

Okay. So obviously, there are competitors that are already entrenched in this business. So how do you expect to win business? Is it more of the fact that you can do it more efficiently because of the use of AI? Or are there other factors do you think that can be successful for you?

Yeah. We do feel like there are areas that we're going to focus on within the product that are not provided by other carriers in an efficient way. And I'm talking about loss control, the ingestion of the data. We do feel like we're going to be able to provide quotes in a faster manner because of the AI tool that we're going to be using for -- to ingest all of the data when we get a submission and to just process the loss runs that can go back 10, 15 years on excess work comp. This is part of our diversification effort.

We've been researching new products for about a year and excess, we felt like was the right place to start because of our extensive expertise in work comp. We felt like it was just a natural extension of what we do now.

We do feel like while there are carriers that are entrenched in the space, there aren't a lot of carriers that do it on a significant basis -- that it's a significant amount of their portfolio. So we felt like there was room for another carrier to enter the market. And we do feel like we're going to make a difference that is going to put us ahead of the pack.

Okay. Obviously, you've done a lot of research on this. So what type of performance does this product perform, I should say. So in terms of combined ratio, and is there a difference between the expense ratio component of the loss ratio? In other words, is it more of a higher expense ratio or lower loss ratio-type product?

And just just trying to get a feel for going forward, like not necessarily in 2026, but when this gets up to full speed, what type of impact that might have relative to your traditional book?

Yeah. I mean, I think relative to the guaranteed cost business that we've written forever, the excess comp space, while it's a bit, what I would say, lumpier, overall, we feel like it's going to perform in the mid-80%s in terms of a combined ratio. The way we've built it and the way that we are using AI to underwrite it, we do feel like our expense ratio will be strong and competitive in the space. And then the loss ratio is just typically less than what you would see in the guaranteed cost space.

Okay. And it's still driven by state loss costs in the same way that the primary workers' comp system is? Is it still priced the same way?

The pricing is a little bit different. Yeah, underlying the pricing, you still start with the state loss costs like you do with guaranteed costs. But because the self-insured retention can be anywhere from $0.5 million to $2 million, you're eliminating a lot of the frequency that comes along with the guaranteed cost book of business. So it's more severity driven than frequency driven. And we think that is one of the things that's a nice diversification play to put excess along with the guaranteed cost. It's very similar to large deductible.

Right, right. Okay. And last one for me. You may not be able to give any specification here, but all right. So once a few years down the road, when this is up to speed, what do you envision in terms of the proportion of your total premium is going to be coming from excess versus the primary book?

Yeah. It's a good question. We don't give guidance, as you know. But we would love to see this be 10% of our overall written premium over the next four to seven years, say. And I know I'm being very broad in my projections there.

I expect nothing but broad right now.

So yeah, that's what we're hoping for, but we'll obviously keep everyone apprised of our progress there.

All righty. That's it from me. Thanks.

Thanks, Bob.

Thank you. I show no further questions at this time. I'd like to turn it back to Kathy Antonello for closing remarks.

Okay. Thank you, and thank you all for joining us this morning. We very much look forward to meeting with you again in April.

This concludes today's conference call. Thank you for participating, and you may now disconnect.