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Employers Holdings. Inc. (EIG) Q4 2022 Earnings Call Transcript

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Employers Holdings. Inc. (NYSE:EIG) Q4 2022 Earnings Conference Call February 17, 2023 11:00 AM ET

Company Participants

Lori Brown - Executive Vice President

Katherine Antonello - Chief Executive Officer

Michael Paquette - Chief Financial Officer

Conference Call Participants

Mark Hughes - Truist

Paul Newsome - AOL.com

Operator

Thank you for opinionated by and invited to nan Employers Holdings Fourth Quarter 2022 Earnings Conference Call. [Operator Instructions] As a reminder, today's programme is being recorded.

And now I'd for illustration to present your big for today's program, Lori Brown, Executive Vice President, General Counsel. Please spell ahead.

Lori Brown

Thank you, Jonathan. Good greeting and welcome, everyone, to nan 4th fourth 2022 net telephone for Employers. Today's telephone is being recorded and webcast from nan Investors conception of our website, wherever a replay will beryllium disposable pursuing nan call.

Presenting coming connected nan telephone will beryllium Kathy Antonello, our Chief Executive Officer; and Mike Paquette, our Chief Financial Officer. Statements made during this convention telephone that are not based connected humanities facts are considered forward-looking statements. These statements are made successful reliance connected nan safe harbor proviso of nan Private Securities Litigation Reform Act of 1995. Although we judge nan expectations expressed successful our forward-looking statements are reasonable, risks and uncertainties could origin existent results to beryllium materially different from our expectations, including nan risks group distant successful our filings pinch nan Securities and Exchange Commission. All remarks made during nan telephone are existent only astatine nan clip of nan telephone and will not beryllium updated to bespeak consequent developments.

The institution besides uses its website arsenic a intends of disclosing material, nonpublic accusation and for complying pinch disclosure obligations nether SEC's Regulation FD. Such disclosures will beryllium included successful nan Investors conception of nan company's website. Accordingly, investors should show that information of nan company's website successful summation to pursuing nan company's property releases, SEC filings, nationalist convention calls and webcast. In our net property merchandise and successful our remarks aliases responses to questions, we whitethorn usage non-GAAP financial metrics. Reconciliations of these non-GAAP metrics to our GAAP results are included successful our financial supplement as an attachment to our net property release, our investor position and immoderate different materials disposable successful nan Investors conception connected our website.

Now, I will move nan telephone complete to Kathy.

Katherine Antonello

Thank you, Lori. Good greeting to everyone and convey you for joining america today. To commencement nan discussion, I'll supply immoderate insights of our 4th fourth and afloat twelvemonth 2022 financial results. And past I'll manus it complete to Mike for much specifications connected our financials. Prior to nan Q&A, I'll stock immoderate insights into our -- into nan existent workers' compensation marketplace and past talk a small astir our attraction for 2023. I americium really pleased pinch what we achieved successful 2022. We closed nan twelvemonth pinch beardown gross maturation driven by crisp increases successful some premium writings and nett finance income. Our written premiums were up 22% for nan 4th and 21% for nan year.

The beardown maturation was nan consequence of higher caller renewal and last audit premiums, our thoughtful and disciplined description wrong nan low-to-medium hazard group classes, accrued submissions, quotes and binds crossed astir of nan states wherever we run and was nan superior driver of caller business premium growth. We besides accrued our last audit premium accruals and recognized beardown audit premium pickup arsenic our payroll vulnerability grew pinch nan beardown labour marketplace and rising wages. Finally, our renewal premium benefited from continued coagulated retention rates passim nan year. We wrote $707 cardinal of nett written premium successful 2022, higher than immoderate different twelvemonth since 2018 and nan 3rd highest successful our history arsenic a publically traded company.

Our nett finance income was up 53% for nan 4th and 24% for nan year. The crisp summation was chiefly owed to higher marketplace liking rates impacting enslaved yields and higher invested balances of fixed maturity securities. We earned $90 cardinal of nett finance income successful 2022, higher than immoderate different twelvemonth since 2009 and nan 2nd highest successful our history arsenic a publically traded company.

With respect to losses, Employers and Cerity each maintained a existent mishap twelvemonth nonaccomplishment and LAE ratio connected voluntary business of 64% versus nan 63.5% recorded passim 2021. During nan quarter, Employers and Cerity each recognized nett favorable anterior twelvemonth nonaccomplishment reserve improvement which amounted to $23 cardinal successful nan aggregate.

Diligent fixed disbursal guidance helped to little our consolidated underwriting and wide and administrative disbursal ratio to 24.7% for nan twelvemonth which was acold little than immoderate different twelvemonth since 2018. Cerity which we launched successful 2019, accrued its premium writings by 350% this twelvemonth from $1.5 cardinal a twelvemonth agone to $6.7 million. Cerity continues to create further business opportunities to pull mini business customers seeking an online acquisition erstwhile purchasing workers' compensation.

Finally, I want to convey our dedicated labor for an outstanding 2022. The unwavering work you supply our agents, our policyholders and their injured workers thrust our continued success.

With that, Mike will now supply a further chat of our financial results and past I'll return to supply my closing remarks. Mike?

Michael Paquette

Thank you, Kathy. Gross premiums written were $174 cardinal versus $142 cardinal a twelvemonth ago, an summation of 22%. The summation was owed to higher caller and renewal premiums and higher last audit premiums. Net premiums earned were $181 cardinal versus $156 cardinal a twelvemonth ago, an summation of 16%. Our losses and nonaccomplishment accommodation expenses were $91 cardinal versus $71 cardinal a twelvemonth ago. The summation was owed to our higher earned premium and little favorable anterior twelvemonth nonaccomplishment reserve development.

We recognized $23 cardinal of favorable anterior twelvemonth nonaccomplishment reserve improvement during nan existent quarter, predominantly related to mishap years 2017 and anterior versus $24 cardinal a twelvemonth ago. Commission expenses were $26 cardinal versus $21 cardinal a twelvemonth ago. The summation was chiefly owed to higher earned premiums, higher 2022 agency inducement accruals and an summation successful caller business writings which are mostly taxable to higher committee rates.

Underwriting and wide and administrative expenses were $47 cardinal versus $39 cardinal a twelvemonth ago. The summation was chiefly owed to higher premium taxes, assessments and bad indebtedness expense, each of which alteration pinch our earned premium.

Income taxation disbursal was $9 million, a 16% effective complaint versus $14 cardinal a twelvemonth agone aliases a 20% effective rate. The effective rates successful each of those periods included taxation benefits and exclusions associated pinch our tax-advantaged finance income and LPT deferred summation amortization.

The effective complaint successful nan existent 4th further benefited from preprivatization favorable anterior twelvemonth nonaccomplishment reserve improvement and a nonrecurring taxation use attributable to nan repeal of IRC Code Section 847. From a reporting conception perspective, our Employers conception had underwriting income of $24 cardinal versus underwriting income of $28 cardinal a twelvemonth agone and its resulting almanac twelvemonth mixed ratios were 87% and 82%, respectively.

Our Cerity conception had an underwriting nonaccomplishment of $3 cardinal for nan quarter, accordant pinch its underwriting nonaccomplishment of a twelvemonth ago. As Kathy mentioned, we stay very enthusiastic astir Cerity's premium writings which person importantly accrued complete nan past respective quarters.

Turning to investments. Our nett finance income was $27 cardinal for nan 4th versus $18 cardinal a twelvemonth ago, an summation of much than 50%. The summation was owed to higher enslaved yields and higher invested plus balances arsenic measured by amortized cost, mostly resulting from our Federal Home Loan Bank leveraged finance strategy.

Pursuant to this strategy, our security subsidiaries person received advances of $183 cardinal from nan Federal Home Loan Bank and nan proceeds from those advances were utilized to acquisition a akin magnitude of high-quality, collateralized indebtedness responsibility securities. Our fixed maturities presently person a long of 3.9 and an mean in installments value of A. Our weighted mean ending book output was 3.9% astatine year-end which is up sharply from nan 3% a twelvemonth agone and our caller money complaint coming is adjacent 6%.

Our nett income this 4th was favorably impacted by $11 cardinal of nett after-tax unrealized gains from equity securities and different investments. Those are reflected connected our income statement. And our stockholders' equity and book worth per stock further benefited by $20 cardinal of nett after-tax unrealized gains from fixed maturity securities which are reflected connected our equilibrium sheet.

And finally, during nan quarter, we repurchased $1.7 cardinal of our communal banal astatine an mean value of $42.15 per share. And since year-end, we person bought a further $4.2 cardinal of our banal astatine an mean value of $42.75 per share. Our remaining stock repurchase authority presently stands astatine $43.2 million.

And now I'll move nan telephone backmost to Kathy.

Katherine Antonello

Thanks, Mike. We expanded our superior guidance strategy successful 2022 to see nan proactive return of excess superior to our shareholders via typical dividends. During 2022, we returned complete $120 cardinal of superior to our shareholders, comprised of $30 cardinal [ph] of stock repurchases, $29 cardinal of regular quarterly dividends and $62 cardinal of typical dividends.

As a unsocial master and mini business workers' compensation, we are some good positioned and good capitalized to further respond to nan favorable trends and opportunities that we're seeing. While workers' compensation pricing remains competitive, nan statement besides remains profitable. Tailwinds from expanding hiring and wages, particularly successful nan leisure and hospitality industry, wherever we've ever had a beardown presence, are benefiting workers' comp and aesculapian ostentation has remained mean comparative to different categories.

Throughout 2023, our attraction will beryllium connected continuing to place caller and profitable segments of nan workers' compensation marketplace to turn our apical statement while maintaining our fixed disbursal structure. We're investing successful improvements to some our workforce and customer acquisition which will output efficiencies and delight our increasing customer base. We stay highly assured successful our continued success.

And pinch that, operator, we will now return questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first mobility comes from nan statement of Mark Hughes from Truist.

Mark Hughes

Kathy, nan superior business arsenic it stands today, your apical statement opportunities look to beryllium beautiful bully that you've sewage thing to do pinch your capital. But presumably, your leverage is still moderate. How do you spot that? Is location still opportunity for superior return pinch what you've sewage successful beforehand of you?

Katherine Antonello

Yes, I do judge so. I will fto Mike talk much of nan details. But I'd conscionable opportunity that we've ever been and will proceed to beryllium committed to managing our superior successful a measurement that's successful nan champion liking of nan institution and its shareholders. And to do that, we're going to usage each instrumentality successful our toolbox which is what we did successful 2022. We do consciousness nan institution is successful a very beardown superior position. And it's highly supportive of our maturation and nan exertion initiatives that I mentioned earlier and we do not spot that changing. And yes, I do consciousness for illustration we person much imaginable going guardant but I will fto Mike springiness you immoderate much specifications connected that.

Michael Paquette

So awesome question, Mark. And 1 of nan reasons why we were capable to impact $62 cardinal of typical dividends this twelvemonth is we did extract successful a typical distribution $120 cardinal from our -- 1 of our larger security companies. That still leaves astir $100 cardinal astatine nan genitor coming which is successful a bully place. But nan consequence of that typical dividend was very adjuvant to america because it helps service to summation our premium to surplus ratio from astir 54% astatine nan extremity of 2021 to 75% wherever we guidelines today. And that's a usability some of reducing nan underwriting superior and nan premium maturation that we saw this year. I deliberation Kathy and I would some for illustration to spot that number moreover higher than nan 75% it's astatine correct now, possibly to nan debased to mid-90s.

So we're connected our measurement towards much ratio successful that regard. With respect to further typical dividends, we'll make a determination successful nan 2nd half of this twelvemonth arsenic to whether that's due for 2023 aliases not. We'll make that determination based connected wherever our superior astatine nan security institution stands, what our superior position astatine nan holding institution looks for illustration and what our opportunities for 2024 look like. There's nary guarantees but we won't beryllium capable to make that determination until that clip but it is important for you to understand that we are comfortable successful making typical dividends erstwhile they're appropriate.

Mark Hughes

Yes. I admit those details. Cerity really had a bully 4th fourth for written premiums, is thing successful peculiar going connected there? Is that -- is location immoderate seasonal constituent to it? Is this a caller tally complaint that you'll look to build on?

Katherine Antonello

Yes. I do deliberation that Cerity will proceed to turn astatine a beardown clip. For nan 4th quarter, Cerity accrued its premium year-over-year by astir 275%. I'd for illustration to spot a continued maturation of that size, location betwixt 200% and 300% successful nan future. We're beautiful cautious pinch nan direct-to-consumer abstraction and don't want to turn excessively fast. We're evidently very not focused connected profitability besides and ever person been and that's why we've been cautious successful that area. The appetite description has helped Cerity and enhancing immoderate of their back-end capabilities and immoderate of nan partnerships that we announced successful 2022 are besides adding to that maturation and we afloat expect much partnerships successful nan future.

Mark Hughes

And past your broader push to expand, I deliberation you talked astir low-to-mid hazard, median hazard classes driving submissions, et cetera. How overmuch much is location to spell would you say? How acold on successful that process are you?

Katherine Antonello

Well, it's an ongoing process. I don't cognize that we will beryllium done anytime soon. What I tin show you is we -- from nan onset of our appetite description which has been a small complete 18 months now, we've written astir $50 cardinal of premium successful those expanded people codes. And we're continuing to -- that group is continuing to usability and look for opportunities wherever we spot that there's profitable maturation there, truthful haven't unopen down that description . We'll proceed into nan early to find maturation wherever we can. There's plentifulness of opportunity there.

Mark Hughes

Yes. If I could conscionable gaffe successful a mates more. Current mishap twelvemonth outlook? Any logic for that to beryllium higher aliases little successful 2023?

Katherine Antonello

I don't expect a worldly alteration successful nan existent mishap year. We're 45 days successful but we didn't spot thing that would origin siren erstwhile we were looking astatine 2023 and trying to task what that mightiness be. So I deliberation it will beryllium very akin to what you've seen successful nan anterior 2 mishap years.

Mark Hughes

And past finally, I wonder, Kathy, whether you person immoderate wide comments astir nan imaginable for reserve development. Just based connected nan magnitude of nan reserve, nan -- really overmuch you've sewage successful immoderate of these mishap years that person been much productive connected that front? I deliberation -- I don't cognize that you dipped into 2020 aliases 2021 but possibly conscionable immoderate high-level thoughts astir -- this has evidently been a awesome tally for you? What could 1 to expect that -- really is it looking arsenic we spell forward?

Katherine Antonello

Yes. So arsenic you know, astir a twelvemonth ago, we decided to do afloat studies of reserves doubly a year. And truthful that will proceed into 2023. The 1 area wherever we've spent a batch of clip looking astatine our reserves is successful respect to inflation. And our reserves person ever included a proviso for inflation. But our existent booked reserves recognized nan anticipation of an summation successful complete nan ostentation that is -- has ever been buried successful our reserve triangles. So we did do a heavy dive wherever we looked astatine respective scenarios and accrued our booking to bespeak thing complete and supra nan implicit inflation. And truthful I consciousness for illustration we're successful a bully spot. There's thing that I'm seeing that is concerning astir our reserves. As you know, we recognized $23 cardinal of favorable anterior twelvemonth reserve improvement that came predominantly from mishap years 2017 and prior. Our reserve accuracy tends to clasp connected nan much existent mishap years until there's a compelling logic to set those. And astatine nan moment, we person not felt that location was a request to do that.

Operator

[Operator Instructions] Our adjacent mobility comes from nan statement of Paul Newsome from AOL.com.

Paul Newsome

It's from Piper Sandler. Congrats connected nan year. I didn't perceive thing astir -- I'd for illustration to person immoderate much item conscionable astir nan competitory situation successful general. Any signs that things are shifting from a competitory perspective.

Katherine Antonello

Not successful a important way. For nan business sectors and nan premium sizes that we are writing, I would proceed to qualify nan situation arsenic competitive. There person been pockets that I've heard chatter astir wherever nan insurtechs are either pulling retired aliases benignant of tightening their pricing to execute immoderate profitability. That could beryllium opening up immoderate opportunities for america to participate successful areas wherever we felt for illustration pricing was somewhat inadequate before. For our renewal book, we -- erstwhile we set for changes successful exposure, I tin show you that our Q4 2022 mean pricing did show nan smallest year-over-year complaint alteration that we've seen successful many, galore years. It's almost approaching flat. But I would opportunity benignant of, successful a nutshell, it's still not a difficult marketplace but location could beryllium immoderate basal changes going on.

Paul Newsome

So what mightiness beryllium nan drivers of that? Is it conscionable simply little wave benefit? Or is location thing other that you deliberation is possibly helping america retired a small spot connected nan margin?

Katherine Antonello

I don't deliberation it's thing going connected pinch frequency. I tin talk astir that for a second. When we look astatine frequency, we're presently comparing our existent mishap twelvemonth which I'm still referring to mishap twelvemonth 2022. If we comparison that to mishap twelvemonth 2019 to region benignant of immoderate interim distortions from nan pandemic, truthful acold our mishap twelvemonth 2022 wave and this is based connected on-level premium, it's really emerging good beneath nan mishap twelvemonth 2019 level. So beautiful important decreases successful wave still coming through. On nan severity side, I deliberation we'll person to support an oculus connected that. I don't deliberation aesculapian ostentation is causing immoderate benignant of problem correct now. But we're seeing a mini uptick successful severity but it's still excessively early, I would say, for mishap twelvemonth 2022 to really cognize wherever that's going to land. Nothing concerning that I'm seeing frankincense far.

Operator

[Operator Instructions] And our adjacent mobility is simply a follow-up from nan statement of Mark Hughes from Truist.

Mark Hughes

Kathy, I conscionable wanted to explain erstwhile you said nan wave is down. Would you opportunity connected a premium basis, truthful not needfully connected nan closure but comparative to premium?

Katherine Antonello

Yes. We for illustration to look astatine wave comparative to on-level premium which puts each of nan years connected nan aforesaid premium level, truthful that you're genuinely conscionable measuring nan axenic wave decline. And we are continuing to spot beautiful important decreases successful wave successful our comp book. And I don't deliberation that's immoderate -- spell ahead.

Mark Hughes

No, I'm sorry, I trim you off. But I was going to opportunity that's -- reasoning of it successful position of exposures pinch [indiscernible]

Katherine Antonello

yes, we're seeing a alteration crossed nan line, whether you look astatine it connected an vulnerability basis, connected a not on-level premium ground aliases connected an on-level premium basis. So yes, versus payroll aliases premium, it's decreasing.

Mark Hughes

Yes. What's nan latest you're seeing, if you look astatine nan authorities information connected for illustration NCCI nonaccomplishment costs. Is location a peculiar inclination successful what they're putting retired successful nan market?

Katherine Antonello

Loss costs are continuing to diminution successful astir of nan NCCI states. In California, nan WCIRB revenge for a axenic premium summation of 7.6% past autumn but nan commissioner approved nary change. I conjecture I would opportunity I'm a small amazed astatine immoderate of nan sizable decreases that are being revenge but these are conscionable nan nonaccomplishment costs and each bearer tin record what is due for them. And it's bully that carriers person that flexibility. I person a batch of religion successful our squad of actuaries and consciousness for illustration they're best-in-class and we ever complete our ain study and make filings that correspond what we consciousness is due complaint adequacy for some Employers and Cerity. But yes, that's benignant of nan wide inclination I'm seeing is WCIRB tends to beryllium seeing immoderate upward unit successful California, NCCI states are still drifting down for nan astir part.

Mark Hughes

Mike, nan Federal Home Loan Bank strategy you've utilized has been seemingly very successful. When does that taper? What's nan effect of imaginable activity successful that complete nan adjacent 6 to 12 months?

Michael Paquette

So that waste and acquisition is astir apt going to extremity successful nan third, possibly 4th fourth of this year. And nan logic for that is that nan CLOs way LIBOR coming that will alteration erstwhile LIBOR goes distant July 1 and nan Federal Home Loan Bank borrowings are done astatine SOFR. And it's nan quality betwixt those 2 rates that's helping america pinch nan arbitrage today. So again, that's going to title arsenic nan twelvemonth goes. To put it into position pinch respect to our activities successful 2022, we had astir a $6.3 cardinal nett finance effect summation arsenic a consequence of that waste and acquisition and that is conscionable nan output connected nan further CLOs. But besides going nan different measurement was $3 cardinal worthy of interest. So that waste and acquisition had a $3.3 cardinal pretax use to america successful 2022 and we'll person to hold to spot what that effect is going to beryllium into 2023. But we'll proceed to person immoderate use from that but it will beryllium dwindling arsenic nan twelvemonth goes by.

Mark Hughes

Okay. That's a beautiful humble number, I would think. And past connected nan disbursal ratio thing -- commissions were up a small spot but your maturation has been beautiful strong. So that each makes sense. Expense ratio overall, though, immoderate thoughts astir 2023.

Michael Paquette

So support successful mind that nan 4th fourth disbursal ratio is up a small spot and that's mostly because of nan occurrence we had pinch nett finance income and nan improvement that we took. So that meant that we had to set immoderate compensation accruals and that accommodation related to nan full year. So 4th fourth is simply a small spot of an anomaly based connected nan further gross that we saw. Going into adjacent year, Kathy and I are doing everything that we tin to clasp nan statement connected our fixed expenses. As you know, nan adaptable expenses are mostly extracurricular of our power because those alteration pinch our premium and can't beryllium avoided. There's astir apt not -- we can't make nan important scatter successful a simplification to nan fixed expenses arsenic we person been capable to execute since nan first 4th of 2021 but nan continued premium maturation and nan catching up of nan earned to wherever nan written is will proceed to use that ratio to nan grade that we're successful successful holding to our fixed expenses.

Mark Hughes

Can you opportunity astir what nan comp disbursal nan accrual catch-up was? What that effect was successful nan 4th quarter?

Michael Paquette

It's reliable for maine to opportunity we're talking short term, agelong term, this, that but it was a fewer cardinal dollars, let's opportunity $3 million.

Mark Hughes

Okay. That benignant of makes consciousness compared to your caller trends.

Operator

This does reason nan question-and-answer convention of today's program. I'd for illustration to manus nan programme backmost to Kathy Antonello for immoderate further remarks.

Katherine Antonello

So, convey you each for joining america this morning. I look guardant to gathering pinch you again successful April and convey you, Jonathan. Have a awesome weekend.

Operator

Thank you. And convey you, ladies and gentlemen, for your information successful today's conference. This does reason nan program. You whitethorn now disconnect. Good day.

Editor: Naga



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