EIG
#Thank you, Michelle.
Good morning, and welcome everyone to the Fourth Quarter 2017 Earnings Call for Employers.
Today's call is being recorded in 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 <UNK>, our Chief Executive Officer; Mike <UNK>, our Chief Financial Officer; and Steve <UNK>, our Chief Operating Officer.
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 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 among other adjustments, the impact of the 1999 Loss Portfolio Transfer, or LPT, and the impact of the Tax Cuts and Jobs Act.
Reconciliations of these non-GAAP metrics are included in our financial supplement as an attachment to our earnings press release, our investor presentation and any other materials available in the Investor section on our website.
Now, I will turn the call over to Doug.
Thank you, <UNK>, and thank you all for joining us on our call today.
The fourth quarter marked a particularly strong end to a very successful year for Employers.
During the quarter, we grew ---+ written premiums by 8% and lowered our current and prior year loss reserve provision.
Our fourth quarter adjusted net income increased 12% or $0.11 per share, and our underwriting income increased 23%, as our combined ratio before the impact of the LPT of 83% improved by 2.6 percentage points.
Our full year adjusted net income increased 15% or $0.37 per share, and our underwriting increase ---+ income increased 19%, as our combined ratio before the impact of the LPT of 92.1% improved by 2 percentage points.
During the fourth quarter, we delivered impressive new business growth by actively pursuing opportunities that met our underwriting requirements.
Despite the strong growth in new business, our top line growth continues to be pressured by declining rates in our renewal book of business linked to improving loss cost trends.
Our policy retention rates remain high, but our average premium renewal rate for the year decreased by 3.3%.
Our book value per share including the deferred gain ended the year at $34.09, an increase of 9.7% from 1 year ago including dividends.
We are waiting regulatory approval to acquire a multistage insurance shell company from PartnerRe.
This acquisition will provide us with even greater underwriting flexibility.
As a mono-line worker's 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 across many economic and market cycles.
We consider this to be a significant competitive advantage for our company.
With that, I'll turn the call over to Mike <UNK> for further discussion of our financial results.
Thank you, Doug.
Net premiums written for the fourth quarter increased by 8% year-over-year, which Steve will address in his remarks.
Our fourth quarter and full year loss in LAE ratios before the impact of the LPT of 48.6% and 59.8%, respectively, each represented significant improvements from those ratios reported 1 year ago.
These improvements reflect the continued impacts of our key business initiatives, involving claims settlements, geographic diversification and data analytics.
Our fourth quarter and full year commission expense ratios of 13.6% and 12.8%, respectively, were each higher than those ratios reported 1 year ago.
Increases in agency incentives and in the amount of business produced by our partnerships and alliances resulted in the higher commission ratios for 2017.
Our fourth quarter and full year underwriting and other operating expense ratios of 20.8% and 19.5%, respectively, were each largely consistent with those ratios reported 1 year ago.
Net investment income for the fourth quarter was unchanged from 1 year ago, despite being higher for the full year due to an increase in year-end trading activity in light of tax reform.
This increase in trading activity also resulted in lower net realized gains on investments, as gains resulting from municipal bond sales were offset by losses from sales of equities securities.
Our effective tax rates for the fourth quarter and full year were 41% and 30%, respectively.
During the fourth quarter, we incurred an incremental income tax expense of $7 million as a result of enactment of the Tax Cut and Jobs Act, representing the impact of remeasurement on our deferred tax assets and liabilities using the new 21% statutory tax rate.
Absent this incremental income tax expense, our effective income tax rate for the fourth quarter and full year would have been 28% and 25%, respectively.
As of year-end, the market value of our investment portfolio was $2.7 billion, an increase of 5% from 1 year ago.
During the year, we reduced our exposure to municipal securities by approximately 25% and reinvested those proceeds into fully taxable securities.
At year-end, our fixed maturities had a duration of 4.2, an average credit quality of AA-, and our equities securities represented 8% of the total investment portfolio.
Our stockholder's equity including the deferred gain now stands at more than $1.1 billion.
In light of our financial strength, the board recently increased our quarterly dividend by 33% to $0.20 per share and authorized a new 2-year $50 million share repurchase plan.
Lastly, it was announced this morning that A.
M.
Best has affirmed our A- financial strength and long-term issuer credit ratings and have revised their outlook from stable to positive.
And now, I will turn the call over to Steve.
Thank you, Mike, and good morning.
Net written premiums for the year of $724 million were up $29 million from those written in 2016.
This growth occurred despite a market environment that is extremely competitive as well as the declining rate environment in virtually all of the states in which we do business.
Net written premium growth for the quarter was $13 million or 8% versus those written 1 year ago.
New business growth for the quarter was 20% over the prior fourth quarter and up 8% for the year.
On previous calls, we have discussed our opportunities within the alternative distribution channel and the fact that we have dedicated resources to grow our business with both existing partnerships and with new partners.
In 2017, our new business revenue within this channel grew 17% year-over-year and 47% over the prior year fourth quarter.
This distribution channel currently makes up 27% of our in-force premiums, up from 25% in 2016.
We also continue to grow new business in our core distribution channel.
Our new business growth has occurred not only in the new states that we have recently entered, but has occurred in states in which we have had a long-term presence.
With respect to renewals in 2017, we continue to see high policy unit retention rates throughout the year.
We have been focused on retaining the business that has positively impacted our bottom line results, and this emphasis is particularly important in a softening market cycle like we are currently experiencing.
As the year progressed, we did observe more aggressive competition from a pricing standpoint, in particular with middle market renewals.
We expect this to continue into 2018.
Claim trends continue to be positive with frequency declines for the year and continuing strong execution on claim closure initiatives.
We continue to invest in predictive analytics in the claim management area with our most recent initiative having been deployed in the fourth quarter.
We believe these investments will continue to enhance our already strong claim results.
The loss ratio before the impact of the LPT of 48.6% for the quarter decreased 5.4 percentage points, which is reflective of not only these initiatives but also our efforts to diversify our risk exposure across broader geographic markets, as well as leveraging data-driven strategies to target underwrite and price profitable classes of business across all of our markets.
Consistent with our geographic diversification strategy, during the fourth quarter, we entered the State of Louisiana.
We now write business in 37 states as well as the District of Columbia.
We plan on continuing this diversification strategy by entering additional states in 2018.
And now, I will turn the call back to Doug.
Thanks, Steve.
We have recently initiated a plan of aggressive development and implementation of new technologies and capabilities that we believe will fundamentally transform and enhance the digital experience of our customers.
We have chosen to reinvest the first 2 to 3 years of our expected financial benefits from tax reform back into our business by greatly accelerating the development and deployment of these new digital capabilities.
We believe that these new technological and intellectual assets will support our future growth initiatives, provide us with greater pricing precision and flexibility and promote long-term value creation.
We expect that the development and implementation of these new technologies and capabilities will increase our underwriting and other operating expense ratio in 2018 and 2019 as compared to that experienced in prior periods.
However, we expect that these increased expenses will be more than offset by operational efficiency gains in future periods.
Lastly, 2018 is shaping up to be a great year for small businesses, the core of our strategic focus.
The most recent small business optimism report from the National Federation of Independent Business reflects a record number of small business owners who believe now is a good time to expand, the highest level reported in the history of the NFIB survey, which began in 1973.
A recent JPMorgan survey cited an expectation that higher wages are likely ahead for workers as the competitive market for labor heats up.
We believe we are ideally situated to benefit from these markedly improved small-business economic conditions.
And with that, operator, we'll now turn the call over to questions.
Year-over-year was down 3.3%.
Yes, don't have a quarterly number in front of us.
We do have the year number at 3.3%.
Yes, we don't have that number in front of us, <UNK>.
So that's partly the answer, <UNK>.
Obviously, as we articulated earlier on the call, the growth in business in the alternative distribution channel was at an accelerated pace compared to our core business.
But the other contributing factor to this is that in our agency incentive payments, which were linked and are linked to our agents hitting their profitability and growth goals, we had some very strong performance for many of our agents in both growth and profitability, which led to an increase in that payment.
I think we're starting to gain some momentum in that area.
We've developed some new partnerships that ---+ we started to see some of that momentum in the fourth quarter.
I expect ---+ not necessarily to the same degree, but I expect to see that momentum continuing into 2018 as well.
The broadest way to answer that question, <UNK>, is it's all of the above.
There is a transformation occurring in the insurance industry right now that we believe we need to get in front of, because we think we're perfectly situated to take advantage of some of what's coming.
So it's really only limited by our imagination.
It really is creating an ability to rely more heavily on data, predictive analytics, and ultimately, AI.
And so we're getting out in front of this very aggressively building it out, because we think it will create a true differentiator in the market and a very strong competitive advantage.
We are very mindful that there is a rapid change occurring in our industry and that development of that channel is occurring.
We've got several competitors who have already gone that route.
Evaluating that opportunity is a part of what our ultimate long-term strategy would be, but I'm not prepared to make any announcement on that today.
<UNK>, this is Mike <UNK>.
And I think you should probably focus on where we came out for the year.
And that is the starting point.
And we hope it to be slightly better than that, but I would start with the year for 2017 into 2018.
Sure.
So what Doug mentioned is that we would be spending the next 2 to 3 years of our tax savings on these new initiatives.
In terms of an effective rate going forward, the fourth quarter of this year was a little high as adjusted because we had significantly more underwriting income, which attracted a 35% rate.
And that's spiked the fourth quarter a little bit.
Going forward and looking at 2017 and the aggregate, we were running at about a 25% effective rate, and with tax enactment, we'd expect that, that number will probably be in the 15% to 16% rates going forward.
For 2018, we expect to spend more than the tax savings, but then we'll catch up in the subsequent 1 year to 1.5 years.
The 4% and 2% mentioned, absolutely, in the other underwriting and operating expense line.
I think it's the latter.
I think it will average out.
Certainly, it's going to take us some time to ramp up and we're ramping up as quickly as possible.
But I think that, that will be an average for the year.
So it's, again, probably all of the above there, <UNK>.
We are adding people internally.
We are beefing up some of the capabilities in the company both in terms of technology, development and deployment, as well as analytical analysis, data management, all the things that we believe are foundational to creating competitive advantage.
We are custom developing those things that we believe would give us a unique competitive advantage.
There are other instances where we are partnering with third parties and acquiring off-the-shelf capabilities.
So it's really a mix of all of that.
We don't intend to build it all internally, but we will build it internally where we want to retain the advantage for ourselves.
Otherwise, we'll partner and identify third-party solutions.
<UNK>, this is Steve.
I'll answer that question.
We have a very aggressive plan for 2018 in terms of entry into the states that we're currently not in.
I'm not going to articulate some of the specifics other than we want to be as aggressive as we can.
We see the benefit of being a truly national workers compensation carrier.
As we've said on prior calls, until we hit that point, there are opportunities that we can't capitalize on.
So there are implications to our top line for us to go into those states.
However, the states that we're in today represent more than 90% of the workers compensation market.
So we shouldn't expect substantial or significant impact, but there will be impact.
Yes, <UNK>, that's correct.
So we prefer to put the money into the business to generate superior ROEs going forward.
But we also understand that there are opportunities to repurchase shares to manage our capital and we just would like to have that tool in the shed.
Our existing program, I believe, expires today.
So we were happy to renew that.
But how much we'll use it will depend on a variety of things.
One of the more key importance to that would be our holding company liquidity.
Yes, <UNK>.
This is Steve.
I'll take that question.
You're correct.
We did launch a new initiative that we believe has real promise for us in terms of predictive analytics in the claim area.
I'm not going to get into the specifics of what it is for some obvious reasons, but we really haven't recognized that benefit in 2017 but we expect to start seeing that in 2018 and beyond.
So that's cause for optimism in terms of the impact that, that particular initiative will have in '18 and beyond.
Okay.
Thank you very much.
Thank you everyone for joining us today.
We appreciate your participation and your questions.
A very strong close to the year.
I believe we're off to a very good start in 2018.
We certainly look forward to discussing first quarter results with you the end of April.
Thank you all very much, and have a great day.
