EIG
#Thank you, Valerie.
Good morning, and welcome, everyone to the first quarter 2017 earnings call for Employers.
Yesterday, we announced our earnings results and today, we expect to 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 <UNK>, our Chief Executive Officer; Steve <UNK>, our Chief Operating Officer; and our Chief Financial Officer, Mike <UNK>.
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, <UNK>, and thank you all for joining us on our call today.
Our first quarter was a strong start to the year.
Net income before the LPT increased $0.05 or 9% per diluted share.
We reported operating income of $0.57 per diluted share, an increase of 6% with an annualized operating return on adjusted equity of 8%.
Operating return was flat year-over-year as we built shareholders' equity.
Net premiums written increased 4% related to higher final audit premium and new business.
We delivered strong new business growth in the quarter as we continued to actively seek and find opportunities that need our underwriting requirements.
Book value per share of $32.20 increased 2.3%, including dividend declared in the quarter.
These favorable results reflect the successful execution of our marketplace strategy, our consistent and deliberate portfolio strategy, and underlines soft market trends, which have remained largely unchanged.
Underwriting results continued to be strong evidenced by a combined ratio of 96.6%.
Our slightly lower accident year loss ratio of 63.8% reflects our expertise in pricing and risk selection as well as our initiatives to close claims early and grow our in-force policies and premium and attractive business class.
As in recent reporting periods, our markets remained highly competitive while in general rates went to improving loss cost continued to decline.
In light of these market conditions, our overall retention in the first quarter remained high.
Renewal premiums remained relatively flat for the first quarter year-over-year, with increases in payroll exposure being largely offset by 1.8% decrease in our renewal average rates.
Additionally, we are actively engaged in multiple technology and analytics initiatives, as well as the multiyear replacement of our policy administration system.
With that, I'll turn the call over to Mike for a more detailed discussion of our financial results.
Thank you, Doug.
We delivered solid financial results in the current quarter in line with our expectations.
Before I begin my review, I want to point out that we recently adopted a new accounting standard that impacted our reporting of tax benefits from stock-based compensation.
As a result of this new accounting standard, we recorded an $800,000 reduction to our income tax expense for the first quarter of 2016 versus what we presented a year ago.
This reduction in income tax expense served to increase our net income and our earnings per share for the 2016 period but it had no impact on our stockholders equity or our book value per share.
Net investment income for the first quarter increased period-over-period reflecting higher investment balances and to a lesser extent a change in the mix of invested portfolio assets.
At quarter end, our fixed maturity portfolio at an average pretax book yield of 3.1% and a tax equivalent book yield of 3.6%.
Net realized gains for the first quarter increased period-over-period, as sizable prior year gains from the sales of equity securities were largely offset by other than temporary impairments.
Net premiums earned for the first quarter increased 2% period-over-period, due to higher final audit premiums and new business writings.
Our first quarter combined ratio before the impact of LPT of 96.6% was slightly lower than a year ago driven by a lower current accident year loss provision rate.
Our commission expenses and the associated ratio for the first quarter were each higher period-over-period.
The increase in our commission expenses was due to higher base commissions for the current period and a favorable prior year true-up of agency incentives, which served to lower commission expenses in the first quarter of 2016.
Our underwriting and other operating expenses and the associated ratio for the first quarter of 2017 were each lower than a year ago.
These decreases were driven by lower bad debt expense, premium taxes and assessments.
Our effective tax rate was 21.4% in the quarter consistent with that of the first quarter of 2016.
As of March 31, 2017, the market value of our investment portfolio was $2.6 billion, an increase of 3.6% from a year ago.
At the end of the first quarter, our fixed maturities had a duration of 4.3 years and an average credit quality of AA- and our equity securities represented 7.7% of the total investment portfolio.
Our balance sheet remains strong, and we intend to continue to actively manage our capital through common stock dividends and when feasible, common stock repurchases.
And now, I'll turn the call over to Steve.
Thank you, Mike, and good morning.
Net written premiums for the quarter of $196.1 million were up $7.4 million or 3.9% from the first quarter of 2016.
This increase occurred despite a declining rate environment in nearly all of our states as well as a very competitive market.
The primary drivers of this increase were final audit pick up as well as an increase in new business revenue.
The increase in final audit pick up can primarily be attributed to increases in payroll at final audit.
The policies audited during the quarter in our top 15 classes of business from a payroll standpoint, every class exhibited growth in payroll when measured at final audit compared to payroll at policy inception.
Several classes exhibited double-digit growth.
This growth is driven predominantly by increased hours of existing employees as well as increases in the number of full-time equivalent employees.
This trend is a continuation of what we've seen in 2016 as well.
New business premium growth over the prior year first quarter was driven by growth both in states that we recently entered such as New York, Connecticut and Massachusetts, as well as many of our states where we have had a long-term presence, such as California and Florida.
We also grew our new business year-over-year in both our traditional distribution channel of independent agents as well as with our alternative distribution channels.
Overall, our new business submissions grew 6.7% from the prior year.
With respect to our alternative distribution channels, we continue to see strong growth with most of our partners in this channel.
In the first quarter, these partnerships generated 25.6% of our in-force premiums, which is up over the comparable period in 2016, when the in-force premium share was 24.1%.
Retention rates on existing policies continued to be strong with no deterioration from the first quarter of last year relative to unit retention rates.
This is driven by strong retention rates on our small policies despite additional pressure from a competitive standpoint on larger middle market policies.
Claim trends continued to be positive during the quarter with overall frequency declining from the first quarter of last year and continuing strong execution on claim closure initiatives.
We are currently investing in analytics initiatives in the claim management area, which in the future will enhance our already strong claim management results.
And now, I'll turn the call back to Doug.
Thanks, Steve.
We continue to deliver strong underwriting and financial results driven by our specialist approach, a disciplined underwriting and our consistent and deliberate investment strategy.
And with that operator, we'll now take questions.
4%.
$4 million.
I'm sorry, $4 million
We're looking that, <UNK>.
I don't think we can pull that number up, <UNK>.
By the way let me backup to the first question you had.
It's $4 million higher this quarter than it was the previous quarter, just to be clear on that.
And I'm sorry your follow-up question was.
No, I don't want to point out specific classes, in particular, some of our larger classes though have had either double-digit or close to double-digit growth.
I would say at this point, we are still considering that the pricing is staying ahead of the loss trends.
I mean we continue to have strong loss ratio results, I don't anticipate that changing in the future.
So I would say that we're very comfortable where the pricing is relative to the loss trends.
Yes.
I'm very satisfied with what we've seen this quarter.
There is a lot more competition that's out there.
I would say like we've said historically, that our expectations that in terms of new business opportunities will be potentially moderately up like it was this quarter or potentially flat.
The submissions increasing is generated not only by the new states that we've entered, which is helping us, but also the fact that some of the existing states that we're in were leveraging our partnerships even more effectively than we have in the past and that's led to new business submissions growth even in those states.
So I would say that I'm optimistic that those trends should continue.
The capital management strategies is unchanged.
We did increase our dividend last quarter continued through this quarter.
In terms of share repurchase, that is always a very important rule for us in capital management.
We've always been opportunistic when it comes to utilizing that tool, so I wouldn't expect our view to change on that.
And then finally, given the profitability that we're seeing in the books, it would be our expectation if that continues, we will see a buildup in capital.
And the result of that is we'll either look for opportunities to deploy the business, opportunities to deploy through an acquisition, and again, I think our views on that are fairly well known.
And then finally, return to shareholders failing either of those other 2 alternatives.
I've got 2 quick follow-ups.
Number one, is going back to the rate versus loss cost discussion.
What do you think the GAAP would be right now.
If I had that number, I wouldn't disclose it.
But I'll certainly support Steve's comments.
Our view is that it continues to be favorable.
And has it narrowed over the past few quarters rapidly maybe just to hover that a bit.
Well, as I was thinking about that as Steve was answering the question.
If you look back and see the decline we had in our loss ratio over the last 24 to 36 months, clearly, that's not going to continue forever.
We don't see the loss ratio go up into 10.
So it is clearly going to flatten and that's going to be influenced by the competitive marketplace.
And at some point, the continuing loss cost trend that we're seeing in virtually every state is going flat.
Now I can't predict when that's going to happen but at least at the current time, we believe, we still have a favorable gap there.
That's very helpful.
The only other question I have is going back to the broader discussion of competition and I know that you being a special tender writers sort of insulates little bit.
Can you just talk about that a bit more, where do you see it coming from, is it the largest companies, the smaller companies, the same players, or new players.
Just help us sort of put that into perspective because most of the companies have been talking about increased competitive pressure some kind of figure out, where is this exactly coming from.
Let me address that question.
And I'll contrast to today to what we were seeing maybe 18 to 24 months ago.
From 18 to 24 months ago, the most aggressive competition would have been coming from a handful of market participant.
They weren't always the same, it somewhat depended on what part of the country you were in but there were some that were fairly aggressive everywhere.
Contrast that to today, we are seeing pretty consistent competition across the market.
There will still be occasions where companies might be standout in terms of how aggressive they are.
But there is a broad market competition everywhere we do business and most market participants are fully engaged in the competition.
And so I think that's reflective of the environment virtually everywhere.
In terms of our strategy, I think it's a very interesting question because what we are seeing is that our small business focus is holding up extremely well in this part of the cycle.
So when you start looking at accounts that are larger for us, say $50,000 and above as an example, a much more competition around price than we're seeing on the smaller accounts.
And realize that roughly, 60% of our premium and 95% of our policies are coming from that smaller segment.
And it's doing extremely well in this market cycle as evidenced by a very high retention rate and a very strong ---+ and in terms of policy units and a very strong premium retention despite declining renewal rates.
And so I think our strategy is looking very good right now and I think our specialty focus positions us very nicely in this part of the cycle.
Well, let's start with the observation that I made in my comments earlier that as specifically as to our policy administration system, that is a multiyear implementation and rollout.
Because of the nature of that project, a large part of that is capitalized.
There will be smaller amounts that are current period expenses but that's principally a capital project.
And so you won't start to see that fully impacting the financial statement until the implementation dates.
In terms of some of the other initiatives that will be driving expense and we commented on this previously, we are building out our analytic capability that tends to be less of a technology expense issue although, there are components of that clearly, that tends to be more headcount related and it tends to be more consulting related.
And for the most part, those are shorter term projects that will likely have a more immediate impact on the expense ratio.
So all in, some hits current, some will be capitalized will hit future periods.
I can't really detail for you exactly when those will hit but it's really a combination of current and capital.
Yes.
So let me describe kind of what happens there.
On the front end, there will be some internal cost relating to standing up a new state, and again, those tend to be more on the technology side, but probably not material.
When we enter a new state, depending on which state it is and I'll use New York as an example, there is a requirement that we put boots on the ground so that we can actively recruit and manage our agency force.
Again, that's a relatively small expense.
Everything else is really not an incremental cost to adding an additional state beyond those 2.
So it's a fairly quick ramp-up.
And then, depending on the success we have, there may be a need to deploy additional sales resources but our expectation is that those would rather quickly pay their own way.
Certainly, our data is suggesting that to us.
And I can assure you, we spend a lot of time talking about this internally because what we're observing in our book of business appears to be inconsistent with what we're hearing on a national level.
And to my comments earlier, our specialists strategy in these low hazard accounts seems to be doing extremely well in this market cycle.
And so I don't think our results are consistent with what you're seeing in the broader economy.
Very good.
Thank you everyone for joining us today.
We appreciate your participation, your good questions, and we look forward to speaking with you again next quarter.
Thank you all very much.
