EIG - NYSE

Good day, and thank you for standing by. Welcome to the Second Quarter 2025 Employers Holdings, Inc. Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Lori Brown, Chief Legal Officer. Please go ahead.

Thank you, Marvin. Good morning, and welcome, everyone, to the Second 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 the disclosure 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 webcasts. 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 on our website. And now I'll turn the call over to Kathy Antonello, our Chief Executive Officer.

Thank you, Lori. Good morning, everyone, and welcome to our second quarter 2025 earnings call. Joining me today is Mike Pedraja, our Chief Financial Officer. During today's call, I'll begin by providing highlights of our second quarter 2025 financial results and then hand it over to Mike for more details on our financials. Prior to Q&A, I'll come back to you with some additional thoughts. Our second quarter gross written premium decreased by 2.2% compared to 2024 due to a decrease in new business written premium within the middle market. Our focus on profitability over growth led to targeted underwriting actions and improved risk selection, which impacted our ability and desire to grow at the same pace in certain classes and jurisdictions. We are pleased that we continue to grow with our small commercial clients that value our investments in automation and ease of use. Net premiums earned for the quarter increased 5.6%, primarily due to strong increases in net written premium in 2024. We ended the period with a record number of policies in force with a year-over-year growth rate of 4.6%. We earned $27.1 million of net investment income during the quarter, which was slightly higher than the second quarter of 2024. Our current accident year loss and LAE ratio on voluntary business was 69% versus the 66% we recorded in the first quarter of 2025. This increase was a prudent response to the rapid rise in cumulative trauma claims in California in the most recent accident years and the level of uncertainty around this new trend. In addition, while we did not recognize any prior year loss reserve development for voluntary business this quarter, we did reallocate significant favorable loss development from accident years 2020 and prior to accident years 2022 through 2024 to reflect the increased frequency of cumulative trauma claims in California. We intend to perform a full actuarial study in the third quarter. I am pleased with the reductions we achieved in our commission expense ratio, which was 13.2% this quarter, down from 13.9% a year ago. We also achieved reductions in our underwriting expense ratio, which was 21.7% this quarter compared to 22.4% a year ago. We continue to find ways to reduce expenses by automating processes, delivering customer self-service capabilities and utilizing artificial intelligence. With that, Mike will now provide a deeper dive into our financial results, and then I'll return to provide my closing remarks. Mike?

Thanks, Kathy. Gross premiums written were $203.3 million compared to $207.9 million for the prior quarter, a decrease of 2.2%. As Kathy previously mentioned, declines in middle market new business offset new business premium growth within our smaller customer segment. Net premiums earned were $198.3 million compared to $187.8 million for the prior quarter, an increase of 5.6%. During the period, our loss and loss adjustment expenses were $104.1 million versus $108.8 million a year ago. As Kathy discussed, we increased our current accident year loss and loss adjustment expense estimates in response to the rapid rise in cumulative trauma claims in California we are experiencing. As a reminder, in our first quarter 2025 reported loss and loss adjustment expenses were based on a loss and LAE ratio of 66%. Accordingly, the current quarter loss and loss adjustment expenses includes a first quarter catch-up adjustment of $5.5 million resulting in a 70.7% loss in LAE ratio. Commission expense of $26.1 million was essentially flat compared to a year ago, and our commission expense ratio was 13.2% versus 13.9% for the prior period. The reduction in the commission expense ratio was primarily due to the proportional increase in renewal premiums, which carry lower commission rates as well as lower agency incentive commissions. Underwriting expenses were $43.1 million for the quarter versus $42.2 million for the prior year. Our underwriting expense ratios for the corresponding quarters were 21.7% and 22.4%, respectively. The underwriting expense increase was primarily related to a reduced internal allocation of underwriting expenses to loss adjustment expenses resulting from a refinement in our internal assumptions. Excluding this allocation, underwriting expenses decreased by $3 million, primarily driven by lower compensation-related expenses and depreciation and amortization costs, offset by higher bad debt expense. Increased net premiums earned contributed to the lower underwriting expense ratio. Net investment income was $27.1 million for the quarter compared to $26.9 million for the prior year. The slight increase was primarily due to higher yields on our fixed maturity investments. The total investment return for the second quarter was $57.5 million compared to $26.5 million for the prior year. The current quarter net income results included after-tax realized and unrealized gains from our investments in equity securities and other invested assets of $14.8 million and $1.8 million, respectively. Our stockholders' equity at June 30, 2025, reflects $7.4 million of net after-tax unrealized gains generated from our fixed maturity investments during the current quarter. Our fixed maturity investments currently have a modified duration of 4.3 and an average credit quality of A+. Our weighted average book yield was 4.5% at quarter end, which is consistent with a year ago. Our adjusted net income, which excludes net realized and unrealized investment gains and losses and the benefit of our LPT deferred gain amortization totaled $11.5 million, a 58.8% decrease compared to prior year's adjusted net income of $27.9 million. During the second quarter, we repurchased $23 million of our common stock at an average price of $48.08 per share and thus far, have repurchased an additional 229,365 shares of our common stock in the third quarter at an average price of $46.44 per share. With that, I'll turn it back to Kathy.

Thank you, Mike. Yesterday, our Board of Directors declared a third quarter 2025 quarterly dividend of $0.32 per share. The dividend is payable on August 27 to stockholders of record on August 13. We are confident in employers' financial strength and financial prospects, and we'll continue to manage our capital strategically. Consistent with my first quarter message, we also continue to identify and implement refinements to our underwriting and pricing approach that we believe will result in profitable growth in new and renewal business. We are pleased that the California Insurance Commissioner, Commissioner Lara, recognized the increased frequency of California cumulative trauma claims through his approval of increased rates and are also encouraged by his call for legislative changes to combat this growing negative trend. We have not experienced direct impacts from the ongoing tariff uncertainties, but we'll continue to closely monitor the cost of prescription drugs and medical services for potential changes. If any necessary headwinds emerge, we are cautiously optimistic that our deep relationships with our customers and agents, our product and service value proposition and our geographic and industry segment diversification will allow us to maintain our strong customer base and weather the storm. I am also pleased with the team's continued focus on expense management and our prudent capital management. We continue to improve our key operating metrics, which is a clear indication of our success. After considering dividends declared, our book value per share, including the deferred gain, increased 12.8% to $49.44, and our adjusted book value per share increased by 8.2% to $51.68 over the last 12 months. And finally, we returned $31.4 million to our stockholders this quarter through a combination of regular quarterly dividends and share repurchases at an average price that was highly accretive to our adjusted book value per share. And with that, Marvin, we will now take questions.

[Operator Instructions] Our first question comes from the line of Mark Hughes of Truist Securities.

You clearly talked about this issue last quarter and it impacted your current accident year loss picks. I wonder if you could kind of just reflect on how this has emerged the last few quarters, couple of years and what you saw this quarter that triggered more significant action.

Sure. So let me just back up and kind of give you the backdrop. As you are aware, though, California continues to be about 45% of our book. And our results in California across the last few decades have consistently been more favorable than the industry. And we believe that, that will continue to be true. But overall industry results are worsening in California. So we talked about the increase that Commissioner Lara approved. It was 8.7%. That was effective 9/1. And the drivers of that increase included things like medical loss development, increase in medical costs in 2024 and an increase in frequency, particularly in CT claims. Now for our book of business, we did not see overall frequency in California begin to increase in total until late 2024. So when I say that, I mean across all accident years. So for example, for accident year 2023, the increase in frequency didn't occur until late 2024. And that's when we started taking action on the current accident year. And then as we discussed in the first quarter and then again this quarter, we've had significant favorable development in older accident years that we've pushed forward to the more recent accident years to reflect that.

The 2023 frequency, am I right in thinking that this is -- it really is just a function of California, the ability to report claims post employment -- and -- yes. No, I was just -- I was going to say why -- is it because the attorneys are just going that far back and advertising, letting people know that, hey, even if you separated in 2023, there is still opportunity. Is this -- can you correlate that with something that's going on in the broader environment? It seems unusual that the frequency would have been increasing across the state. You wouldn't have seen it. And then now you're starting to see it, and it's on older accident years as well. So clearly, these are events that are seemingly well in the past.

Yes. It's a very good question. So California is in an outlier in terms of the way that they treat cumulative trauma claims. They allow claims to be filed, as you mentioned, post termination. And they're the only state that allows cumulative stress in workers' compensation. So they have a much broader and much more liberal legislative -- the way it's written into law is much broader than any other state. So they're an extreme outlier there. So we -- this post termination filing of claims does have high attorney involvement. So when the claim comes in the door, there's typically an attorney involved. The other trend that has been cited is the ability for attorneys to bring these cases remote. So this was previously Southern California, primarily Los Angeles area phenomenon. And we're now seeing it spread into the Bay Area and into Sacramento, and that's because they can handle these hearings remotely.

When did they make that change -- the ability to hear remotely?

Sometime during and after -- well, COVID was sort of the starting point for it, right? Because they wanted to enable hearings to keep things moving along to be remote. So COVID was the start of it, and now it's continued.

Yes. Okay. The frequency and severity, I think the -- I understand the severity is not that substantial on these, generally speaking. Can you talk about that and what you've seen over time with severity for these type of claims when they have emerged in your book?

Yes. I would say that's generally true. This is a frequency issue that we're seeing. It is not necessarily a severity issue. Now you can see severe CT claims, particularly legitimate CT claims are oftentimes severe, but there are a lot of nuisance claims that come in too. But yes, it's really a frequency phenomenon. When we look at our book of business across countrywide, our lost time claim frequencies have continued to trend downward over the last several years. California, again, is the outlier. It's increased in the latest accident year again, and that's all driven by the CT claims. If we take the CT claims out of California and look at non-CT, we continue to see a nice decrease in frequency. And in some ways, that can mask what's going on when you put the 2 together. But when we adjust for wage changes, our overall claim severity values have really held steady in the more recent years, and they're still below pre- pandemic levels. And that's mostly driven by medical severity coming down still.

How confident are you that you've fully reflected the trend in your reserves? I know you alluded to the fact that you don't have quite as much visibility because it's a new phenomenon. But that being said, I think that contributed to your reserve actions in the current accident year increase, how confident are you that you've got this under control?

Well, we have put together over the last 6 months, we've implemented a multipronged approach to manage through this period. And we're confident that this approach is going to be impactful. We've implemented a combination of pricing actions, risk selection actions and claim management strategies. So getting to reserves, the claim management strategies are looking at these CT claims after they come in the door and actively managing those. From a reserving standpoint, it's changing -- it's a rapidly changing environment, and that's why we felt it was important to do another full study in the third quarter. We're very confident that accident year 2025 is in a good spot, and we continue to see really significant redundancies in those older accident years. So I am very confident that our book as a whole is in a good spot.

Yes. How do you see your book comparing to California as a whole, if you look at the state data, are you now seeing claims that are more consistent with the industry as a whole. You're still better than the industry? And then I'll ask this question and kind of a separate question is, do you think it's emerging more aggressively across the industry and across the state? Or was there something about your book that it was somewhat delayed and now you're having the -- having it happen to you, but the state maybe is more -- it's already at a point where this has hit its kind of run rate. Is this -- do you think the state more broadly is going to see an acceleration and you're kind of the early indicator? Or are you the laggard and you're finally kind of catching up with the state?

I don't think we're a lagger. Going to your first question, our book has consistently been better than the industry-wide average in California, and it continues to be significantly better than the industry-wide average. I don't think we're a laggard. I think these claims are typically very late reported. I think when I look at how they're emerging in some of these older accident years, it's pretty consistent across the accident years, how they're coming in. So the ultimate way to solve this problem is for legislative reform. Commissioner Lara did write a letter to Governor Newsom asking him to work towards reform. And we are actively involved in working towards that also. And I'm fairly confident that, that is going to occur. It's been a while since I've seen something kind of come to light and the state jump on it this quickly. And in his letter to the governor, he highlighted the impact on business in California when he was urging them to take action. So I think that's fairly unprecedented, and I'm very, very hopeful that they're going to move on this quickly. But having said that, we're not waiting on any legislative reform to occur. And we've got a well thought through plan internally to combat this.

Yes, yes. I'm going to be super rude and ask just 2 more, if that's all right. The magnitude of the reserve shift, I think you used the word significant. Are you able to size that or give -- throw any other adjectives at it, what that might have been between the older redundant accident years and then this -- the more recent years where you're seeing this phenomenon?

Yes. We were -- the older accident years this quarter, we had over $50 million of favorable development. And to be prudent and cautious instead of taking any action, we moved those reserves to the more recent accident years. So it was -- it's a significant number, and I have no reason to believe that, that will not continue because it has emerged like that for a long time now.

Very good. And then from a capital management perspective, could you talk about what you see as the kind of excess capital on the balance sheet? How much more conservative might you be in light of this trend that's emerging? And assuming you'd get the opportunity, I'm just looking at the market, it's not that volatile in your experience, it doesn't seem that volatile under the circumstances. But would you push the capital management in order to take advantage of the situation here?

Thanks, Mark. It's Mike. As Kathy discussed and has been well publicized by A.M. Best, we are ranked at the highest level of excess capital, and we're very proud of that dynamic. And we think it gives us a lot of flexibility. Our prioritization for excess capital is to support our organic and inorganic growth investments in technology. But assuming that we have those covered, thinking about capital management will be something to consider, especially when the return on investment significantly exceeds our cost of capital. So we'll be driven by an investment -- return on investment criteria and be very disciplined by it, but we see the opportunity that's out there and are considering all options.

Our next question comes from the line of Matt Carletti of Citizens Capital Markets.

Mark made it easy for me. So he covered a few that I was going to ask, so I'll make it really short, and it's just kind of the last follow- up I had on the CT claims. As you look across your book, is there anything you note in terms of where you're seeing it more, whether that be by account size or industry exposure, class code, whatever it might be? Is it -- or is it more kind of just -- or geography? I know you mentioned it had been an LA thing and it's moving up north, but just any observations you might have in terms of any nuances like that.

It's a good question. And the answer is other than the spread from a geographic standpoint, we don't see any other trend occurring. It's not within a specific class code or policy size. It's a broad-based trend other than it's the fact that it used to be highly concentrated in LA, and it has now moved into the Bay Area and Sacramento.

Okay. And then I guess one other, just you talked a little bit about deciding to do an additional reserve study in Q3 that you wouldn't normally do. And it sounds like that's just -- it's moving quickly and you want to stay on top of it. Will that reserve study will be kind of different or just be focused on the CT angle of things, would differ from kind of the more typical Q2 or Q4 studies? Or is it just kind of the same approach, but let's do it every 90 days to make sure that we're not missing anything as this develops?

It will be a very similar approach to what we did in Q2. But in Q2, we did start to look at things differently from a cumulative trauma standpoint. So it will be another point for us to reflect on. But generally speaking, yes, our approach to reserving has not changed and won't for the subsequent quarter.

[Operator Instructions] Our next question comes from the line of Bob Farnam of Janney Montgomery Scott.

Unfortunately, I'm going to ask a couple more questions on the cumulative trauma claims, even though Mark and Matt have covered it pretty well. I just wanted to verify a couple of things. So you do -- you say that there are cumulative trauma claims in other states. It's just that they're more narrowly defined and you don't see a change in frequency. Is that accurate?

That's accurate. And the reason the frequency is controlled in other states is because they are defined very narrowly in other states, whereas the opposite is true in California.

Right. Okay. And -- just one more verification. You're not seeing any change in your legacy classes versus your expansion classes. That's still -- it's kind of broadly based on both aspects.

Not at all. This has -- we have not seen anything different in our appetite expansion. If you're speaking narrowly to CT claims, we don't see any difference there. But I will also add that our expansion class codes are behaving favorably. So they're either very similar to or better than our original target class codes from, say, 4 years ago.

Okay. Great. And last question for me, just quickly, just the reserve study, that's internal only, right? You're not getting external actuarial opinions on what's going on?

We do have an external actuarial study that we do from time to time, but that will not be occurring at the end of the third quarter.

Okay. That's more of a fourth quarter thing.

Yes.

I'm showing no further questions at this time. I'll now turn it back to Kathy Antonello for closing remarks.

Okay. Thank you, Marvin, and thank you all for joining us this morning. I look forward to meeting with you again in October.