Vicki Mills - Vice President-Investor Relations Doug Dirks - Chief Executive Officer Terry Eleftheriou - Chief Financial Officer.

Mark Hughes - SunTrust Amit Kumar - Macquarie Capital Matt Carletti - JMP Securities Brian Rohman - Boston Partners.

Good day, ladies and gentlemen, and welcome to the third quarter 2015 Employers Holdings earnings conference call. My name is Matthew and I will be your operator for today. At this time all participants are in listen-only mode. We will conduct a question-and-answer session toward the end of this conference.

[Operator Instructions] As a reminder, this call is being recorded for replay purposes. And now I would like to turn the call over to Vicki Mills, Vice President, Investor Relations. Please proceed, ma'am. .

Thank you, Matthew. Good morning and welcome everyone to the third quarter 2015 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 Dirks, our Chief Executive Officer and Terry Eleftheriou, our Chief Financial Officer. Due to a family medical situation, Steve Festa, our Chief Operating Officer is unable to join us today. 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. We use non-GAAP metrics that exclude the impact of the 1999 Loss Portfolio Transfer, or LPT. These metrics are defined in our earnings press release available on our website. Now, I will turn the call over to Doug..

Thank you, Vicki and thank you everyone for joining us today. Employers had another strong quarter. Our third quarter annualized operating return on equity was 9.9%, that is an increase of 5 percentage points or 102% year-over-year, and 1.7 points or 21% over the second quarter of 2015.

We recognized underwriting income before the LPT of $7.9 million compared with an underwriting loss in the third quarter of last year.

We will continue to price our coverage to properly reflect loss probabilities and we have consistently demonstrated our willingness to forego business to competitors who price business at rates we consider insufficient. Our combined ratio before the LPT of 95.6 improved 8.8 points year-over-year and 3.2 points over the second quarter of this year.

Our adjusted book value per share, excluding unrealized gains, was $26.23 at the end of the quarter, an increase of 5% since the end of last year. Our strong third quarter results were in line with our loss and expense expectations.

Revenues were below expectations due to lower than expected new and renewal business in Southern California, as well as lower-than-expected new business production in most parts of the country. Outside of Southern California, renewals in the quarter exceeded expectations.

Since June of 2014 we non-renewed 11.8% of our premium available to renew in Southern California. In addition, 16.6% of the business we offered to renew in Southern California was written by competitors, presumably at a lower rate. In the third quarter, year-over-year our in-force premium declined 2% overall and 6% in California.

Our overall in-force premium count declined 1% overall and 7% in California. In-force payroll exposure was less than 1% lower overall but 10% lower in California. This means that we are generating more underwriting margin and less risk.

Outside California, we've had success in growing revenue, particularly in classes of business with historically low loss ratios. Despite a declining rate environment in many states, year-over-year in states outside of California, we have increased policy count by 6%, in-force premium by 4% and payroll exposure by 6%.

This growth coupled with our results in California has reduced our percentage of in-force premium in California to 57% of our total book at September 30 2015. This is almost a three percentage point decline since year end.

We have spoken previously about our diversification strategy of growing revenue outside of California and lessening our dependence on the Southern California market. These results speak to the success of the actions that we’ve have taken to accomplish this strategy.

Despite the impacts our initiatives are having on retention rates within the Southern California market, we are recognizing improved retention rates overall. Our policy retention rate nationally has improved five points year-over-year.

Throughout this year we have experienced an increasingly competitive operating environment in all of our states as multi-line and regional carriers target workers compensation.

Our net rate in California increased 4% as a result of the application of territorial multipliers, the effect of which has been to decrease new and renewal business in Southern California and to increase new and renewal business in other parts of California where losses are less volatile and margins are more attractive.

Nationwide net rate declined 2% in line with the industry trends And with that, I will turn the call over to Terry. .

Thank you, Doug. Good morning everyone. We again delivered solid operating earnings in the current quarter, in line with our expectations. Net premium written increased 1.4% and net premium earned increased 4% year-over-year in the quarter. These increases were largely driven by higher final audit premium compared to the third quarter of 2014.

The increase in final audit premium resulted from the following items. First, revised payrolls on expired policies upon final audit for the quarter were at levels significantly higher than estimates and were higher than what we have seen year-to-date.

And second, we implemented a new audit process that drove a much higher level of compliance along our policyholders, particularly for our California business. These factors led to an 88% increase in final audit premium in the third quarter relative to the same period in the prior year.

This impacted net written premium and net earned premium by $10.1 million in the current quarter which resulted in a 0.8% -- percentage point improvement in our quarterly expense ratio compared to the prior year.

While this final audit premium impacted our expense ratio for the quarter, it only increases our operating earnings-per-share by $0.04 per diluted share for the quarter. We continue to prudently manage our expenses.

Our underwriting and other operating expenses for the quarter were $31.6 million or approximately 1% lower than in the same period last year. Our underwriting expense ratio declined almost 1 percentage point year-over-year with the largest contributor being the increased final audit premiums that I just mentioned.

Our third quarter loss ratio before the LPT improved 7.7 percentage points over the prior year driven largely by our lower current accident year loss provision rate of 66.3%, a decline of 7.1 percentage points year-over-year and 20 basis points lower than the end of the second quarter.

As I discussed during our second-quarter earnings call, the year-over-year decline in our loss provisional rate has been driven by a number of factors, including rate changes, loss trend, changes in business mix by territory and by class, our strategic underwriting initiatives and the non-renewal of high loss ratio business, particularly in Southern California.

The reduction in our third-quarter loss pick was the result of three factors in roughly equal parts. These include the year-to-date shift in business mix by state and territory, improved pricing in California and the non-renewal of poorly performing business in Southern California.

While our indemnity claims frequency decreased year over year, our loss experience indicated a slight upward movement in medical and indemnity costs per claim which are reflected in the current accident year loss estimate. There were no changes to prior accident year reserves for our voluntary business.

Once again in the third quarter there was no adverse development in our prior period reserves. Third quarter net investment income of $18.5 million increased 1.6% year-over-year, attributable to an increase in invested assets. The average pretax book yield on invested assets was unchanged at 3.2%.

The tax equivalent yield on invested assets decreased to 3.8% at September 30 2015 compared to 3.9% at September 30, 2014. Income tax expense increased $4.6 million in the quarter primarily due to a year-over-year increase in projected annual net income before taxes. Our effective tax rate was 19.4% in the quarter.

We continue to actively manage our capital and our balance sheet remains strong. The market value of our investment portfolio was $2.5 billion at the end of the quarter, an increase of 3.6% since December 31 of 2014. The average quality of the fixed income portfolio was unchanged at AA minus with the duration of 4.2.

Equity securities represented 7.8% of our investment portfolio. High dividend equity portfolio rebalancing generated $1.7 million in gains, accounted for nearly all of the realized investment gains in the quarter. At the holding company, at the end of the third quarter we had $76 million in cash and securities net of restricted cash and securities.

And now I’ll turn the call back over to Doug..

Thanks, Terry. Our results for the quarter reflect a continuation of actions that we initiated over a year ago and we have again made good progress in reducing underwriting risks while improving profitability. We continue to remain focused on creating value for our customers and for our shareholders.

And with that, operator, we are ready to open the call up for questions..

[Operator Instructions] And your first question comes from the line of Mark Hughes of SunTrust..

The audit premium, you've got a new process in place. It obviously was very helpful in Q3.

Should we anticipate more potential gains as other policies expire and are audited?.

Hi Mark, this is Terry. In terms of the final audit premium pick up in the third quarter, I think there is a number of factors that I tried to reference in my comments that have driven that. This new audit process that we’ve implemented is driving a greater compliance.

The other piece of it is the fact that the reported -- the revised payrolls that are reported have increased as well. Now there are two elements to that.

One is the extent to which payrolls were under reported when the policy was first issued and the extent to which payrolls that are reported really reflect true sort of economic growth in our policyholders businesses. I think it's really difficult to assess the split of that between the two elements. .

Now how about -- but the sustainability of that? I guess I assume if it's -- both of those factors should be just as true this quarter as they were last quarter. .

So I was just about to get on to that. So in terms of looking forward, I think I would say that it’s very difficult from largely the last two months of the quarter where this really manifested itself to really draw a trend from that, I would be hesitant to draw a trend.

The final audit premium, I think historically if you look at it, have fluctuated quarter on quarter. I think if we look at the year-to-date results, we’re probably in line with where we were last year for the same period. So I don’t know if I can really say there is any trend here – I think we just need to see what the subsequent months show us. .

Any early sense on 4Q?.

In terms of final audit premium?.

Yes..

No, I can’t give you any guidance there..

The benefit to the expense line, the 1.8 points, there's no benefit to commission or losses in those case -- in a case for this audit premium.

Is that correct?.

Correct..

The commissions were a little lower sequentially this quarter. Was that a function of the lower production? I guess as a percentage of earned it was down sequentially.

Should it stay at this lower level or will it maybe move back up a little bit?.

I think we cited in the last quarter we had for the second quarter, that there were factors that drove the commission ratio higher for the second quarter. We talked about some temporary sales programs, incentive programs that we had, that have sort of ceased.

I think if you look at the year to date, we gave guidance that we would expect that commission ratio to be in the 12% to 12.5% range. If you look at the year-to-date we’re at 12.3%, I think that’s probably in the ballpark of what we would expect. .

And then the lower-than-anticipated new business, I hear what you're saying, a little more competitive environment.

Would you anticipate -- are there steps you can take? What's your feeling about how that is going to shake out over the next few quarters?.

Mark, this is Doug. We are still putting final touches on our plan for 2016 and just to describe what that process is, we go class by class, state-by-state and build it from the ground up. We’ve not finished that, we’ve not come to a final view for 2016.

But we think there will be opportunities for us to pursue growth by expanding into additional states and identifying additional pursue classes of business in the states we’re currently in. So that’s the opportunity for growth.

The impacts we've had on our book is a result of actions taken in Southern California, will begin to moderate as we go through the balance of this year and into next year, both in terms of impact on policy count as well as an impact on premium and you saw that in last quarter's numbers, although we’re still getting more rate in Southern California, we are seeing a fall off in policies continuing but at a slower rate.

So those are kind of the forces that will impact going forward but clearly our objective remains the same. We want to continue to grow at a faster rate outside of California and change the business mix within California so that we have less dependence on the LA Basin..

The Southern California steps, you did kind of a round and then I think you're on your second round of pricing adjustments.

How many points headwind do you think that was this quarter and when does that drop off?.

Well we did the last rate filing that is having the impact on that Southern California book back in June. So we still have nine more month, eight more months for that to work its way through the book. So we will have a headwind there, how big of a headwind is somewhat dependent on what the competition does in that marketplace.

We’re putting up a price, we’re not adjusting our price so that we can retain more of it or lose more of it. So how much stays on the books is a function of what our competitors do. We are setting our pricing independent of what we think they're going to do. But there’s still another eight months or so for that to work its way through the book. .

And then just one final one, Terry, getting back to the audit process. I guess I have to assume if you've got a new audit process in place it was very successful for the last couple of months of the third quarter, you'll be applying that audit process to an incremental group of new policies that are being audited this quarter.

Is there any reason not to think that you ought to have -- maybe not the same magnitude of benefit, but some still meaningful benefit?.

The process that we’ve implemented began in large part during the later part of the second quarter. That process will continue. So we would expect that will continue to drive high levels of compliance. .

Your next question comes from the line of Amit Kumar of Macquarie. .

Thanks and good morning and congrats on another strong quarter. Maybe just a few quick questions. And I apologize if you answered these because I had to jump from another call.

If you look at the underlying loss ratio, and out of state was very strong this quarter and we've seen I guess you guys on a streak here in terms of the improvement in the loss ratio.

Can you talk about the sustainability as I guess the prior rate increases are earned? At what point does this flatten or do you think we continue on this improving arc, if you will?.

This is Doug. I will take that question, Amit. A couple of things I’d point to, the first is we’re not seeing significant changes in loss trends, that’s been true through the year. As I just referenced to Mark’s last question, rate increases are moderating in California.

We’re continuing to see them in Southern California but we are continuing to a reduction in our higher loss business in LA, that’s a positive in terms of the loss trend. If you look nationwide, rates are flat to declining outside of California.

If you look at the NCCI states their projections, the either the file or approved rates for 2016 are down in almost all of the states where we are doing business. There is less than a handful that are seeing modest increases less than 2%.

So that would suggest that we are going to be reaching a point that’s going to be more normal in terms of loss ratio. I can’t project whether or not it’s going to go downward, or go up, I think it is going to flatten. I would be surprised to see another eight point decline next year given all of the items I’ve just discussed.

So those are the factors that we expect will impact it going forward. But again I can’t put a number on any one of them individually. But everything would suggest that that there will be a slowing to a flattening going forward. .

That's helpful. The only other question I have is just based on I guess the backdrop of strong results. And you're also talking -- we were also talking about I guess pricing overall slipping nationwide. There was some discussion in the past of more competitors showing up over the past few years.

Can you -- did you address the competition? Is it steady state or do you think, based on where we are in the market cycle, they are beginning to pull back too?.

I would say the competition continues nationwide. It is a competitive market but I would stress that for the most part what we’re seeing in the market is rationality in terms of pricing. It’s not universal, it never is, it never will be. But for the most part the market is pricing business in our view rationally. It’s competitive.

You’ve got to be in the market. When you look at the declining rate levels it is not just a function of pricing, it’s loss experience. The industry is experiencing favorable loss trends in most of the country.

And so the declining revenue stream the topline is, it’s not just a function of competitive pricing, but it’s a function of improving loss fundamentals. And so I think you have to break those two up against, it’s pretty hard to assign a number to one or the other. But it's -- the decline in revenue is not solely related to a more competitive market. .

Your next question comes from the line of Matt Carletti of JMP Securities..

Thanks. Good morning. I just had a couple questions that haven't been covered. One, Terry, I just want to follow up on kind of where we left the audit premium discussion with Mark. You mentioned how the new process -- I think the way you put it was it drives better compliance.

And I guess my question is, just in trying to understand the new process, is it that these are premiums that maybe in the past might have gone uncollected by the company at some point and so net/net it's better compliance in that sense in terms of you're auditing more accounts or however you might go about it, or is it more of a timing issue in that you're either more quickly auditing the accounts and just accelerating the recognition of that audit premium?.

Matt, as you probably understand the process of estimating final audit premium is a fairly complex one. We set accruals on a monthly and quarterly basis in terms of what we expect to -- to be able to bill. That accrual process looks at historical data, that looks at the level of pickup in final audit premiums, it looks at a variety of factors.

A big driver as I pointed out in my comments in terms of the pickup in the current quarter is, is the fact that yes, this new audit process has driven a much high-level of compliance, so it’s sort of accelerated the reporting of final payrolls that we perhaps didn’t get as quickly as we’d received in the past.

And there has been a much higher percentage of compliance for the audits that we’ve undertaken. So we saw a significant pick up there. The other piece of it is this piece around – the actual final reported payrolls that our clients submit.

So, yes, they’re much quicker to provide us with the final audit payrolls, they’re also the payrolls that they submit, all the locations that they operate under have increased. And so those two things drive it. You have to be able to sort of assign how much applies to each of those is very very subjective.

I don’t really have that level of data analysis. But I think the second part of that is probably more significant than the former. .

That's quite helpful. And then just a last one, just a numbers question. I mean we saw and you mentioned that there is, in aggregate, essentially no prior-period development in the quarter. I'm just curious.

Were there any large movements year by year, whether it's favorable and a few years offsetting and adverse in others or was it just pretty quiet across the board?.

No, no significant, I think the only thing we show in our earning release is a 10 basis point improvement and that relates to our involuntary business but no significant change..

Your next question comes from the line of Brian Rohman of Boston Partners..

A couple of questions. Following up on something that Mark asked earlier. You said a slowing or a flattening of the combined ratio.

Are you suggesting that it's -- I mean nobody expected it to continue to improve 8 percentage points year over year forever, but you're suggesting where it is right now based on the stability in loss costs that 94 or so, I think that was the number for the quarter, is sustainable for some period going forward?.

I am not going to take the bet on that one, Brian. .

No, no, no. I'm not trying to project, I'm just trying to –.

I know, I know, I'm happy to address that question. We continue to see improvement in the line because loss cost frequency is coming back down again, severity is relatively modest so that provides an opportunity for some continuing improvement in the loss ratio.

The actions we’re taking in California, we’re still getting rate on the business we want to keep in Southern California. In terms of the more aggressive action of non-renewing business in Southern California that’s essentially done, it never ends but the initiative was a 12 month initiative, we've taken care of that.

There are parts of the country frankly where the business is performing extremely well and we’re going to have to concede some margin to keep that business, and that’s why when we suggest that it’s moderating potentially flattening there, there are offsets there depending on what stage you’re in or even within parts of the particular state.

And that’s what will happen as we go through 2016. Again we’ve not finalized those plans yet but certainly we would hope that we can continue to show improvement in the loss ratio. .

Okay, that's fair. Now I've got to ask you some questions about capital here. A.M.

Best, you're still A minus with negative outlook or whatever they call it?.

Thank you for that asking that. I will just give you an update on that. We did have our annual meeting with A.M. Best several weeks ago. We are in our normal rating cycle. Typically in that normal rating cycle we would expect an action from Best sometime near the end of the year.

We don't control that, they do but if they were to follow past process that’s what we would expect..

So sometime before year-end. .

Typically that would be the case, yes and I have no reason to think it would be different from that this year. But again we don't control the timing on that..

So I always ask questions about what are you going to do with all of your capital. And when you sit down with A.M.

Best, do they ask you what are your potential plans for uses of excess capital or capital generation, or do they just review the business at hand?.

As a part of that process we do provide a multi-year projection, multi-year projection addresses both operating results and capital. .

Now let's just say that, for argument's sake, they take the negative watch off. I mean, look, however you slice it you've got a lot of capital and the business isn't growing. In fact, it's getting a little bit smaller and you're generating capital.

Absent an acquisition of some size, I'm trying -- maybe you could talk through what are the potential options for use of capital. Because it's going to get increasingly hard to generate a decent return on equity if the capital builds. .

I would agree with that. So let’s, for purposes of that discussion, I will take your points. Let’s take M&A activity off the table, let's take off dramatic demands on capital because of organic growth and I am taking those off to be consistent with your question.

That leaves us with a handful of actions and those are all returning capital to shareholders, that could occur through the ordinary dividend, it could occur through an extraordinary dividend, it could occur through share repurchases, those are all options for us.

I would agree that give our current results, if you were to project them forward, would be a build up of capital in the company, clearly generating the type of results we are now with almost a double-digit return and our operating return on equity, we are clearing our cost of capital, we are able to build up capital in the organization.

So if we achieve our targets I would expect that as you described we will need to define a capital strategy. That would likely include some return of capital to shareholders through some mechanisms. .

And last question, what are your thoughts on acquisitions? Is there stuff in the marketplace? What sort of things would make sense?.

We would certainly be interested in anything that allowed us to improve our footprint in the market. At this point we are not actively pursuing an expansion of other lines of insurance. I’ve always described it as something that opportunistically we would be interested in. But we are not out trying to make that occur.

We are focused on the business we’re in today and I am very pleased with the results we’ve been able to generate not only in the last quarter but over the last -- about 7 quarters now. So that is our focus but we've always viewed M&A activity as opportunistic. .

And your next question comes from the line of Mark Hughes of SunTrust..

Could you talk about loss development on the older accident years? You've talked in times past about how your loss performance on some of your claims in California, for instance, your losses were lower than peers. I'm just sort of curious.

As time goes by and you get more credibility in your experience, how do you see the older accident years developing? You've been kind of flat in recent quarters in terms of development.

What are the prospects for that-- again, with more time and better information, to come out differently? I guess the other point is you've been settling claims at an accelerated pace. You've commented on that as well.

When does that start to show up in loss development?.

I will address that, Mark. Let’s start with our performance relative to the industry. I’ve had the opportunity to sit through a presentation within the last 30 days or so with updated data and this comes out of the CWCI, so it’s a very good view of total claims experience in California.

We continue to see an outperformance relative to industry on a paid basis really across the board. We've attributed some of that, probably a significant part of it to our outcome based network, we are driving much better medical results in California today than we were previously and previously we were outperforming the industry.

So that, that continues. In terms of our accelerated claims settlement, that’s happening nationwide. Really California is the biggest part of the book and it’s having the largest impact there. We are starting to see that emerged in the actuarial data. It takes a little bit longer to see it in the actuarial data than it does in the paid data.

But we can observe it in real-time. It continues to be a favorable impact on overall loss results and as that makes its way through the actuarial work, I would expect we’ll start to see more benefit from that.

That initiative has not finished, we are continue to aggressively pursue claims and get them closed, so that there's no exposure to development going forward. And that’s had a very very favorable impact. That eventually will reach an end. I mean that's not a forever process. But we have changed our claims process.

We will be much more aggressive in trying to settle claims within say the first three years and get that risk off the books. .

And your point about your superior performance in California, is that already reflected in your reserves, or if it's sustained and you give it more credibility, then it will lead to potential favorable development?.

We are starting to see it work its way through the actuarial data. I mean it takes time, number one, for it to get into the data, then work its way through and then finally for the actuaries to assign it higher levels of credibility.

So it’s not something that happens overnight, it is a lengthier process as that experience emerges in the loss triangles. Now the actuaries are very much aware of what's happening in real time and it certainly influences their opinions in terms of loss picks but they very much wait to see it emerged through the data. .

So you could have a situation where current accident year dynamics are slowing in terms of improvement, possibly flattening, but then at the same time your development on prior accident years could begin to emerge in a more favorable way.

Is that fair?.

I am not quite sure how I want to answer that one, Mark. I think that's a reasonable assumption. I am not projecting that but I think that’s a reasonable assumption. End of Q&A.

[Operator Instructions] We have no more questions at this time. So now I would like to turn the call back over to Mr. Doug Dirks for closing remarks..

Thank you very much. Thank you everyone for joining us on the call today. We appreciate your participation and your questions. We look forward to seeing you in February next year to report our full 2015 results .Thank you and have a good day. .

Thank you for joining in today’s conference ladies and gentlemen. This concludes the presentation. You may now disconnect. Good day..