Lenard Ormsby - EVP, Chief Legal Officer & General Counsel Doug Dirks - President & CEO Mike Paquette - EVP, Treasurer & CFO Steve Festa - EVP & COO.

Mark Hughes - SunTrust Matt Carletti - GMP Amit Kumar - Buckingham Research.

Good day ladies and gentlemen and welcome to the Fourth Quarter 2017 Employers Holdings Incorporated Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions].

As a reminder, today’s conference call is being recorded. I would like to introduce your host for today’s conference Mr. Lenard Ormsby, General Counsel. Sir, please go ahead..

Thank you, Michelle. Good morning and welcome everyone to the fourth quarter 2017 earnings call for Employers. 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, Mike Paquette, our Chief Financial Officer and Steve Festa, our Chief Operating Officer. 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 some 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 Investors section on our website. Now, I will turn the call over to Doug..

Thank you, Lenard 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% and our combined ratio before the impact of the LPT of 83% improved by 2.6 percentage points.

Our full year adjusted net income increased to 15% percent or $0.37 per share and our underwriting increased income increased 19% and 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 a year ago including dividends. We are awaiting regulatory approval to acquire a multi-state insurance shell company from PartnerRe.

This acquisition will provide us with even greater underwriting flexibility. As a model line workers compensation rider, 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 Paquette 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 improvement from those ratios reported a year ago.

These improvements reflect the continued impacts of our key business initiatives involving claims settlement, 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 a 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 a year ago.

Net investment income for the fourth quarter was unchanged from a 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 are offset by losses from sales of equity 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 the enactment of the Tax Cut and Jobs Act, representing the impact of re-measurement 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 a 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 maturity had a duration of 4.2, and average credit quality of AA minus. And our equity securities represented 8% of the total investment portfolio.

Our stockholders 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 two year $50 million share repurchase plan. Lastly, it was announced this morning that and that A.M.

Best has affirmed our A minus 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 a declining rate environment in virtually all of the states in which we do business.

Net written premium growth for the quarter was $13 million dollars or 8% versus those written a year ago. New business growth for the quarter was 28% 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 claimed results.

The loss ratio before the impact of the LPT, a 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 all 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 we 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 two to three years of our expected financial benefits from tax reform back into our business by greatly celebrating 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 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.

A highest level reported in the history of the NFIB survey which began in 1973. A recent JPMorgan survey cited in 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, will now turn the call over to questions..

Thank you. [Operator Instructions] Our first question comes from the line of Mark Hughes with SunTrust. Your line is open. Please go ahead..

Yes, thank you. Good morning..

Good morning..

You had given a number for pricing, I'm sorry I missed it, the pricing on renewal?.

Year-on-year was down 3.3%..

And did I get that correctly, is that for the full year, the quarterly number as well?.

I don't have a quarterly number in front of us. We do have the year number at 3.3..

And then how about California pricing?.

We don't have that number in front us Mark..

Okay. Commission expenses up roughly a point, it seems like in the quarter above your more recent trend.

Is that a function of the alternative distribution or just some variability?.

So that's partly the answer Mark. 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 performances from many of our agents in both growth and profitability, which led to an increase in that payment..

You mentioned that the - I think 47% increase in that alternative distribution new business in the fourth quarter. Is this kind of the front end of what should be something that sustained for at least a few more quarters, was the fourth quarter kind of, not if anomaly.

But is it something that you would necessarily sustain or is that a new initiative that will carry through into subsequent quarters?.

I think we're starting to gain some momentum in that area. We 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..

Doug, you talked about enhancing the digital experience, I hope if you could elaborate on that. Are you talking distribution customer service, claims.

How is this going to change the business?.

The broadest way to answer that question Mark 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 in out because we think it will create a true differentiator in the market in a very strong competitive advantage..

And is this – I assume there is a direct to consumer element here when you take out a few years, are you really going direct to the policyholder, direct in small business? What proportion of your business could be direct?.

We are very mindful that there is a rapid change occurring in our industry and the development of that channel is occurring. We've got several competitors who have already gone that route. Evaluating that opportunity opportunities a part of what our ultimate long-term strategy will be. But I'm not prepared to make any announcement on that today..

The last pick for 2018, you obviously had a very good fourth quarter on current accident year in addition to the favorable development, your last pick has been running 63.8 roughly for the full year, you’re at 62.4. When we think of all the puts and takes on pricing, your new analytics where is that.

Where should we think about it starting out for 2018? Is it the full year number, the prior trend, the fourth quarter number, what's the right direction?.

This is Mike Paquette. I think you should probably focus on where we came out for the year and starting points and you know, we hope it to be slightly better than that, but that would start with the year for 2017 into 2018..

And then finally your tax rate, you point out that the four points of investment, I assume would be roughly equivalent to your tax savings.

Is that the right relationship and can you point us to what the tax rate ought to be in 2018?.

Sure, so Doug mentioned is that, we would be spending the next two to three years of our tax savings on the new initiatives.

In terms of an effective rate going forward, the fourth quarter of this year was a little higher as adjusted, because we had significantly more underwriting income, which attracted a 35% rate and that spiked the fourth quarter a little bit. Going forward and looking at 2017 in the aggregate, we were running at about a 25% effective rate.

And with tax enactment, we expect that that number will probably be in the 15% to 16% rates going forward..

And then just to be clear. I think you've laid out numbers specifically 4% of margin, I guess 4% of earned premium would be dedicated to digital investment this year and then 2% the following year. Is the 4% you envision that, is that equivalent to this year's savings. I I'll do the math.

But – and if that's the case and you cut it in half next year are you actually getting a net benefit next year from tax savings or are you spending more than the tax savings this year?.

For 2018 we expect to spend more than the tax savings, but then we'll catch up in the subsequent year to year and a half..

And this is going to show up in the underwriting expense line or underwriting another?.

The 4% and 2% mentioned absolutely in the other underwriting and operating expense line..

Thank you very much..

Thank you. And our next question comes from the line of Matt Carletti with GMP. Your line is open. Please go ahead..

Thanks, good morning. Mark did a pretty good job, covered most of my questions. Just one follow up on the digital investment and the expense ratio impact, how should we see that impact across the year? Are these initiatives already underway and that will come on in Q1 and be fairly consistent four points across the year.

Or is it something that will ramp front to back end and average out to about 4 points?.

I think it's the latter, I think it will average out. Certainly it will 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..

Okay, great. Thanks very much. And congrats on a nice quarter and year..

Thanks, Matt..

Thank you. And our next question comes from the line of Amit Kumar with Buckingham Research. Your line is open. Please go ahead..

Thanks and good morning. Two quick follow up questions. The first questions goes back to the discussion on this - on the digital change. Is this- is this all going to be in-house or you sort of hiring something externally.

Maybe just talk a bit more about are you hiring more people et cetera or is it some off the shelf product, maybe just give some more color on what exactly will happen?.

So it’s again probably all of the above there Amit. 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 firing off the shelf capabilities. So it's really a mix of all of that.

We don't intend to build at 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..

Got it. The other question I had was, I think in the opening remarks there was a discussion on additional states for expansion.

And can you just maybe talk a bit more about that and is that going to materially alter the topline or how should it think about that?.

Amit, 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 and 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 get that point there are opportunities that we can't capitalize on. So there are implications to our topline 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..

Got it. And I guess a final question I had was I think the buyback was reloaded.

But I guess just based on the comments, it seems that the buyback reload is more notional than being actually being put to use based on your expansion strategy is that correct?.

Yes Amit, that's correct. So you know, 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..

Got it. That's all I have. Thanks for the answers..

Thank you. [Operator Instructions] We do have a follow up question from the line of Mark Hughes with SunTrust. Your line is open. Please go ahead..

You had talked about the declining losses attributable to the lower frequency, good execution of your claims closing, and your investment and predictive analytics. I think you referenced that had come out recently here - recently here maybe in the fourth quarter.

Could you talk a little bit about that? And is that going to have a carryover effect - a positive effect in 2018, if that's sort of part of your early thoughts about lower last pick for next year?.

Yeah. Mark 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 go 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..

Thank you..

Thank you. And I'm showing no further question. And I'd like to turn the conference back over to Mr. Doug Dirks for any closing remarks..

Okay. Thank you very much. Thank you everyone for joining us today. We appreciate your participation and your question. A very strong close to the year. I believe we're off to a good start in 2018. We certainly look forward to discussing first quarter results with you at the end of April. Thank you all very much and have a great day..

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone has a great day..