Lenard Ormsby - Chief Legal Officer, EVP, General Counsel and Corporate Secretary Douglas Dirks - President, CEO & Director Michael Paquette - EVP, CFO & Principal Accounting Officer Stephen Festa - COO and EVP.

Amit Kumar - The Buckingham Research Group Mark Hughes - SunTrust Robinson Humphrey.

Good day, Ladies and gentlemen, and welcome to the Q1 2018 Employers Holdings, Inc. Earnings Conference Call. [Operator Instructions]. As a reminder, this conference call is being recorded. I'd now like to introduce your host for today's conference, Mr. Lenard Ormsby. Sir, you may begin..

Thank you, Jimmy. Good morning, and welcome to the First Quarter 2018 Earnings Call for Employers. Today's call is being recorded and webcast from the Investor Relations section of our website where 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 fact are considered forward-looking statements.

These statements are made in reliance on the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995.

Although, we believe the expectations expressed in our forward-looking statements are reasonable, risks and uncertainties could cause actual results to be materially different from our expectations, including the risks set forth in our filings with the Securities and Exchange Commission.

All remarks made during the call are current at the time of the call and will not be updated to reflect subsequent developments. In our earnings press release and in our remarks or responses to questions, we may use non-GAAP financial metrics, including those that exclude the impact of the 1999 Loss Portfolio Transfer or LPT.

Reconciliations of these non-GAAP metrics are included in our financial supplement as an attachment to our earnings press release, our investor presentation and any other materials available in the investor section on our website. Now, I will turn the call over to Doug..

Thank you, Lenard, and thank you all for joining us on the call today. The first quarter was a strong beginning to 2018. During the quarter, we grew written premium by healthy 7%, lowered our current asset and year loss provision rate and recognized favorable development on our prior year's loss reserves.

Our first quarter adjusted net income increased 55% or $0.31 per share from a year ago and our underwriting income doubled $18.3 million. Our combined ratio before the impact of the LPT of 91.1%, improved by 5.5 percentage points versus that of a year ago.

During the first quarter, we delivered solid new business growth by actively pursuing opportunities that fit within our underwriting strategy and that met our underwriting requirements. Despite the strong growth in new business, our top line premium continues to be pressured by declining rates in our renewal book of business.

Manual rates or the rates filed with regulators by independent rating bureaus have declined in virtually all of our states due to declining loss cost. Our policy retention rates remained high, but our average renewal rate for the first quarter of 2018 decreased by 9.5% from a year ago.

For the same period 1 year ago, our average renewal rate declined by 1.8%. Our book value per share, including the deferred gain at March 31, 2018, was $33.32, a decrease of 1.7% from year-end, including dividend as a result of unrealized losses on our fixed maturity investments stemming from rising yields.

We have maintained a relatively short duration fixed income portfolio to somewhat blunt what we believe to be an inevitable rise in rates, but could not completely shelter the portfolio from the impact of that rise. And with that I'll turn the call over to Mike Paquette for further discussion of our financial results..

Thank you, Doug. Net premiums written in the first quarter increased by 7% year-over-year, which Steve will address in his remarks. Our first quarter loss in LAE ratio, before the impact of the LPT of 55.5%, was 8.3 percentage points lower than a year ago.

7 percentage points of that improvement resulted from $12.4 million of favorable prior period loss reserve development relating to accident years 2016 and prior. The balance of the improvement resulted from the continued impacts of our key business initiatives involving accelerated claim settlement, geographic diversification and data analytics.

Our first quarter commission expense ratio of 13.4% was 1.1 percentage point higher than a year ago. Increases in profitability and growth-related agency incentives as well as growth in our alternative distribution channels that generally carry a higher commission expense, resulted in the overall higher commission ratio in the current period.

Our first quarter underwriting and other operating expense ratio of 22.2% was 1.8 percentage points higher than a year ago, in line with our expectations as we develop and implement new digital capabilities. Net investment income for the first quarter was $19.4 million, up 3% from a year ago.

Our equivalent pretax book yield on the portfolio was 3.4% as of quarter-end. Our effective tax rate in the first quarter was 13% versus 21% a year ago. The reduction in this tax rate is the result of a 40% year-over-year reduction in the federal statutory income tax rate, resulting from the Tax Cuts and Jobs Act.

As of March 31, 2018, our fixed maturity had a duration of 4.4 and an average credit quality of AA- and equity securities represented 7% of the total investment portfolio. And now I'll turn the call over to Steve..

Thank you, Mike, good morning. Net written premiums for the quarter of $210 million were up $14 million or 7.1% from the first quarter of 2017. The primary driver of this increase was new business growth, which increased to $20.6 million over the comparable period in 2017.

The new business growth rate of 46.4% was a result of year-over-year increases of submissions, quotes as well as bound policies. This growth has been driven by both the new partnerships as well as long-term existing partnerships in both our core as well as alternative distribution channels.

Despite of declining rate environment in virtually all states, a significant majority of our states exhibited new business growth for the quarter. With respect to the quality of the new business growth, we had strong growth quarter-over-quarter in our target classes of business.

These target classes have historically exhibited superior loss ratio performance as well as higher retention rates. With respect to renewals for the quarter, we continue to see high policy unit retention rates. In fact, these rates increased slightly over the comparable period in 2017.

This improved unit retention experience was offset by an overall rate decrease for the 3 months ended March 31, 2018, versus the rate level and effect on those policies a year earlier. This is not surprising considering the soft market cycle in which we are operating and have discussed on many occasions.

As indicated previously, we are focused on retaining the business that continues to positively impact our bottom line results. During the first quarter, we entered the states of Maine, Vermont and South Dakota. This follows our entry into Louisiana during the fourth quarter of 2017.

We now write business in 40 states as well as the District of Columbia. We plan on entering additional states during the remainder of 2018 as we complete the national build-out of our operating model. Our current accident year loss and LAE ratio improved from 63.8% during the first quarter of 2017 to 62.5% in the current quarter.

Our indemnity claims frequency continues to decline, and these overall results are reflective of both improving loss environments in the majority of the states in which we do business as well as internal initiatives we have undertaken that have been discussed on prior calls.

One of the states that continues to see an improving loss environment is California. Because California is our largest market, we want to speak to the recent WCIRB loss cost advisory recommendations.

On prior calls, we have discussed the improving loss environment in California and the conclusions reached by the WCIRB are, for the most part, consistent with our experience. The Bureau's recommendation is a 7.2% reduction from the January 1, 2018, approved loss cost.

The key drivers for this reduction continued to include trends, such as, loss development patterns emerging favorably as well as acceleration of claim settlement activity and significant reductions in lean filings. Our experience is consistent with these outcomes.

All of these trends as well as others speak to the improving loss environment in the largest worker's compensation market, most of which have resulted from the reformed legislation over the past few years. And now I will turn the call back to Doug..

Thank you, Steve. As we progress into the second quarter of 2018, our overall results continue to be in line with our expectations.

At the close of the first quarter, we had a record number of policies, a record amount of in-force premium, near-record levels of statutory surplus and invested assets, and our best underwriting performance as a public company. Premium growth exceeded our plan.

Although, the headwind continues to be the average renewal rate, and the tailwinds are comprised of higher-than-expected payrolls and stronger-than-expected new business growth.

We continue to aggressively develop and implement a variety of technology and analytic capabilities, driving superior underwriting and claims results and sustainable operating efficiencies. Though, many of these initiatives are multiyear in nature, we expect to roll out these new capabilities on a frequent basis.

As to our geographic expansion, with the addition of 3 additional states this past quarter, we now offer our products in 40 states in the District of Columbia, representing approximately 97% of the total U.S. market. And with that, operator, We'll now take questions..

[Operator Instructions]. Our first question comes from Amit Kumar with Buckingham..

Two questions, if I may. The first question was on the discussion on the loss picks. I was having some trouble reconciling your commentary and the reduction in the loss picks versus the commentary from some of the larger commercial players, which are all warning about a potential reversal in the environment.

I do appreciate that the book of the business is not one is to one.

But can you just talk about this improvement, which is maturely above and beyond the overall industry, and some of the other players?.

Amit, both, Steve and I will answer that question. I want to start by saying none of our comments are reflective of what others are seeing. Our results are what we're seeing in our book of business. And as you properly point out, our book of business is considerably different from the industry, as a whole.

We've chosen this underwriting strategy because we've consistently said it outperforms the industry as a whole. And so I expected the results we're seeing today are consistent with that.

Beyond that, part of what we're observing in terms of loss experiences, as a result of initiatives that we've been implementing over a number of years that we're now starting to see the benefit of them.

Let me turn it over to Steve, and he'll talk a little bit about what's happening within our claims operation both from a tactics and a technology standpoint..

Sure. And before I even get into the claims, Amit, as you know, a few years back we deployed some predictive analytic capabilities that we didn't have before in terms of helping us make better decisions with respect to risks that we want to write and pricing them appropriately.

More recently, we've invested in some initiatives in the claims area that help us identify claims that have the potential to accelerate the severity and get on top of those claims earlier with the appropriate resources, which we've had some early success with that as well.

And the other thing that I would point out is, and I referenced this earlier in my comments is, we have seen substantial growth this quarter and we saw at the tail end of last quarter or last year as well, in, what we referred to as our target classes, which historically have had better loss results for us than our average book of business.

So all of those components go into our confidence with respect to the improving loss environment. Not only in our book, but as indicated earlier, there are some of the states we do business in, California being one of them, those environments themselves are improving on top of that..

Can I overlay that answer with -- obviously, the market discussion, including NCCI, making filings, pointing to the rate filings, incorporating the tax benefit from the tax bill, how does that change, I guess, the dynamics going forward for 2018?.

I don't know if I can speak specifically to that, but if you're talking about states that have a full administered pricing, those rate filings can incorporate the expected profitability. And consequently, that will be factored into the rate. But in states that have a pure loss cost filing, I would expect that the impacts would be 0 to minimal impact.

And so when we look at what's happening in terms of the declining loss cost, again, in current virtually everywhere around the country, we think that's indicative of an improving loss environment from both the frequency and severity standpoint. And I don't see anything on the horizon that suggest that that's about to change.

Now what might be happening in the broader market is, given the declining available premium in the marketplace, because of falling loss cost, those that are insisted upon maintaining top lines, will likely do that by offering lower prices at the smaller margins. As Steve indicated in his comments, our focus is on the bottom line.

We are continuing to see growth but we're only doing in the class of business that we think will provide us with margins expansion..

Amit, this is Steve. The other thing I would comment on, with respect to your question is, as you know, we have a large concentration of our business in California.

If you go back to the January 15 filings from the WCIRB through the most current filing, they've reflected a 35% reduction in loss cost, which frankly is a result of the improving loss environment in that state.

And their most recent projection is that they expect to see frequency declines at least through 2019 and the new [indiscernible] went into place on January 1 of this year will reap some benefits as well. So another reason for optimism on a go-forward basis..

Got it. And final question on the growth trajectory. At year-end you were in 37 states, now you're in 40 states and obviously, it's materially different versus when you had IPO.

Does that recent -- in all of this discussion, has there been any change in the growth strategy? Are you still exactly accelerating at the path, which you had discussed at the time of Q4 earnings? Or has there been maybe a bit of slowing of that growth strategy? Maybe just talk about that..

No, I mean, we're still consistent with our expectations in terms of growth. We've entered into some new partnerships that already have proven to be very productive for us. We've gained traction in the past couple of years from some of the states that we entered 3 to 4 years ago that had some size attached to those states.

And then, I think I've mentioned on prior calls that over the past year, we've made some changes internally within our sales organization that has brought new relationships into the organization and improved the caliber of our sales organization as well.

So we're leveraging on profitable opportunities that are out there in the marketplace and there are many of them out there today..

And Amit, let me just jump in here. Of the remaining 6 open-market states that we're not currently doing business in, that represents approximately $1.5 billion of available premium. And we have about 1% to 2% market share strategy, some states pick up as much as 3%. So there won't be a material growth opportunity from those remaining states.

Why it's important for us to build those out is, we do have national partners, and our national partners really look for us to have an ability to do business every place that they do business. And so it's an important part of our business but it's not likely to drive significant additional growth by adding those last 6 days..

[Operator Instructions]. Our next question comes from Mark Hughes with SunTrust..

The net premiums earned were not up quite as much as the written.

Was that an audit premium issue or some other factor driving that?.

Mark, that the earned premium is just a function of the written. And you're right, there wasn't a sizable audit premium accrual to drive that. But on the other hand, we are now taking a more proactive approach in terms of endorsements.

And that means that we're accelerating the audit premiums, there's is no net positive or negative necessary, as a result. But really, it's just the fact that we're growing in this quarter so those earned numbers will grow in future quarters..

Right. Seems like you have good written numbers if I look at the last -- half of last year, you were up 8%, 9% and net and gross written.

And so I had -- and given that you had another strong quarter, the up 1% on premiums earned seemed a little more modest, but -- I guess, you're saying nothing, no unusual factors driving that?.

The unusual factors driving that is that, you'll see, in all likelihood, less volatility in our premium audit accruals. The audit accrual has an immediate impact on the earned. And as that smooths out, which we all would agree is a good thing, you're just going to see that anomaly for a brief period of time..

Okay. The new business, I think, you had said it was up 48% in the quarter.

Am I right in checking my notes, is that up 20% last quarter -- I'm sorry, 46% this quarter? Is that correct? And is this sustainable for some period of time, this level of new business?.

You're correct. It was actually 46.4%, quarter-over-quarter. As I said earlier, Mark, a lot of the traction we gained this quarter came from areas where I don't expect that traction to start slowing down.

The fact of the matter is that some of these newer partnerships we've developed, they accounted for a decent percentage of that growth and they're just in the early stages of the relationship we have with those partners. So I'm not expecting much moderation from that number over the short term, at least..

Understood. And then, underwriting expenses at the fourth quarter call, you had laid out a strategy for stepping up some investments and that having an impact. Historically, your Q1 was always a higher mark for operating expenses. And in this quarter, it seems like that was perhaps not the case depending on your full year level of investments.

How do I think about the trajectory on, kind of, maybe absolute level of spending, as it say, last couple of years you had a sequential decline in absolute terms in operating expenses.

But given the investment program you've layed out, it seems like that would be less likely this year? How do we think about it, going forward?.

Yes, Mark, we still expect the increase in our underwriting expenses to be consistent with what we disclosed at year-end. The timing of that would be a little bit challenging. We are, again, aggressively pursuing all of our initiatives.

It's a little bit more difficult to get into exactly right as to which quarter the expenses will be incurred, but we're still looking for about a 4-point increase in our underwriting expense this year and into next year related to those initiatives.

So the fact that it's been, in your view, a little bit lower than you might have expected and maybe even a little bit lower than we planned, we still expect to incur those amounts during the course of this year..

And speakers I'm showing no further questions in the queue at this time. I'd like to turn the call back over to Doug Dirks for any closing remarks..

Thank you, everyone, for joining us today. We appreciate your participation. We look forward to speaking to you in about 3 months when we do our midyear results. Thank you, all, and have a great day..

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