Participants

Lori Brown; Executive Vice President, General Counsel, Secretary, Chief Legal Officer; Employers Holdings Inc

Katherine Antonello; President, Chief Executive Officer, Director; Employers Holdings Inc

Michael Pedraja; Chief Financial Officer, Executive Vice President; Employers Holdings Inc

Mark Hughes; Analyst; Truist Securities

Robert Farnam; Analyst; Janney Montgomery Scott LLC

Presentation

Operator

Good day and thank you for standing by. Welcome to the fourth quarter of 2024 Employers Holdings, Inc earnings conference call. (Operator Instructions) Please be advised that today's conference is being recorded.
I would not attend the conference over to your speaker today, Lori Brown, please go ahead.

Lori Brown

Thank you, Kevin. Good morning and welcome everyone to the fourth quarter of 2024 earnings call for Employers. Today's call is being recorded in 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 1,995. 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 non-public information and for complying with disclosure obligations under the SEC's regulation FD. Such disclosures will be included in the investor 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-gap financial measures. Reconciliations of these non-gap 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 investor section on our website.
Now I'll turn the call over to our Chief Executive Officer, Katherine Antonello.

Katherine Antonello

Thank you, Lori. Good morning, everyone, and thank you for joining us today.
On the call with me is [Michael Paquette], our retiring Chief Financial Officer, and I would like to welcome Michael Pedraja, our incoming Chief Financial Officer. During the call, we will follow our typical agenda where I will deliver my opening comments and then hand it over to Mike to provide the details on our financials.
I'll close with a few additional thoughts and then we'll open it up for questions, comments, and discussion. The fourth quarter contributed nicely to a very successful year for Employers. We finished the year with the highest levels of written and earned premium, ending enforced premium and policies, and net investment income in our history.
We achieved solid growth in new and renewal premiums throughout 2024, which was offset by lower final audit premiums and endorsements. Our gross written premiums, excluding both final audit premiums and the change in audit accruals increased 3% in the fourth quarter and 6% for the full year. With all major distribution channels contributing to the growth.
Our investment performance was also a boost to our revenue throughout 2024, with strong net investment income and net unrealized gains from our common stocks and other investments. From an underwriting standpoint, our year-end full reserve study led to the recognition of $9 million of net favorable prior year lost reserve development from our voluntary business.
That action, coupled with meaningfully lower underwriting expenses, yield yielded a combined ratio of 95.5%, excluding the LPT for the fourth quarter. For the full year, we had a combined ratio of 98.6% excluding the LPT, which represents our tenth straight year of achieving an underwriting profit in our long-tailed line of business. I'm particularly pleased with the reductions we achieved throughout the year in our underwriting and general and administrative expense ratio.
That ratio for the fourth quarter was 23.2% versus 24.6% a year ago and was 23.5% for the full year versus 24.9% a year ago. The decreases were primarily the result of cost savings achieved through the Cerity integration plan that we executed in the fourth quarter of 2023, and we remain laser focused on achieving further reductions to that ratio going forward.
As you're aware, we do not provide specific guidance, but in light of the ongoing competitive rate environment for workers' compensation, we currently anticipate increasing our 2025 accident year loss and LAE ratio for voluntary business. The increase is consistent with both our prudent reserving philosophy and the current trend in in the workers' compensation industry.
We expect this to mitigate the impact of our continued focus on reducing the expense ratio. Finally, I want to thank our talented and dedicated employees for all they achieved in 2024. They are our most valued asset and have successfully positioned the company for even better results in the coming years.
With that, Mike will now provide a deeper dive into our 2024 financial results, and I'll return to provide my closing remarks. Mike.

Michael Pedraja

Thank you, Cathy. Gross premiums written were $176 million for the fourth quarter and $776 million for the full year, with both being highly consistent with the premium levels that we wrote a year ago. In each period, higher new and renewal premiums were offset by lower final audit premiums and endorsements. That premiums earned were $190 million for the quarter and $750 million for the year, representing increases of 1% and 4% respectively.
Our fourth quarter and full year loss in LAE ratios excluding the impact of the LPT were 59.5% and 61.6% respectively versus 50.2% and 57.2% respectively a year ago. The increases in each period were the result of lower favorable prior year loss reserve development and a slightly higher current accident year loss in the LAE estimate.
We recognize $9 million and $18 million dollars of favorable prior year loss reserve development during the fourth quarter and full year on our voluntary business, respectively, versus $25 million and $0.45 million dollars respectively a year ago. Throughout 2024, we continued to settle claims on an accelerated basis to both mitigate our overall tail risk and generate additional reserve salvage.
As mentioned in our earnings release, within the 2024 periods presented, we refined our presentation of certain expenses associated with our involuntary premium. This revision, which was immaterial, had the effect of reducing both our fourth quarter and full year 2024 commission expense ratios by approximately 0.3% points and increasing our respective underwriting and general administrative expense ratios by the same amount.
This revision had no effect on our total underwriting expenses or net income. Our fourth quarter and full year commission expense ratios were 12.8% and 13.5% respectively, versus 14% and 13.9% respectively a year ago. The decrease in our commission expense ratio for the quarter was primarily due to a non-recurring adjustment to our commission expenses, which served to reduce this ratio by approximately 0.6% points, as well as the previously mentioned involuntary premium refinement.
Our commission expense ratio for the full year was highly consistent with that a year ago when considering the involuntary premium refinement. Our fourth quarter and full year underwriting and general administrative expense ratios were 23.2% and 23.5% respectively, versus 24.6% and 24.9% respectively a year ago. The decreases in each period were primarily related to lower professional fees and information technology expenses resulting from our 30-integration plan that we executed in the fourth quarter of last year, partially offset by higher bad debt expense and the involuntary premium refinement.
Net investment income for the fourth quarter was $27 million versus $26 million a year ago. The increase was due to higher bond yields, partially offset by a lower average investment balance as measured by amortized cost. Our net investment income for the full year was $107 million which was highly consistent with that of a year ago. Note that the net investment income in 2023 benefited from our former Federal Home Loan Bank, leverage investment strategy, which we unwound in the fourth quarter of last year.
Our fixed maturity currently have a duration of [4.5%] and an average credit quality of A plus. Our rated average ending book yield was 4.5%, which is up from 4.3% a year ago. Net realized and unrealized losses on investments through the income statement were less than $1 million for the quarter versus net gains of $12 million a year ago. For the full year, our net realized and unrealized gains were $24 million versus $23 million experienced a year ago.
Our interest in financing expenses were both down sharply in the fourth quarter and the full year versus those of a year ago. The decreases in each period were due to the repayment of our Federal Home Loan Bank advances during the fourth quarter of 2023, as previously mentioned. Income tax for the quarter was $6 million and an 18% effective tax rate versus $13 million or a 22% effective tax rate a year ago.
The effective tax rates in each period reflect applicable income tax benefits and exclusions and exclusions associated with tax advantage investment income, LPT adjustments, pre-privatization loss in LAE reserve adjustments, and deferred gain amortization. Our income tax expense for the full year was $28 million a 19% effective tax rate versus $30 million or an effective tax rate of 20% a year ago.
Our book value per share, including the deferred gain of $47.35 increased by 10.6% during 2024, and our adjusted book value per share of $50.71 increased by 9.8% during 2024, each including dividends declared. These measures were favorably impacted by $24 million of net after tax and realized gains arising from our equity securities and other investments. During the fourth quarter, we repurchased $10 million of our common stock at an average price of $51.20 per share.
And since year end, we bought a further $11 million of our stock at an average price of $49.38 per share. Our remaining share repurchase authorization currently stands at $18.7 million. Earlier this week, our board of directors declared the first quarter 2025 regular quarterly dividend of $0.30 per share. This dividend is payable on March 19th, to shareholders of record as of March 5th.
And now I'll turn the call back to Kathy.

Katherine Antonello

Thank you, Mike. We met our capital management objectives in 2024 by returning $72 million to our stockholders through share repurchases and regular quarterly dividends. Our success and opportunistically repurchasing our shares throughout 2024 allowed us to meet these objectives in the best possible way, thereby improving several of our current and future key metrics without the need to declare any special dividends.
Beyond our financial results, we recently announced that AM Best upgraded the financial strength ratings of each of our insurance companies to A. This upgrade reinforces our ability to provide reliable, trusted, high quality coverage to small businesses across the nation. Looking ahead to the remainder of 2025, we will continue to vigorously pursue profitable growth opportunities. By focusing on disciplined underwriting and claims management, cultivating and maintaining strong long-term relationships with both traditional and specialty insurance agencies.
Thoughtfully expanding our appetite to new risk segments, further developing important alternative distribution channels, and offering insurance solutions directly to customers. We are confident that our strong capital position will support both our growth and innovation initiatives, and we look forward to the year ahead.
And with that, Kevin, we will now take questions.

Question and Answer Session

Operator

(Operator Instructions) Mark Hughes, Truist Securities.

Mark Hughes

Thank you. Good morning.

Katherine Antonello

Good morning, Mark.

Mark Hughes

Cathy, can you, give us a sense of the magnitude of the change in the loss pick for a current accident year and then you've been holding steady at 64 for a while. And a lot of the same dynamics seemingly have been at play, the Lower loss costs, the medical inflation, et cetera. Why now? What do you see in the marketplace that, motivates you to increase the loss pay.

Katherine Antonello

So Mark, our current accident year loss in LAE ratio is determined annually by our actuaries. And they consider the pricing environment of each of our states and the growth prospects that we have in those states. They also look at the trends and frequency and severity and any initiatives that that we might be implementing within the year that we feel could impact our results.
I would say that our philosophy or our approach, has not changed. We generally like to choose the ratio at the beginning of the year and, that's based on the current environment, and we like to leave it there until there's a compelling reason to change it. As you said, our prudent reserving philosophy and the continued, competitive rate environment led us to select a 2024 accident year loss in LAE ratio of 64%. That was slightly higher than what we chose for 2023, which was 63.3%. And that has been consistent for a while. We have the same loss pick in 2022.
When I mentioned that we do expect to increase our accident year loss in LAE ratio in 2025. The primary drivers there are some higher actuarial trend selections and as I mentioned, the ongoing competitive rate environment. What I would say is we do see also improvement in our expense ratio, but that will be mitigated to some extent by the change in the loss in LAE ratio that we're expecting.
I just also add that the change that, we are expecting will be directionally consistent with the work comp industry, which has been, increasing the current accident year last pick for several years and we've been coming in below that.

Mark Hughes

Understood, is one to think the, 70 basis point uptick in 2024. Is that a good, starting point to think about 2025?

Katherine Antonello

Because we don't give guidance, I can't give you, any indication at this point as to how high it will be, except for the fact that we do expect our, decrease in the expense ratio, to be an offset and a mitigating impact.

Mark Hughes

To be will it fully offset, do you think, or just partially offset or no specifics at this point.

Katherine Antonello

No specifics at this point, but we expect the offset to be meaningful.

Mark Hughes

And then you said the higher actuarial trend selection. That phrase carries a lot of weight. Can you maybe say what trends are driving that frequency, severity, medical?

Katherine Antonello

So when we look at frequency, and we always do that based on our own level premium. Our last time claim frequency have continued to trend downward over the last several years. We do not expect that trend to change. When we adjust for the change in wages, our overall claim severity values have really held fairly steady in the most recent years.
And they remain generally speaking below the pre-pandemic levels, and that's been driven by lower medical severity. Indemnity severity, I would say is trending about the same as wage inflation. And up to this point, medical inflation and the economic data has remained relatively mild, especially when you look at it, in relation to other sectors like energy or housing or food, so that's good news.
So the pressure is really just coming from a little bit more conservatism and what we're seeing. Broadly in the industry, I will add that the accident year loss and LAE ratio picks for 2023 that we saw coming out of last year's state of the line was a 69. I'm not suggesting that that's what we are selecting in any way, shape or form, but I'm just saying that we have been well below the industry for many years.

Mark Hughes

The wage inflation that you might have seen in earlier years, I think ended up being beneficial, since medical inflation was benign it was essentially a kind of a, won't say hidden but an extra amount of premium that might have offset any kind of Inflation and any trends around severity. I guess maybe the fact that you're not seeing as much wage inflation is that then put a little more pressure on the current accident year is that? Does that make sense or is it off base?

Katherine Antonello

No, I mean that does make sense. I'll tell you, when I look at the BLS numbers, as of December, the annual change in employment and hourly wages was 5.3% for all sectors and 5.5% for leisure and hospitality, which is where we have a big concentration. Those numbers compared to 6.1% and 8.1% a year ago. So it's that reduction in the acceleration of employment and wages that's impacting our book of business and it's impacting it by decreasing.
The audit pickups and the audit accrual that we have and that's putting a bit of pressure on our net written premiums. So you're spot on that some of the, -- it's really the reduction in the acceleration of employment and wages that we're seeing that's putting pressure on the net written premium. There are still very strong increases, but not to the extent that we saw coming out of COVID.

Mark Hughes

And then maybe just one final question you've been talking about expansion in your appetite. That's helped drive the top line. How should we think about that going into 2025?

Katherine Antonello

Yes, we are going to continue to, expand our appetite, and we're actually accelerating our effort there because it has been a very successful program for us. That segment of business is operating at a loss in LAE ratio that's very similar if not slightly better than, our traditional target classes it's really contributing to our overall growth. In the fourth quarter, just to give you some numbers, the appetite expansion classes generated $35 million or 20% of our new renewal premium.
The other area that we're focused on is what I've mentioned in the past is this continued shift towards API utilization for submissions, quotes and binds that's coming through digital agents and digital marketplaces. So we've focusing our efforts on increasing those digital partnerships so we'll see quite a bit of that going on in 2025 too.

Mark Hughes

Thank you very much.

Katherine Antonello

Thank you, Mark.

Operator

Robert Farnam, Janney Montgomery Scott LLC.

Robert Farnam

Hi there, good morning, Mike, a question for you. Th -- it looks like you may be transitioned a bunch of your investments into mortgage-backed securities during the quarter. I just kind of want to know what your thought process was there.

Michael Pedraja

Sure, what you'll see when we file our 10-K is that we increased our letter of credit issued by about $100 million through the Federal Home Loan Bank, and we used that to satisfy deposit requirements in California which permitted us to liberate some of the lower yielding assets that we that we had on deposit with California.
And we sold those in the quarter and recognized the small realized loss on those of just over $2 million but what that allowed us to do is to go along with residential mortgage-backed securities that were yielding near 6%, a pretty big increase over what we were getting with these deposits. But the Federal Home Loan Bank, we only have to pay a 50-basis point letter of credit fee. So that will have a little bit of an uplift in our net investment income for next year. Those trades were accomplished in December. So you're not seeing that in the net investment income that we printed for the quarter in the year.

Robert Farnam

So the, -- so it sounds like the differential between your kind of your book yield and your new money yield is expanded or it should expand the next year is that the right way to think about that?

Michael Pedraja

We show that the ending, the 4.5 is the ending as of December 31th, but some of that increase from the prior period is a result of that trade.

Robert Farnam

Okay, alright. And my second question, I'm not sure if you're going to have the data available, but I wanted to talk about kind of the increase in the higher hazard, groups that kind of percentage of enforce. Now for years that was kind of low single digits. I think in 2022 it went to the higher thing of digits in 2023 it may have been in the mid-teens.
And I just kind of want to have an idea of where you see that maybe in 2024. I know that probably will come in a 10-K, but I didn't know if you wanted to talk about that right now. And my feeling is what are the claims trends for the higher hazard business? Is it a longer tail? Is it just kind of maybe describe what types of risks you're taking on the books there and how that might impact profitability.

Katherine Antonello

Yes. So our shift into some of the higher hazard groups has been, that is all tied. well, not all, but some of that has been tied to the appetite expansion effort and that's been a very thoughtful expansion, and we have intentionally moved into some of those higher hazard groups. While the class codes that we are writing may be in the higher hazard groups we're selecting risks that are in the lower hazard range of those hazard groups.
Another cause of that shift was from, a change that NCCI made about three or four years ago now. That remapped hazard groups. So some of the classes that we've been in for years shifted upwards into higher hazard groups. So it's a combination of those two things that's caused that shift over time.
I can't tell you exactly what numbers where we'll land on the percentage in all of the hazard groups or where we're ultimately headed. Except that we are being very cautious when we expand into those and we're looking to cherry pick the best risks and not change who we are as a carrier in terms of you know our risk appetite.

Robert Farnam

And that was kind of the just the question that I know you've always been noticed kind of the low hazard, workers' comp writers. So as you continue to write more in the higher hazard groups, it might change if that thought might change your actual kind of company identity there, but it doesn't sound like it's still a huge portion of your overall, target profile.

Katherine Antonello

No, not a huge portion.

Michael Pedraja

So Rob, what I can add is in the last couple of quarters we've been hovering between kind of 91% to 92% in categories A through E, and that's been pretty consistent for the last couple of quarters.

Robert Farnam

Okay, all right, thanks. That's a good color. One last question for you. Just the $9 million or so of favorable development, was that related to any particular accident years or is it, old stuff or new stuff or what?

Michael Pedraja

It was predominantly in in accident years 2020 and prior, and you'll see that when the 10-K comes out and we file our statutory. So you will see a little bit of strengthening in 2023 and 2021, but we'll address that in the 10-K and, it's some large losses that we experienced in those years but you'll see it all very soon and happy to have a conversation with you once that's published.

Robert Farnam

Okay, very good, thanks for the answers.

Katherine Antonello

Thank you.

Operator

(.Operator Instructions) I'm not showing any further questions at this time. I like to turn the call back over to Katherine Antonella, for any closing remarks.

Katherine Antonello

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

Operator

Thank you, ladies and gentlemen does include today's presentation. You may now disconnect and have a wonderful day.