Employers Holdings, Inc. Q3 FY2025 earnings call

• Resolved loss in LAE reserves by strengthening reserves for accident years 2023-2025 due to California cumulative trauma claims, adjusting prior year reserves by $38.2M. - Gross written premium up 1.4% from renewal business. - Implemented 4-pronged approach in California to mitigate CT claims: targeted pricing, aggressive claims handling/litigation management, underwriting refinements, geographic diversification. - Commenced build-out of excess workers' compensation product. - Underwent reorganization in August leading to lower underwriting expenses. - Declared $0.32 per share dividend and announced $125M recapitalization plan for share repurchases.

Gross written premium increased by 1.4% compared to 2024 due to renewal business premiums. Loss and loss adjustment expense (LAE) reserves were adjusted: prior year reserves increased by $38.2 million (2.8% of net unpaid loss in LAE), with accident years 2023 and 2024 being the primary contributors ($40.5M for AY 2024, $16.1M for AY 2023) and prior accident years 2022 and prior decreasing by $18.4M. Accident year 2025 loss and LAE ratio increased to 72%. Commission expense decreased due to increased renewal business. Underwriting expenses decreased primarily from lower compensation-related expenses and higher net premiums earned.

• Confident current reserves are adequate, with fourth quarter to have full reserve review. - Focus on underwriting margin over growth, with small commercial growth continuing. - Plan to start accepting submissions for excess workers' compensation in early 2026, with binding by July 1, 2026.

• Uncertainty in California cumulative trauma claims frequency and trend impacting reserves. - Sustained soft workers' compensation market affecting growth and underwriting margin.

Q: You mentioned one of your strategies would be to perhaps be more assertive on the litigation front. Is this something you can make yourself a harder target. And so the plaintiff's attorneys are not as enthusiastic about pursuing you as opposed to others? Or is that -- is it more of an administrative process that you can really control, so to speak?

A: Yes. It's a good question, Mark. When -- when I talk about our targeted litigation strategies, it's internal. We're using analytics to determine the best course of action -- and those analytics are based on individual claim back. So we have a multi-disciplined team that we've developed internally that's focused solely on managing the CT exposure. We've established some really aggressive targets to reduce the defense and cost containment portion of the claim to also reduce it possible the litigation because CT claims are more highly litigated than other claims. In fact, about 90% of them are litigated. And then also just to focus on the average cost per claim and bringing that down, if possible. We've identified and we've developed several defense tactics that are targeting specific firms that represent numerous hundreds and hundreds of CT claims, thousands across the industry that have no medical associated with them. And then as I've said in the past, we're taking a leadership role in pursuing some legislative reform, working with different industry groups and so forth to really present some meaningful language to legislative committees that would bring California's CT legislation in line with other states across the country. So we really are sort of trying to attack this from a lot of different angles when you talk about the claim perspective. But as I said in my prepared remarks, we also want the industry to know that we're committed to paying cumulative trauma claims. There are legitimate cumulative trauma claims out there, and it's something that's very important to us to provide the best service to injured workers.

Q: The trend in terms of those claims, I think you talked about how you're taking underwriting pricing actions and that has helped the improvement or help for the 2025 accident year. How do we think about, say, going into 2026 and loss picks -- do you feel like you have enough of a handle on the trend that the trend is predictable at this point? . I'm kind of mixing different ideas in this question. So I apologize for that, but I'm just trying to figure out whether -- is the trend stable enough? Have you taken enough actions, pricing, underwriting that you can get to a more predictable loss pick or what kind of loss pick can we expect -- is it going to be 72% from here? So like I said, I'm growing a little bit, but pick and choose among those topics and would be -- would appreciate your feedback.

A: Sure. So -- on the pricing side, we have -- we took action earlier than the California filing that went in was effective 9/1 -- so we were ahead of the curve on that, and then we've taken a couple of targeted actions after that. We feel like we're in a nice position on the pricing side and have taken more rate than what the WCIRB filed with the bureau. So that's what we saw on the pricing side. On the underwriting side, we have more underwriters looking at risks that are flowing through as submissions and putting eyes on these risks to determine whether they have a higher exposure to CT claims. So we've lowered -- we typically -- we have a straight through quote processing system where our underwriters really only touch the more complex risk, but we've lowered that threshold for California. So we have more eyes on it from an underwriter standpoint. From a trend perspective, I feel like -- the trend is settling. It is very difficult to know what will happen in the future. I don't expect our accident year pick to be much changed from what it is this year until we see these results flow through. So when I say these results, I mean, the pricing actions, the underwriting actions, any changes that are made within California and so forth. We're going to continue to be conservative and hopefully be ahead of that trend.

Q: On the -- Mike, on the buyback, what is the interest rate that you expect on the borrowings, I think, of the Federal Home Loan line that you've got. What is the rate on it.

A: Yes, Mark, so that's why it's very exciting. The current rate is 3.7%.

Q: And is that float or is it...

A: No, that number is fixed.

Q: And then the -- how much capital do you have at the holding company at this point?

A: So very several times, as you can imagine, we manage the capital effectively through the dividends from our insurance companies, but we have a sufficient level of capital at the holding company. We don't publish that number, but it's plenty to cover a decent portion of our expenses, including repurchases and dividends at the holding company.

Q: The -- how much is available under the share repurchases, $250 million in total? How much of that has been used of?

A: So to date, on the existing plan, we used $65 million.

Q: And then what would you anticipate in terms of the pacing on the $125 million was the $45 million this quarter? Is that a preview of things to come until you use the $125 million? Or how would you characterize it?

A: I think I mentioned on the previous calls, we really look at the repurchases on a return on investment basis. And so we're going to be very disciplined -- and when -- if the stock goes down below and creates further opportunity will increase that activity. And so we will -- we're very focused on affecting this $125 million recapitalization plan. So it's going to be market dependent, but we're disciplined and intend to affect it as soon as we can.

Q: The top line growth here kind of steady some puts and takes, obviously, some expansion in excess, but the tighter underwriting your rate increases. Is this kind of steady state for top line dynamics. I mean would we assume maybe flat to up slightly? Would that be consistent with where you were at in terms of taking these actions to help control the loss trajectory here?

A: Yes. I mean I think you categorized it well by saying puts and takes. There are areas in which we are wanting to grow. And then there are areas in which we're perfectly fine turning down business, and that varies by state. It varies by policy size. We are having a lot of success on the smaller policy side, and that's why size is, and that's why you're continuing to see the growth and policy count, but it's putting pressure on the top line because of the average policy size that we're writing is lower. So I would not expect tremendous growth over the next 12 months, because, as I said in my prepared remarks, underwriting margin is what we are focusing on right now.

Q: I've got 2 questions. The first one is really just regarding the cumulative trauma claims, statute of limitations and date of injury that is kind of part of the legal issue here. Can you comment on that?

A: Yes. So the real issue underlying CT, and this is my opinion, in California is the fact that an injured worker can file a cumulative trauma claim post termination -- and the claim itself can stretch over multiple years and multiple carriers can be involved in that claim. So it's -- what we're seeing is a lot of these claims are being filed post termination now. They have much more indemnity on them than they used to. It used to be more of a medical phenomenon. That's the real issue in terms of what's going on with California CT.

Q: And then just a follow-up question in regard to the buybacks. I'm just looking at the model. And I'm just curious, will your investment leverage technically go up and maintain the investment balance as you buy back the shares?

A: Well, because our investment balance should not be impacted, right? Because we're going to fund the repurchases through debt. So the investment leverage will stay. So investments compared to equity will increase. So if that's what you're asking, yes, the investment leverage will increase.

Q: So what happens with the -- are you going to have a traditional fourth quarter reserve review as well, like internal and external? Or is this third quarter review kind of taking your annual look fee?

A: Yes. And that's a good question, Bob. We are going to have a full fourth quarter review and get back on track. Third quarter was off cycle. We usually just look at actual versus expected then, but we wanted to, definitively come out with something and look at it with a fresh eye -- and -- but we'll get back on track in fourth quarter, we'll have an internal review. It will also -- because this is the year that we've hired an external actuarial firm -- to review our reserves, they will also do a fourth quarter review, but we do not expect an impact from that fourth quarter review.

Q: Right. Is the external firm that's looking at the fourth quarter, are they the same one that looked at them at midyear?

A: Yes.

Q: Okay. And was there -- I know you've had to discuss this thing, these types of things with AmTrust. Like what kind of commentary have you gotten from rating agencies in regards to the the whole situation with the cumulative trauma in California?

A: Yes. Thanks, Bob. So we're very active and engaged with our rating agency partners and we've discussed and keep them posted as far as the process, what -- from an operating perspective as well as a capital perspective and they all continue to be quite supportive of where we're at, the actions we're taking, both from an operation perspective as well as from a capital perspective.

Q: Have you seen any change in medical cost trends? I know you probably asked every quarter about it, but what's going on with medical costs. I know we've been talking a lot about claim frequency, but how about the severity side.

A: Yes. The severity side, what we're seeing, our overall claims severity values have generally held steady in the most recent years. There -- they continue to be, generally speaking, below pre-pandemic levels, and that's both indemnity and medical severity in that number that are in that severity that I'm speaking to, but it's driven by lower medical severity. I've talked about in several calls that we monitor our own prescription drug costs. We've seen slight increases in drug costs versus those that were in place pre-pandemic, but nothing that is really alarming on the pharmaceuticals. So severity is not something that we are currently concerned about. We did have some large losses in 2024. Those are more than adequately reserved for. But we're not seeing anything that is concerning to us right now.

Q: So if in a recessionary environment, with the increase in unemployment or terminations and stuff, I understand they can file claims in California. But you see some similar issues in other states if unemployment starts to become -- it starts to go up?

A: It's something that has been researched in the past, and there have been studies that show that, that could and has happened. The most prominent one was the study research that was done after the great recession. Of course, that was a huge impact to the economy and unemployment and so forth. So I don't -- I wouldn't expect anything like that. Recessions are just very specific in terms of the industries and jobs that they tend to impact. So it's very difficult to answer your question other than generally. But the answer is it could, It just depends on the type of recession.

Q: Just can you talk a little bit more about the excess workers' comp product what size market is that? Who competes in that market and where you can add value?

A: Sure. So -- the -- our entry into excess workers' compensation is part of our diversification effort. And as I said earlier, it's our first new product expansion. We've been researching new products for about a year now in excess was the right place to start for us. Given our expertise in workers' compensation, it's just a natural extension of what we do now and leverages the talent and the systems capabilities and so forth that we already have in place. So we're spinning this up in a very efficient way by hiring a team of underwriters and then we're utilizing Agentic AI to build out the underwriting platform and the CRM platform. We don't -- we're going to go slow here. We don't expect -- we're not expecting something huge in 2026, because we're going to learn as we go -- but we do expect to get submissions in the door in early second quarter and binding by July 1, 2026. There aren't a lot of excess workers' compensation providers that are large and have an extensive book of business. So we feel like this is a good place for us to enter. It's a good time in the market for us to enter it, and we're really excited about it.

Q: And you're saying your producers are basically saying this would be a nice add-on just because placing that type of risk to others. Is that kind of...

A: Yes. We feel like there's just an opportunity for another entrant in the market and that we can provide some services that potentially don't exist right now. And we can absolutely leverage our extensive agency plant that we have in place. So there's not a lot of friction there for us to enter the market.