Employers Holdings Inc
NYSE:EIG
Earnings Call Analysis
Q4-2023 Analysis
Employers Holdings Inc
The company reported a steady rise in financial metrics, with gross premiums written increasing by 3% in the fourth quarter to $178 million, and 7% for the full year to $768 million. Similarly, net premiums earned climbed by 4% to $188 million in the fourth quarter and by 7% to $722 million for the full year.
The fourth quarter and full year loss, and Loss Adjustment Expense (LAE) ratios, which reflect the company's losses in proportion to earned premiums, showed significant improvements. The fourth quarter recorded a ratio of 50.2%, while the full year was 57.2%, marking enhancements from the previous year's figures. Contributing to this positive trend were lower current accident year loss provisions and higher prior year loss development. The company also recognized $25 million and $45 million from favorable prior year loss reserve developments for the fourth quarter and full year, respectively.
Efficiency in managing expenses was evident with slight improvements in commission expense ratios and stability in underwriting and administrative expense ratios. From an investment perspective, net investment income for the quarter slightly declined to $26 million, influenced by a reduced invested asset balance and partially counterbalanced by higher bond yields. However, the annual net investment income grew to $107 million. The book yield on fixed income investments stood at a healthy 4.3%, and the company realized $23 million in net investment gains for the full year, a noteworthy recovery from the previous year's $52 million in losses.
The effective tax rate saw an increase, with the quarter at 22% and the full year at 20%, compared to the prior year's 16% and 13%, respectively. Despite this, the balance sheet benefited from unrealized gains, which strengthened stockholders' equity. Reflective of a robust capital management strategy, $107 million was returned to shareholders through share repurchases and dividends, and the company continues to hold a significant authority for future repurchases.
A milestone was reached with the full integration of Cerity's operations, aiming to enhance direct-to-consumer offerings and achieve underwriting expense savings. Looking into the future, the company plans to expand its service and technology offerings, particularly through self-service options for policyholders and agents, while continuing to drive growth in small business workers' compensation.
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Good day, and thank you for standing by. Welcome to Employers Holdings, Inc. Fourth Quarter 2023 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Lori Brown, General Counsel. Please go ahead.
Thank you, Norma. Good morning, and welcome, everyone, to the Fourth Quarter 2023 Earnings Call for Employers. Today's call is being recorded and webcast from the Investors section of our website, where a replay will be available following the call. Presenting today on the call will be Kathy Antonello, our Chief Executive Officer; and Mike Paquette, our Chief Financial 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 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 nonpublic information and for complying with disclosure obligations under SEC's Regulation FD. Such disclosures will be included in the Investors section of the company's website. Accordingly, investors should monitor that portion of the company's website in addition to following the company's press releases, SEC filings, public conference calls and webcast.
In our earnings press release and in our remarks or responses to questions, we may use non-GAAP financial measures. Reconciliations of these non-GAAP 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 Investors section on our website.
Now I'll turn the call over to Kathy.
Thank you, Lori. Good morning to everyone, and thank you for joining us today. To start this morning, I will provide some highlights of our fourth quarter and full year 2023 financial results. I'll then hand it over to Mike for more details on our financials. And prior to Q&A, I'll speak to you about our focus for 2024. The fourth quarter was a strong end to a very successful year for Employers. We finished the year with impressive revenue growth driven by strong increases in both premium writings and investment income. Our steady growth in written premium in 2023 resulted from a 20% increase in new business, a 9% increase in renewal business and continued solid audit premium recognition. Gross written premium, excluding final audit premium and the change in audit accrual increased 12% for both the full year and fourth quarter. Our investment performance was also a boost to revenue with net investment income increasing by 19% in 2023. In addition, the partial recovery of last year's unrealized losses from common stock and other investments benefited our income statement. The impact of numerous initiatives led to year-over-year increases in our ex-LPT underwriting income of 38% in the fourth quarter and 128% for the full year. Our adjusted net income for the same period increased 5% and 26% with even stronger increases when expressed on a per share basis. The entry year volatility and market interest rates throughout 2023 enabled us to buy and sell fixed maturity securities opportunistically, which contributed to a $59 million after-tax reversal of last year's unrealized bond losses. As a result, our book value per share, including the deferred gain, increased 16% for the year after considering dividends declared. We also hit an all-time high in terms of our policies in force, which we expect will serve us well in 2024. I want to thank our highly dedicated employees for their outstanding efforts in 2023. 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 impressive financial results. and then I'll return to provide my closing remarks. Mike?
Thank you, Kathy. Gross premiums written were $178 million for the fourth quarter, $768 million for the full year, increases of 3% and 7%, respectively. The increases were due to higher new and renewal premiums. Net premiums earned were $188 million for the fourth quarter and $722 million for 2023, increases of 4% and 7%, respectively. Our fourth quarter and full year loss and LAE ratios, excluding the impact of LPT of 50.2% and 57.2% respectively, each represented meaningful improvements from the ratios reported a year ago. These improvements reflect a lower current accident year loss provision as well as higher prior year loss development. We recognized $25 million and $45 million of favorable prior year loss reserve development during the fourth quarter and full year on a voluntary basis, respectively versus $23 million and $32 million, respectively, a year ago. We continue to settle claims throughout the year on an accelerated basis to both mitigate our overall tail risk and generate additional reserve salvage. Our fourth quarter and full year commission expense ratios were 14% and 13.9%, respectively, each representing modest improvements from those ratios reported a year ago. Our fourth quarter and full year underwriting and general and administrative expense ratios were 24.6% and 24.9%, respectively, with the full year expense ratio of being highly consistent with that of a year ago. Our net investment income for the quarter was $26 million versus $27 million a year ago. The slight decrease was due to a lower invested asset balance as measured by amortized cost, partially offset by higher bond yields. The reduction in our invested asset balance was partially the result of an unwinding of our Federal Home Loan Bank leveraged investment strategy. Net investment income for the full year was $107 million versus $90 million a year ago, and our weighted average ending book yield on our fixed income investments was 4.3%. Net realized and unrealized gains on investments recorded through our income statement were $12 million for the quarter versus $14 million a year ago. For the full year, our net investment realized and unrealized gains were $23 million versus losses of $52 million experienced a year ago. Interest and financing expenses for the quarter were less than $1 million versus $2 million a year ago. The decrease was due to the repayment of our Federal Home Loan Bank advances, as previously mentioned. Interest and financing expenses for the full year were $6 million versus $4 million a year ago. Other investments of about $2 million, consisted of a nonrecurring charge in connection with the write-off of previously capitalized cloud computing costs. We did not incur any noteworthy other expenses a year ago.
Federal and state income tax expense for the quarter was $13 million, a 22% effective rate versus $9 million, a 16% effective rate a year ago. The effective rates in each of the periods included income tax benefits and exclusions associated with our tax-advantaged investment income and LPT deferred gain amortization. Our income tax expense for the full year was $30 million, a 20% effective tax rate versus $7 million, a 13% effective tax rate a year ago. Our net income this quarter was favorably impacted by $14 million of net after-tax unrealized gains arising from equity securities and other investments, which are reflected on our income statement. And our stockholders' equity and book value per share this quarter was favorably impacted by $66 million of net after-tax unrealized gains, arising from our fixed maturity securities, which are reflected on our balance sheet. During the quarter, we repurchased $15.4 million of our common stock at an average price of $38.40 per share. And since year-end, we bought a further $4.9 million of our stock at an average price of $39.45 per share, and our remaining share repurchase authority currently stands at $16.2 million. And now I'll turn the call back to Kathy.
Thank you, Mike. We met our capital management objectives in 2023 by returning $107 million to our shareholders through share repurchases and regular quarterly dividends. Our success in opportunistically repurchasing our shares in 2023 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, I am very excited to announce that we recently completed an ambitious full integration of Cerity's operations into those of employers. The integration allows us to continue to offer direct-to-consumer policies through the Cerity brand, and we expect to realize meaningful fixed underwriting expense savings going forward. We've also eliminated the former Cerity segment from our financial reporting, returning to single segment reporting. With the Cerity integration behind us, we are now exceptionally well positioned to focus our efforts on the future of small business workers' compensation and how we can offer a superior experience to our growing customer base. In 2024, we plan to deliver more self-service options to our policyholders, our agents and our injured workers. And we expect to continue our appetite expansion effort, which has led to very profitable growth. We are confident that our strong capital position will nicely support both our growth and technology initiatives, and we look forward to the year ahead. And with that, Norma, we will now take questions.
[Operator Instructions] Our first question comes from the line of Mark Hughes with Truist.
Yes. I wanted make -- maybe just comment on the strategic partnerships you have, the distribution agreements with some of the payroll processors, for instance, I know you had been kind of restructuring some of the commissions for new versus renewal. Could you just give us an update on where we stand with those? Is that -- those updated commissions, is that fully reflected in the P&L? How do you feel about the growth prospects in that channel for 2024?
Yes. So I would say that the changes in any commission structures with our payroll partners, have been fully reflected in the financials that you are seeing, that was a couple of years ago. So we don't expect that to have much of a change going forward. The growth in all of our segments is really quite strong whether you look at it from our payroll partners or any alternative distribution channels, our core business is growing really strong. And I've said in the past, that's due to our new sales and underwriting operating model. So we're seeing quite a bit of growth across all of our segments in addition to the payroll partner channels.
And then just -- the question about medical inflation. I think you've suggested it's maintained -- or continue to be pretty benign. Is there a historical pattern of kind of the delayed impact in medical? It takes a while for selective bargaining to catch up or for government fee schedule to adjust. Is that a real thing based on your experience? Or is there less reason to think there might be a delayed impact on medical cost inflation?
Well, I would agree with what you said. Up to this point, medical inflation in the economic data has been relatively mild, especially compared to the inflation in the other sectors like energy and housing or food. So that's really good for us. We have not also -- also, I'd say, we have not seen it within our data, any indication that medical inflation is creeping up in terms of whether or not there's a lag I haven't necessarily seen any studies that are pointed just at looking at that. I've seen the same news articles that you have seen that perhaps that's what's going on. What I will say though is we have taken a look at some scenarios in case that does happen. And we have recognized an explicit medical inflation addition to our reserves, and we did that a couple of years ago, maybe 1.5 years ago, and that's reflected in our current reserves. So we feel like if we do see something happen with medical inflation, we're in a good spot, and we've tried to already contemplate that in our reserves.
[Operator Instructions] I'm currently showing no further questions at this time. I'd like to hand the conference back over to Ms. Katherine Antonello for closing remarks.
Okay. So thank you so much, Norma. And thank you all for joining us this morning. I look forward to meeting with you all again in April.
This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.