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Edited Transcript of EIG earnings conference call or presentation 25-Jul-19 3:30pm GMT

Q2 2019 Employers Holdings Inc Earnings Call

RENO Aug 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Employers Holdings Inc earnings conference call or presentation Thursday, July 25, 2019 at 3:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Douglas Dean Dirks

Employers Holdings, Inc. - President, CEO & Director

* Lori Ann Brown

Employers Holdings, Inc. - Executive VP, Chief Legal Officer, General Counsel & Corporate Secretary

* Michael Scott Paquette

Employers Holdings, Inc. - Executive VP, CFO & Treasurer

* Stephen Vincent Festa

Employers Holdings, Inc. - Executive VP & COO

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Conference Call Participants

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* Amit Kumar

The Buckingham Research Group Incorporated - Analyst

* Mark Douglas Hughes

SunTrust Robinson Humphrey, Inc., Research Division - MD

* Matthew John Carletti

JMP Securities LLC, Research Division - MD and Senior Analyst

* Robert Edward Farnam

Boenning and Scattergood, Inc., Research Division - MD and Analyst of Property & Casualty Insurance

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Employers Holdings Second Quarter 2019 Earnings Conference Call. (Operator Instructions) As a reminder, today's conference may be recorded.

I'd now like to introduce your host for today's conference, Ms. Lori Brown, General Counsel. Ma'am, please go ahead.

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Lori Ann Brown, Employers Holdings, Inc. - Executive VP, Chief Legal Officer, General Counsel & Corporate Secretary [2]

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Thank you, Liz. Good morning, and welcome everyone to the Second Quarter 2019 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. 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 development.

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 Investors section of our website.

Now I will turn the call over to Doug.

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Douglas Dean Dirks, Employers Holdings, Inc. - President, CEO & Director [3]

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Thank you, Lori, and good morning, and thank you, everyone, for joining us on the call today. Our second quarter results were very strong and in line with our expectations, absent unplanned favorable reserve development.

During the quarter, we delivered a 9.7% annualized return on adjusted equity while continuing to execute on our plan of accelerated development and implementation of digital IT initiatives and capabilities that will benefit and support our agency force as well as our direct customers.

During the quarter, we delivered a combined ratio before the impact of the LPT of 91.2%, more than doubled our comprehensive net income, and grew our book value per share, including the deferred gain, by 5.4%.

Our top line continues to be challenged by declining rates, stemming principally from steady declines in loss costs leading to average rate reductions across nearly all markets. We experienced an average renewal rate decline of 13% year-over-year, which compares to a decline of 10% for the same period a year ago. While underlying loss cost trends continue to be favorable, we increased our year-to-date 2019 accident year loss and loss adjustment expense ratio on our voluntary business to 65.5%, which compares to 64.5% in the first quarter and 62.5% a year ago.

Our increase in the provision for current period losses reflects market pricing considerations and does not reflect concern regarding deterioration of underlying loss trends. Although this is our current best estimate of the expected loss ratio for 2019, it is based on only 6 months of actual experience and could change, either up or down, during the remainder of the year.

We recently undertook an average rate increase in California to address general market pricing concerns, which Steve will speak to in his remarks. We continue to make solid progress in building out the Cerity direct-to-customer platform. We currently are able to offer Cerity in 10 states, with at least 5 more slated for the third quarter. We continue to make adjustments to the platform based on observed customer behaviors. Additionally, we are testing different marketing strategies and content as we seek to drive more business into the platform. Although early, we believe that a direct-to-customer offering will be essential in the coming years.

And with that, I'll turn the call over to Mike for a further discussion of our financial results.

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Michael Scott Paquette, Employers Holdings, Inc. - Executive VP, CFO & Treasurer [4]

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Thank you, Doug. Our second quarter loss and LAE ratio before the impact of the LPT of 52.7% was 0.5 percentage points lower than a year ago. During the quarter, we recognized $24 million of favorable prior year loss reserve development relating to nearly every accident year 2017 and prior, including periods covered by the LPT.

Our second quarter commission expense ratio of 13.5% was highly consistent with that of a year ago. Our second quarter underwriting and other operating expense ratio of 25% was 2.5 percentage points higher than a year ago. Expenses associated with our accelerated development and implementation of new digital technologies and capabilities contributed heavily to this increase. Our year-to-date underwriting and other operating expense ratio of 26.1% was 3.8 percentage points higher than a year ago, which is highly consistent with the 2019 expense ratio guidance that we had previously provided.

Net investment income for the quarter was $21.4 million, up 5% from a year ago. Our pretax book yield on the portfolio was 3.5% for the quarter versus 3.3% a year ago, reflecting a modest shift made to the investment portfolio that I will speak to next. At quarter end, our fixed maturities had a duration of 3.7 and an average credit quality of AA-, and our equity securities represented 9% of the total investment portfolio.

Our duration today is lower than the 4.4 reported a year ago due to investments we've made in variable rate bank loans as well as changes in prepayment speed assumptions affecting our mortgage-backed securities.

During the first 6 months of 2019, we benefited from $115.5 million of pretax unrealized investment gains. Our portfolio of fixed maturities increased in value by $85.7 million, which is reflected on our balance sheet, and our equities increased in value by $29.8 million, which is reflected on our income statement. These unrealized investment gains were the primary driver of our 12.3% year-to-date increase in our book value per share, including the deferred gain.

During the quarter, we repurchased $15.3 million of our common stock at an average purchase price of $41.05 per share, and our remaining share repurchase authority currently stands at $52.7 million. And last but not least, we expect to close on the PartnerRe New York transaction next week. This shell company will be used to support Cerity's writings and will be renamed Cerity Insurance Company post-closing.

And now I will turn the call over to Steve.

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Stephen Vincent Festa, Employers Holdings, Inc. - Executive VP & COO [5]

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Thank you, Mike, and good morning. Net written premiums for the quarter of $175 million were down $10 million or 5.3% from the second quarter of 2018. This decrease occurred despite an increase in new business-bound policies of 13.3% over the comparable period in 2018 as well as improved policy unit retention rates quarter-over-quarter. Specifically, unit retention rates improved from 93.5% for the second quarter of last year to 95.7% for the current quarter. There was also improvement from the first quarter of this year where the unit retention rate was 95.2%.

In addition, on a year-over-year basis, our in-force payroll exposure increased 21.1%. As a result of the new business policy growth as well as improved unit retention, our in-force policy count has grown 8.8% on a year-over-year basis. The drivers for the quarter-over-quarter decrease in net written premium are continued decreases in rate in the states that we do business in, and to a lesser degree, heightened competition on middle-market business. In our book, this is reflected in an average policy premium size decrease year-over-year of 5.5%. The decrease in average premium policy size in California is 9.2%, a reflection of the several years of rate decreases that the industry has taken due to improving loss trends.

In fact, the WCIRB has indicated that the average charged rate in California in 2018 was 11% below the average charged rate for 2017, and down 1/3 since 2015. In addition, the industry average charged rate in California for the first quarter of this year has not been this low since 1976.

We continue to see favorable results in our California business in frequency to exposure and severity. With continued declining rates, frequency to premium, as expected, is raising. We believe that pricing in California is at or near an inflection point. The reforms in California have resulted in historically high underwriting profit margins, but we believe that industry market pricing declines are now outpacing improvements in loss trends.

As a result, we have taken action effective July 1 to increase our pricing in California. Our actions were not universal across California but rather were tailored to our estimate of pricing needs by specific territories to maintain or improve current levels of profitability.

Finally, we have discussed on previous calls the technology investments that we are making in multiple areas of the organization. During this quarter, we released some of these new capabilities in the customer experience area, including a new customer-facing portal for our agency partners. The early feedback has been very favorable, and we continue to make expected progress on other initiatives that will be launched in coming months.

And now I will turn the call back to Doug.

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Douglas Dean Dirks, Employers Holdings, Inc. - President, CEO & Director [6]

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Thank you, Steve. In summary, our second quarter results were highly favorable and generally consistent with our expectations. Workers' compensation continues to be a relatively attractive line of business in the property and casualty industry. Our business model has always recognized that small low hazard accounts are characterized by less competition, less price sensitivity and higher persistency.

As we move through this segment of the cycle, our view remains unchanged. As a nimble, mono-line insurer, we continue to closely monitor changes in the market, and you should expect us to continue to react quickly to changing conditions to our advantage.

And with that, operator, we'll now take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Mark Hughes with SunTrust.

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Mark Douglas Hughes, SunTrust Robinson Humphrey, Inc., Research Division - MD [2]

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Do you think others see California as being at an inflection point as well? Are you ahead of the trend, well ahead of the trend on raising pricing?

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Stephen Vincent Festa, Employers Holdings, Inc. - Executive VP & COO [3]

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Mark, this is Steve. I'll answer that question. We're not seeing any evidence at this point that our competitors are doing what we just announced that we were going to be doing. So to specifically answer your question, we think that we are ahead of the rest of the industry in noticing these trends.

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Mark Douglas Hughes, SunTrust Robinson Humphrey, Inc., Research Division - MD [4]

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In California, are you seeing a little change in frequency and severity? I think the WCIRB had pointed to some trends perhaps. Is that part of the inflection? Or is it purely a pricing issue?

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Stephen Vincent Festa, Employers Holdings, Inc. - Executive VP & COO [5]

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The frequency as a percentage of payroll and severity trends that we're seeing on our book in California are what we expect to see. This is purely a pricing action. As I mentioned earlier, our frequency as a percentage of premium is being pressured at this point, which will have an impact on the loss results.

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Mark Douglas Hughes, SunTrust Robinson Humphrey, Inc., Research Division - MD [6]

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And then kind of the down 5% this quarter, when you take a lot of these factors into account, do you think this is -- does it feel like Q3 is going to be similar to Q2? Maybe not specific numbers but in terms of the competitive dynamic and your ability to sign up and retain business?

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Stephen Vincent Festa, Employers Holdings, Inc. - Executive VP & COO [7]

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Obviously, we're -- this was in place effective July 1, so it's fresh, obviously, Mark. But we expect to see some pressure in California on unit counts. Now the business that sticks with us, obviously, will have a higher rate attached to it, so that will have a positive impact on premium, but there will be pressure. We've started to see a little bit of it starting this month.

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Douglas Dean Dirks, Employers Holdings, Inc. - President, CEO & Director [8]

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And I'll jump in there, Mark. Again, we're 3 weeks into this rate action in California, so we're still accumulating data. But it's clear that the greatest impact in those first 3 weeks is in the middle-market business, and we expected that.

We've been observing for quite some time now that that segment of the market is particularly competitive. And we've cited in the past instances where we've lost on some of that businesses in the range of 20% to 30% from a pricing standpoint. So we've taken the actions that we think are necessary to maintain the margins we expect on that business. And to the extent that the market hasn't recognized it yet, yes, we expect to lose out on those opportunities.

But we have consistently said that our principal focus is on the bottom line, not the top line. And we think the California pricing trends have gotten to the point where it can no longer be sustained, in our view. So we're stepping back a bit here. What we've seen to date in the smaller account business continues to be favorable, but again, it's early there.

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Mark Douglas Hughes, SunTrust Robinson Humphrey, Inc., Research Division - MD [9]

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On the expenses, Mike, your expenses are a little lower, I think, sequentially. Is this just a natural variability? Or is this maybe expenses coming a little better than you might have expected? I wonder if you could just comment on whether this was a light quarter or -- or how you see it?

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Michael Scott Paquette, Employers Holdings, Inc. - Executive VP, CFO & Treasurer [10]

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So I'd like to say that our expenses are consistent from period to period, but that's just not the case. So they're dependent upon incentive accruals that can fluctuate. They're dependent, in this case, based on the timing of projects coming online.

So I think the best thing to recommend for you is take a look at where we are on a year-to-date basis, and that's probably a better projection going forward because some of the amounts that are included in that line can be a bit lumpy.

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Mark Douglas Hughes, SunTrust Robinson Humphrey, Inc., Research Division - MD [11]

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And then on the capital management front, I see that you -- it looks like you paid off your debt. You're incurring those higher expenses on your digital initiative but still making good money. Any body language on what you might do with the capital now especially that you've got the PartnerRe deal in your sights and will be done presumably in a few days?

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Michael Scott Paquette, Employers Holdings, Inc. - Executive VP, CFO & Treasurer [12]

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Well, regarding the debt, just keep in mind, those were at the insurance company level and those were surplus notes. So we're not going to miss that surplus because we believe we're overcapitalized at the insurance company levels and it won't free up a whole lot of cash flow because that capital is trapped within the insurance company.

The reason why we took those out is that they were LIBOR-based and they became very expensive compared to what they were just a brief period ago, so we removed that load from the equation. The PartnerRe transaction is really only a $6 million acquisition for us and we're trading cash for cash. As I said before, we're going to use that platform predominantly to support Cerity's writings going forward once that company is up and in. And really that's been the case -- been the thoughts all along.

So I don't think either one of those transactions, particularly given the length of time before we could close the PartnerRe transaction, will affect our capital activities going forward. Those were largely factored in, or in the case of the surplus notes are really not relevant.

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Mark Douglas Hughes, SunTrust Robinson Humphrey, Inc., Research Division - MD [13]

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Yes. I guess my thoughts might be that those things are now in the rearview mirror and you'll be generating capital presumably and you've got a clean balance sheet. Do you step up the share buybacks, I guess, is a direct question.

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Michael Scott Paquette, Employers Holdings, Inc. - Executive VP, CFO & Treasurer [14]

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I don't think it will have any impact. Reason why is we've really been keeping the PartnerRe at bay for some time. The purchase price is largely in line with what we expected in terms of the capital that will become insurance company capital versus holding company capital.

So I don't think it will impact our view in any way. We are opportunistic with respect to share repurchases, expect those to be lumpy as well. But I don't think that either one of those actions will change our view going forward.

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Operator [15]

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Our next question comes from the line of Matthew Carletti with JMP.

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Matthew John Carletti, JMP Securities LLC, Research Division - MD and Senior Analyst [16]

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Just a couple of questions either for probably Steve or Doug. Steve, you mentioned -- you talk about frequency on a premium basis. I was hoping you might be able to categorize it or give some color on it on a payroll basis, to kind of take the pricing out of it and get kind of a little purer view of just what the underlying loss costs are doing.

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Stephen Vincent Festa, Employers Holdings, Inc. - Executive VP & COO [17]

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Yes. So the frequency as a percentage of payroll for the company as a whole is actually down year-over-year, as is the severity. It's up very, very slightly in California as a whole, but severity is down in California. But the frequency, as I mentioned earlier, as a percentage of payroll -- or excuse me, as a percentage of premium, is actually up year-over-year.

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Matthew John Carletti, JMP Securities LLC, Research Division - MD and Senior Analyst [18]

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Okay. That's helpful. And then just one other one. More broadly thinking, the economy has been strong and I think some competitors out there probably in a little bit of a larger market space, middle-market and higher, have suggested at times that they might see some claims heating up as a result of full employment environment. Are you guys seeing anything anecdotally? Do you guys expect to see anything or does your kind of smaller book of business remove you from that a bit?

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Stephen Vincent Festa, Employers Holdings, Inc. - Executive VP & COO [19]

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Yes. I would say, Matt, that our smaller book of business, it's not so much it's smaller but the hazard groups that we traditionally write, we don't have as much exposure in that area as some of our competitors do. And we're not seeing that happening at this point, at least at this point. So if the economy goes through a recession, that might be a different story from the standpoint of post-termination claims, but we're not seeing any of those trends today.

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Matthew John Carletti, JMP Securities LLC, Research Division - MD and Senior Analyst [20]

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Congrats on the PartnerRe approval. I know it's been a long time coming.

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Operator [21]

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Our next question comes from the line of Amit Kumar with Buckingham Research.

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Amit Kumar, The Buckingham Research Group Incorporated - Analyst [22]

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Just a few quick follow-ups. The first question is, did you mention in your opening remarks what time frame the reserve releases came from?

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Michael Scott Paquette, Employers Holdings, Inc. - Executive VP, CFO & Treasurer [23]

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Yes, I did. 2017 and prior in almost every accident year, including the LPT period. So it was really coming from nearly all periods.

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Amit Kumar, The Buckingham Research Group Incorporated - Analyst [24]

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So was it, like, equally distributed? Or was there any AOI which sort of stood out in that reserve release bucket?

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Michael Scott Paquette, Employers Holdings, Inc. - Executive VP, CFO & Treasurer [25]

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The biggest year, I wouldn't say it's the predominance of it, but the biggest year is absolutely 2017 and some of the years just preceding that.

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Amit Kumar, The Buckingham Research Group Incorporated - Analyst [26]

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Got it. That makes sense. I guess related to the reserve discussion is if you look at the reserve release trends, obviously, they have been very strong. Are you getting -- are you thinking that you're getting to the point where reserves now maybe more accurately reflect the loss trends historically, and hence, this level of run rate probably would not be sustainable? Or how should I think about that?

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Michael Scott Paquette, Employers Holdings, Inc. - Executive VP, CFO & Treasurer [27]

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I can't answer that for you, Amit. We look at where we stand each and every quarter and react based on what we see during that period of time. And for the last 6 quarters, we have seen some things that caused us to act, and that was in a favorable way. I can't predict what we're going to see going forward but this is 6 in a row.

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Amit Kumar, The Buckingham Research Group Incorporated - Analyst [28]

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But net-net, what you're saying is that if you compare the last few quarters, you haven't seen anything which makes you feel that anything would change? Just rephrasing what you said.

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Michael Scott Paquette, Employers Holdings, Inc. - Executive VP, CFO & Treasurer [29]

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In each of the last 6 quarters, we've just seen continued emergence. I would say the only difference between what we see today versus what we saw in the past is it was in virtually every accident year pre-2018. And 2018 could very well turn out to be good or bad, but it's just too early to tell based on 6 months experience post 2018.

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Amit Kumar, The Buckingham Research Group Incorporated - Analyst [30]

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Absolutely. That makes perfect sense. I guess the only other question was, we were talking more about, I presume, the pricing and loss cost trends in California. Can you just talk about those trends? Also, ex California, the remainder of the country.

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Stephen Vincent Festa, Employers Holdings, Inc. - Executive VP & COO [31]

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Yes. In the states -- and I'm just going to lump all the states together. There are exceptions depending upon each state individually. But in our states outside of California, what we're seeing is decreases in our frequency as a percentage of payroll, we're seeing decreases in severity. And we're not seeing, at least at this point, the pricing pressure that we're seeing in California that would cause us to reevaluate our pricing in those other states.

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Amit Kumar, The Buckingham Research Group Incorporated - Analyst [32]

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And generally, when we talk about California, the medical inflation was -- there was nothing which changed or...

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Stephen Vincent Festa, Employers Holdings, Inc. - Executive VP & COO [33]

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No, the environment in California is still a very favorable environment. The reforms that went in place a few years back are still holding up fairly well. This is really a pricing decision that we've made. It's not an environmental issue in California at all.

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Operator [34]

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Or next question comes from Bob Farnam with Boenning and Scattergood.

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Robert Edward Farnam, Boenning and Scattergood, Inc., Research Division - MD and Analyst of Property & Casualty Insurance [35]

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So I guess a question for Mike. With the expense of the initiatives, it sounds like 2019's going according to plan. You expected maybe a 4 point increase in expense ratio there. How -- have you had any change to your thoughts about 2020? And how does 2020 look?

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Michael Scott Paquette, Employers Holdings, Inc. - Executive VP, CFO & Treasurer [36]

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Unfortunately, Bob, I agree with your first statement. It does appear as if the 4 points is at a good place where -- with what we've seen so far. But we're still moving aggressively, as we said, and we're trying to accelerate these into the shortest possible period.

There's still a lot that we'll need to know in terms of second half spend and when some of these projects come in line. And I'd rather not make an expense projection for future years until we know a little bit more. So unfortunately, I think it's just too early to go there.

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Robert Edward Farnam, Boenning and Scattergood, Inc., Research Division - MD and Analyst of Property & Casualty Insurance [37]

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Okay. All right. And then just switching gears a bit. I want to talk about Cerity a bit. So how much -- how big is this program at this point? And how is this going according to plan?

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Douglas Dean Dirks, Employers Holdings, Inc. - President, CEO & Director [38]

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Yes, I'll take that one. Just in terms of where we are, as I indicated in my opening remarks, we're live in 10 states. We expect 5 more to come online in this current quarter. So from that standpoint, we're making very good progress. With the closing now of PartnerRe New York, we'll actually have the ultimate platform that we intended to write this business on anyway.

We have been aggressively seeking certificates of authority and doing rate filings. So I would say, from that standpoint, our presumption that we would have PartnerRe available to us sooner has had an impact on the rate at which we've stood this up but that will shortly be behind us.

In terms of what our expectations were, the business is coming on slowly, it continues to grow but it's an immaterial part of the total book of business today. I would say where most of our learning has been occurring has been on the marketing side which is really trying to identify who these customers are, where they are and how you get them into the portal. And really, we've been attempting a variety of different types of marketing strategies.

Originally, this started with a paid search approach, and we found that that was successful that, in fact, we were bringing in customers through paid search. But we concluded that that's not, at least in terms of what the current market pricing is for paid search, a sustainable long-term strategy. So we are attempting a variety of different approaches so that we can drive more business into the portal and do it in a more efficient manner.

It's early, this market is still taking shape. It remains to be seen how long it takes for it to take shape. But as I said in my comments, we think this is essential long term. I mean, this is not a short-term play, this is a long-term play. And we think this market is going to be there. We think there's a lot of advantage to doing the learning we're doing today earlier in the process, so as the market takes shape, we're ready to react to it.

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Robert Edward Farnam, Boenning and Scattergood, Inc., Research Division - MD and Analyst of Property & Casualty Insurance [39]

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Right. Do you see any difference in the types of accounts that would go the Cerity route versus your traditional route? In other words, are you seeing even smaller accounts in the Cerity book? Or are they just a different business, different segments? Any changes there relative to your traditional book?

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Douglas Dean Dirks, Employers Holdings, Inc. - President, CEO & Director [40]

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So I'll start by saying they're not identical underwriting appetites because Cerity intentionally was rolled out with a subset underwriting appetite. So part of the strategy here is by using data and analytics in this model, being able to expand the classes of business that we write.

That being said, to date, the average policy size is considerably smaller in Cerity. What we're finding is these are the types of buyers who need a workers' compensation policy quickly. One of the examples I would give, and think of this as kind of a gig economy business where they've just landed a job, they're going to report to -- they're a contractor, they're a consultant, however you want to describe them, they need proof of insurance and they need it today.

And so we've got a platform that allows them to have a policy in their hand in 5 minutes. And we think that's unique to the marketplace. So as that market takes shape, we think it's an underserved, or maybe a previously completely not served market. So we're looking to grow that out. But certainly, we don't envision that ultimately being the entire strategy. But it's been an interesting observation to see that there is this market that's not been able to be served through a traditional agency-based distribution system.

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Robert Edward Farnam, Boenning and Scattergood, Inc., Research Division - MD and Analyst of Property & Casualty Insurance [41]

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Is this business that theoretically would have been written by state funds or mostly taken care of by state funds?

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Douglas Dean Dirks, Employers Holdings, Inc. - President, CEO & Director [42]

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That's possible. I don't -- it is very small. And so to do this well, it requires a degree of efficiency that probably hasn't existed most parts of the industry, maybe anywhere. I mean the idea that you can put a policy in somebody's hands in 5 minutes is not something the industry has ever been able to do. So again, we think there's great opportunity there. Just a question of finding these customers, making them aware of the product and then this ability to buy online taking shape in the marketplace.

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Robert Edward Farnam, Boenning and Scattergood, Inc., Research Division - MD and Analyst of Property & Casualty Insurance [43]

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And you expect -- the differences in the type of accounts, do you expect that to have different loss characteristics? Like something that is not something you've traditionally seen?

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Douglas Dean Dirks, Employers Holdings, Inc. - President, CEO & Director [44]

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We went into this with an expectation that if we're writing the same classes of business, and even though it's a different rate filing, our insight into the data as to the performance of classes is the same.

What we're actually seeing is, at least in some of these particularly small accounts, there's probably a better loss result ultimately. But that's going to be dependent on the platform having a large enough scale that you can even out some of the volatility because until it ends up that scale, and that's going to take some time, one loss could completely disrupt that.

So it's going to take some time there, but we think there's opportunity longer term that this book actually generates a better loss result because it's a different category of business even though it's in the same industry classification.

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Operator [45]

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(Operator Instructions) Our next question comes from the line of Mark Hughes with SunTrust.

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Mark Douglas Hughes, SunTrust Robinson Humphrey, Inc., Research Division - MD [46]

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I'm just curious on the impact of audit premiums in the quarter.

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Stephen Vincent Festa, Employers Holdings, Inc. - Executive VP & COO [47]

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Audit premium pickup is still very strong and the quarter showed those result as well. And as I mentioned earlier on the call, on a year-over-year basis, we've increased our payroll exposure 21.1%. So we consistently see strong pickup at final audit.

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Operator [48]

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

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Douglas Dean Dirks, Employers Holdings, Inc. - President, CEO & Director [49]

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Very good. Thank you. Thank you, everyone, for joining us today. We appreciate your participation and your questions. Again, a very strong quarter. We've got a lot going on right now. We're very pleased with the progress we're making. And we think we are carving out a unique space in the marketplace. So we'll continue moving forward. We look forward to talking to you again in the latter part of October. Thank you all very much.

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Operator [50]

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Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program, and you may now disconnect. Everyone, have a great day.