Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2011 Employers Holdings Earnings Conference Call. My name is Jennifer, and I'll be your coordinator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to today's host, Ms. Vicki Ericsson Mills, Vice President of Investor Relations. Please proceed.

Thank you, Jennifer, and welcome, everyone, to the Fourth Quarter and Full-Year 2011 Earnings Call for Employers Holdings Inc. This morning, we announced our updated earnings results, and after the call, we will file our Form 10-K with the Securities and Exchange Commission. Our updated press release and Form 10-K may be accessed on the company's website at employers.com and are accessible through the Investors link. Today's call is being recorded and webcast from the Investor Relations section of our website, where a replay will be available following the call. With me today are Doug Dirks, our Chief Executive Officer; and Ric Yocke, 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 at the time of the call and will not be updated to reflect subsequent developments. We use the non-GAAP metrics that excludes the impact of the deferred gain from the 1999 Loss Portfolio Transfer or LPT. This metric is defined in our earnings press release available on our website. As has been our practice, a list of our portfolio securities by CUSIP is available in the Investors section of our website under Calendar of Events: Fourth Quarter Earnings Call. As you know, this morning, we've reported updated financial results. Our financial statements were updated to adjust for an accrual associated with the incentive bonus program. This adjustment has been recorded in the fourth quarter of 2011 and has not had a negative impact on the company's current or historical financial statements. Please refer to our updated earnings press release for changes in the results related to this adjustment. Now I will turn the call over to Doug.

Thank you, Vicki. Welcome, everyone, and thanks for joining us today. I would like to once again extend the company's apologies for any inconvenience we may have caused as a result of the rescheduling of this call. The workers compensation market experienced another difficult year in 2011. While the final underwriting results have not yet been published for 2011, A.M. Best reported a calendar year statutory combined ratio of 118% for the workers compensation industry in 2010, the highest level since 2000. And the industry observers expected even higher combined ratio for 2011. Workers compensation premium dropped from $48 billion in 2005 to $34 billion in 2010, largely because of rate decreases, competition and job losses. Also, investment yields remain at historically low levels. So reflecting on this past year, we are pleased with what we have achieved, particularly in terms of growing premium and reducing our non-loss operating expenses. We have now reported fourth quarter net income before the LPT of $16 million or $0.46 per diluted share, an increase of $0.07 per share over the same period in 2010. The increase in earnings per share benefited from our repurchase of over 6 million common shares during 2011. In the fourth quarter, we repositioned our investment portfolio to achieve the following strategic objectives: to reduce tax-exempt municipal exposure, to shorten duration and to increase high dividend yielding equities. Realized gains of $18 million were from the sale of municipals and longer-term treasury agency and corporate bonds. While our unrealized gains at the end of 2011 are still substantial at approximately $180 million, we chose to take some profits off the table in the fourth quarter and modestly lower overall exposure to tax-exempt municipals. Throughout the year, we continue to build scale in our business. As a result of the…

Thank you, Doug. As in the third quarter, our underwriting margin in the fourth quarter was pressured by premium growth in current accident year loss trends in California. Excluding the impact of the LPT, our underwriting loss was $14.8 million with the combined ratio of 114.9. Our fourth quarter loss ratio before the LPT increased 4.1 points year-over-year, while our underlying losses in LAE increased $16 million or 27% year-over-year with approximately 73% of that change related to premium growth. Much of the remaining change and losses in LAE was related to the increase in the provision rate for the current accident year losses, resulting from loss cost trends, particularly in California. Our provision rate for current accident year losses remained stable at approximately 77% in each quarter throughout 2011. We had a $1.5 million unfavorable development in the fourth quarter, which was attributable to our assigned risk business. We believe our reserves for prior accident years continue to remain adequate. As we've noted before, while we evaluate prior accident years' reserves collectively, we have seen some unfavorable development in more recent periods, 2007 and subsequent, offset by favorable development in earlier accident years prior to 2007. However, our overall, prior-year -- prior-period reserves remained largely unchanged. The increase in our fourth quarter loss ratio was partially offset by improvement in our underwriting and other operating expense ratio year-over-year. The fourth quarter improvement was largely driven by an increase in net premiums earned of approximately 20%. In terms of underwriting expenses, our cost-control measures resulted in declines in salary, benefit and facilities expenses of $2.2 million for the fourth quarter of 2011 compared to the fourth quarter of 2010. However, growth raised premium taxes and assessments by $1.9 million, and the allowance for bad debt increased $0.7 million. In total,…

Thanks, Ric. Our focus in 2011 was to continue to control operating expenses, to build scale by growing in markets which have historically produced losses that are lower than industry averages, to closely monitor and react to loss trends, to prudently price our products and to actively and judiciously manage our capital. We achieved virtually all of our objectives in 2011 with the exception of our premium growth target. While premium growth has been substantial, our average policy size continued to decline throughout the year. However, in January of this year, we saw a slight uptick in the average policy size, and we believe that declining trend will reverse. In terms of underwriting performance, increases in losses and LAE related to premium growth and recent loss trends have temporarily outpaced cost reductions and rate increases. However, our total net rate is flattening, and in fact, the net rate turned positive in the fourth quarter compared to the third quarter of 2011. The key question in 2012 for us and for the workers compensation industry, as a whole, is whether increases in pricing will be adequate to overcome the increased losses. Additionally, we expect historically low investment yields will continue throughout the year. While overall profitability will remain a challenge, increasing rates and a sluggish but recovering job market may help to provide some lift in the workers compensation market this year. While the difficult market for workers compensation in 2011 is likely to extend into 2012, there are some bright notes. According to A.M. Best, industry net written premium in the first 9 months of last year increased compared to the same period in 2010. As I mentioned earlier, industry premium increased in 2011 in our largest market, California. And in 2011, the NCCI, an independent rating bureau, filed rate increases in 19 jurisdictions nationally, and we write business in 13 of them. We believe we will continue to produce additional revenue in 2012 as a result of our growth initiatives with a larger policy size than in the recent past. And with that, operator, we will now take questions.

[Operator Instructions] Your first question comes from the line of Amit Kumar.

Amit Kumar from Macquarie Capital. Just going back to the discussion on growth initiatives. Obviously, you've had substantial growth in 2011. Can you sort of talk about how should we think about your premium-to-surplus going into 2012? How far can you go on a premium-to-surplus basis?

Well, let me answer that question just slightly differently. It does relate to the premium-to-surplus ratio. But first and foremost, we do manage our capital relative to what the requirements of the rating agencies are, in particular, A.M. Best. And as we've indicated previously, we believe an A- rating is necessary to support the business we write, not more than that and not less than that. And consequently, as we think about how much capital is required and how we model potential capital use going forward and what the impact of growth might be on it, we are keeping a very close eye on the A.M. Best per card calculation.

I'm sorry. My question was, what sort of ratio do you have in mind for your go-forward premium-to-surplus?

The ratio will be influenced by ultimately what our capital requirements are from the rating agency.

Kumar, we're not targeting any ratio, such as 1.5:1 or something of that order, if that answers your question.

It does answer my question. I'm just -- I'm somewhat, maybe -- then sort of moving on and then I'll sort of ask this question in a different way. What is the state regulator's view on the growth which was seen coming from you?

The state regulators expressed less of an opinion than the rating agencies do. We are required to risk the -- subject to risk-based capital requirements from the various states. And that's something that we have to monitor and manage. But in terms of growth, as you're well aware, as A.M. Best thinks about growth, they're measuring both in terms of the premium growth and policy count growth. And that's in light of the quality of the capital. So that's really looking at the balance sheet, the allocation of assets on the balance sheet and losses. So it's not as simple for us to just pick a target in terms of leverage of premium-to-surplus. It's really much more important to think about it in terms of what the capitals required to support the rating.

I guess that's where my follow-up question comes. If you look at the maximum dividend capacity at year-end 2010, that was roughly $115 million. Out of that $115 million, roughly $68 million was dividended by the subs to the holding company as of Q3. Now I'm just wondering, based on your growth, is it fair to say that one should not expect buybacks going forward based on your current capital position?

A fair question, Amit. As we move into a harder market, one of the things we will be considering is the best use of capital. And as I have repeated many times, we really think about capital in 3 ways: One is to continue to invest in the business, one is to use it for opportunistic acquisitions, and the third is to return it to shareholders. As we see a hardening of the market, the opportunity may be better going forward to reinvest that capital back into the business. I can't tell you we'll have definitive plans of that because it's something we're evaluating constantly as we try to judge where we are in terms of the market cycle and where capital will be best deployed.

But even if you look at the current capital scenario, it does seem, as of today, you would be limited in buying back stock irrespective of if the market turns going forward or not. Or are you saying that as of today, you are fine, but if the market turns, then it would be a different story. I'm just trying to reconcile the holding company numbers, the dividend capacity and as I said, and if you do the math, it just seems that should the flexibility in buying back would be fairly limited going forward, irrespective of the market turn.

Well, Amit, first, the dividend capacity that you're looking at, coming from the operating companies, is somewhat separate in the sense that our share repurchases are, in fact, coming out of the holding company, and that capital is separate. We evaluate that, as Doug has just said, as to whether it's going to be returned to shareholders, whether we're going to hold it for some period of time or whether it's needed to be infused back down in the operations. But the dividend being up is something that we evaluate separately from what we're doing with the holding company capital. So there's not necessarily a direct link there. They're related.

But the capital has to move from one place to other. It can either sustain the growth or you can buy back. The same capital cannot do both at the same time. That is my question.

And I guess that's my point, Amit, which is we have that choice to make. We may choose to reinvest more capital back in the business because we believe that in a firming [ph] market that the returns are more attractive there. We may choose to do an acquisition and use the capital in that fashion. And finally, we could choose to return it to shareholders through repurchases and dividends. Those are choices that we would make. And it can come either through organic growth within the operating companies to support growth or it can come in the form of capital contributions, up or down, from the holding company.

Okay, that helps. Last question, based on your debt to capital, if the market does turn, do you anticipate tapping the credit markets at that time to sustain your growth?

Yet again, we would view that as an option available to us. We'll carry very little debt on our balance sheet today, and so we certainly would have capacity to do that if we saw a need for it and we found terms that were favorable.

Your next question comes from the line of Jack Shareck[ph].

A question for you on the commission expense line, moving up as a percent there. So is that just the -- going after the smaller accounts, is that a function that's going to continue or is it more kind of one-time in nature?

A combination of forces there that are impacting that number. First, as we grow the percentage of business that we write to our strategic partners, that carries a slightly higher commission load than we do with our independent agent business because of the services they provide in addition to producing the business. We are seeing, in some of our markets, continuing pressure on commission levels, although recently, we've begun to see a change in that trend. So -- and then, finally, the last thing I should point out there is, that number is influenced by the amount of contingent profit commission that's related to the LPT. And so year-over-year or period-over-period, that can influence that number.

Okay. And then on the underwriting and other operating expenses. Ric, you mentioned that, that was mostly operating leverage, but at same time, in your earlier prepared comments, you mentioned that much of the policy growth you're seeing is coming electronically. And I think that in some previous calls, you mentioned, that technology and so forth may be helping out there. Can we look for some, maybe, upside there based on other factors other than operating leverage?

Well, as we mentioned before, we continue to strive for improved efficiencies. We do see some increases in cost as merit raises, et cetera, that have upward influence. We'll continue to look at it. We're not forecasting that rate at this moment for 2012, but it certainly is something that we're working towards.

Okay. And then just my final question on any sort of return-to-work initiatives or just sort of what you're seeing from claimants [ph] in terms of their activity, if that's changed at all recently.

Yes. It hasn't changed enough yet for us to declare a trend. Something we've observed, and I think others in the industry had, is that duration of claims was lengthening because of the challenges of return to work. And we believe that our business model has been particularly challenged there because we focused on small employers, and they tend to have more limited return-to-work opportunities and in some cases, maybe, even appetite. But as the employment market improves, we would expect that, that number will start to come back down to more historic norms. But we're just not quite ready to say we're seeing that yet.

[Operator Instructions] Your next question comes from the line of Matt Carletti.

I just had a few questions. The first one is kind of following on the growth comments or the questions that Amit had, maybe going about it in a different way. I know the growth has been, in percentage terms, quite large relative to employers. If I recall, kind of a whole, what got you moving in this direction was following the AmCOMP acquisition, a very kind of undersized market share in the ex-AmCOMP states as compared to what you viewed as more mature markets, legacy EIG states. Can you give us some idea of how you think you've moved on a market share basis over the -- since this initiative started on average in those states and how that compares to where you stand in kind of legacy EIG states?

That's a difficult question to answer, Matt, because the data lags so much. We won't have good data for 2011 until late summer of 2012. And so that market share data is very challenging to get to on a real-time basis. We have -- if I think about how we're getting growth across the country, California has been a combination of both rate and policy count. And we're starting to experience the same thing in the rest of the country, in most of the rest of the country as well. Whereas, in the beginning of last year, we were getting much more growth in terms of policy count. As we move to the end of the year, we started to see more of the growth coming in terms of premium. And in fact, if we look at January, January was the first time we've seen policy count growing at a slower rate than premium growth. And that's been a trend that's been in place going back many years. And so we've seen that turn now where we're starting to see less of the growth in policy and more in the premium. And I think that's going to be fairly consistent across the country now.

Okay. And then just kind of moving to the kind of uses of capital question again. Can you help us think through, particularly given where your stock is trading on a book basis? So I think, roughly, call it, 70% of book currently. How that -- how you view the return metric on, clearly, near-term basis on buying back shares versus maybe what sort of ROE hurdles or combined ratio hurdles or however you might think about it you view on new business needing to have in order to make that decision or that option to reinvest in the business versus buying back your shares.

We think about it less on a short-term and more on a longer-term basis. With the share price where it is today, no question that repurchases are extremely accretive to book value as we saw in the last quarter and really over the last year with nearly 14% growth in book value. Over the longer term, when you think about the best use of capital, it really requires us to model where we believe the market is going. Because as we move into a hard market, despite our best hopes, it's not going to be overnight. It is going to take some time, and that's why we think about that on a longer-term basis as we're evaluating alternative uses of capital. So the share repurchases might look very attractive in the immediate timeframe. But if we believe the market is hardening over a longer period of time, that might be the better use of capital.

Is there a general rule of thumb as to how many years of you might look out? Is it 3 years, 5 years, or no set kind of rule?

We model out beyond 3, but it's hard to put a lot of credibility out beyond 3 years.

Fair enough. And then just one quick question -- numbers question, probably for Ric. I know you mentioned, I think, if I'm recalling, an aggregate kind of the moving adverse and favorable pieces within accident years for the year was more or less awash, at least aside from the assigned risk pool. How much -- can you tell us how much, either in dollars or loss ratio points, 2009 and '10 accident years developed adversely in 2011?

Generally speaking, that moved around 1 point or less.

And there are no further questions at this time. I will now turn the call over to Mr. Doug Dirks for closing remarks.

Thank you very much, operator. Thank you, everyone, for joining us today. Again, our apologies for having to move the call to today. We thank you for joining us, and we look forward to speaking with you again next quarter.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.