Good day, ladies and gentlemen, and welcome to the Q1 2015 Employers Holdings, Inc. Earnings Conference Call. My name is Kate and I will your operator for today. At this time, all participants are in listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would like to now turn the call over to Vicki Mills, Vice President, Investor Relations. Please proceed ma’am.

Thank you, Kate. Good morning, and welcome everyone to the first quarter 2015 earnings call for Employers. Yesterday, we announced our earnings results. And today, we expect to file our Form 10-Q with the Securities and Exchange Commission. These materials 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 on the call are Doug Dirks, our Chief Executive Officer; Steve Festa, our Chief Operating Officer; and our Chief Financial Officer, Terry Eleftheriou. 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 non-GAAP metrics that exclude the impact of the 1999 Loss Portfolio Transfer, or LPT. These metrics are defined in our earnings press release available on our website. Now, I will turn the call over to Doug.

Thank you, Vicki, and thank you, all, for joining us on the call today. We just had a minor technical issue. I will start my comments over again. Our first quarter results compared to the first quarter in 2014 indicate a strong start to this year. Our net income before the LPT increased $0.14 per diluted share, relative to last year’s first quarter. Our operating return on equity, adjusted for the LPT, increased 2.6 percentage points to 5.1%. Our combined ratio, before the LPT, improved 6 percentage points; and our book value for outstanding common share increased 1% since December 31 of last year, and 8% year-over-year. These solid results reflect a number of continuing favorable trends in our business. First, our net rate was 12.4% higher in California and 3.1% higher overall in the past 12 months. Second, our year-over-year payroll exposure was 13.9% lower in California and 3.6% lower overall. Third, as rate increases continued to outpace increases in loss cost, we again lowered our provision rate for current accident year losses. This in-turn is driving the on-going improvements in our loss ratio and the combined ratio. In advisory rate filing in April by the Rating Bureau in California indicates that loss emergence for accident years 2014 and prior was better than expected. The bureau proposed an average pure premium rate decrease, which is 5% lower than the industry average filed pure premium rate and 10% less than the improved average advisory pure premium rate as of January 1, 2015. In our book of business, our indemnity claims frequency decreased year-over-year and our loss experience indicates a slight upward movement in medical indemnity costs per claim that is reflected in our current accident year loss estimate. These favorable trends in our net rate, exposure, and losses are in…

Thank you, Doug. Our pricing and underwriting initiatives over the past year continue to drive improved operating results. Our operating income increased $0.17 per diluted share or 121% in the first quarter, due largely to decreases in losses and loss adjustment expenses. You will note that we are now reporting operating return on equity, which increased by 2.6 percentage points to 5.1% for the current quarter. Our reported operating return, excludes amounts related to the LPT on both realized and unrealized gains net of taxes. These items are excluded because they are impacted by economic and other taxes that are not necessarily indicative of trends in our operating performance. Operating income and operating return are important measures that reflect multiple disciplines that are critical to creating long-term shareholder value. And we believe that tracking and reporting these measures will better align the interests of management and shareholders. Our first quarter combined ratio before the LPT improved 6 percentage points year-over-year to 101.6%. We lowered our provision rate for current accident year losses by 6.9 percentage points year-over-year, as rate increases continue to outpace increases in loss costs. The provision rate for the current exiting year was 67.7%, while our indemnity claims frequency decreased year-over-year, our loss experience indicated a slight upward movement in medical and indemnity costs per claim, which is reflected in the current accident year loss estimate. Excluding impacts related to the LPT, our loss ratio declined 7 percentage points year-over-year, largely due to the low provision rate for losses compared with the first quarter of 2014. Our $9 million increase in paid losses in the quarter was driven by an internal initiative that is focusing on settling claims. Settlement payments were up 40% in the first quarter year-over-year. This resulted in savings in case reserves, while overall…

Good morning. As Terry mentioned, our results in the first quarter continued the trends exhibited in the second half of 2014. On a year-over-year basis, we have increased net income and improved our operating results, more specifically our combined ratio, as well as operating return on shareholders’ equity. In prior calls we have spoken often about several strategic initiatives that were launched during the second quarter of 2014. The ultimate objective of these initiatives has been and will continue to be improved operating results. We have also spoken previously about the impact these initiatives could have on our top line in the short term as we have identified and targeted classes of business, specifically in the Southern California market, that have underperformed relative to our expectations. We previously have indicated that we were raising rates in these classes and expressed willingness to walk away if the appropriate pricing was not accepted. We have adhered to that commitment and as a result, we have observed a decline in the premium in the first quarter. We expect this decline to be temporary, as we work through our renewable book of business in California, a process which started in June 2014. We also indicated that the trade-off would be improved profitability, a result we have achieved again this quarter. It is important to note that outside of California we have increased policy count by 5.8% on a year-over-year basis and in force premium in excess of 3%. Those increases have come despite highly competitive markets with declining rates in many states, much of the improvement in our bottom line can be attributed to reducing our exposure in certain classes, specifically in the Southern California market. Additionally since June 2014, we have non-renewed 13.5% of our premium available to renew in this market because…

Thanks Steve. We are pleased with our continued improved profitability in the first quarter. Though our top line premium fell short of our expectations because of our profitability demands, we exceeded our targets in terms of losses commissions and underwriting expenses. And with that operator, we’ll turn the call over for questions.

Thank you. [Operator Instructions] Your first question comes from the line of Amit Kumar, Macquarie Capital. Please go ahead.

From Macquarie. Congrats on the improvement in loss ratio. Just a few questions. Maybe just going back to the discussion on the Southern California markets and the non-renewal of the poorly performing business, you gave some numbers, can you just sort of broadly talk about how far are you in that process? Are we getting closer? Is it just starting? Or are we halfway there? Maybe just give us some sense on that.

Let me start with that question Amit. We started that process June of last year, so we are most of the way through the non-renewal activity. It is a continuous process, but in terms of that first year what we expected to do, we’ve been following that plan very closely and at this point now have a couple of months to go before we have gone through the whole cycle. The other piece of that plan had to do with re-pricing business that was acceptable to keep on the books, but only in the even we were able to get the price we needed. And as I indicated earlier in my comments, with the adjustment to our territorial multiplier in Southern California, we will continue that push going forward.

And, I guess, related to that is the discussion on the geographic concentration in California at, I think, it's 58% is what's in the press release. Broadly if you sort of step back, what would be sort of a range where you might be comfortable at?

Our objective over the next three years is to not only decrease the percentage of business we have in California, but also decrease the percentage within California of Southern California to the rest of the state. We have an aggressive plan to accomplish that, I don’t want to get into too much detail with respect to the long term plan, but our expectation is by the end of this year that there will be a noticeable drop in that percentage in both Southern California, compared to the rest of the state and California relative to our entire book.

Let me take a longer view on that Amit. Ultimately, our objections is to be conducting business in all of the continental states, excluding the monopolies. And if this is a business strategy that suggest that we should have 2% to 3% market share in all of those states California represents 20% of the total U.S. comp market, we will probably always have a heavier exposure to California because it’s our most mature book of business, but as Steve indicates that number is certainly going to materially be falling over multiple years.

That's good to know. The other question I had, in your opening remarks, you briefly touched upon the rate decrease from the bureau, and maybe just talk about how should we anticipate what the trajectory for your net rate might be for 2015? Maybe just in broader terms?

There are a couple of considerations there and I will point to the filing that we made that will be affected in June. We expect to push rates harder in Southern California and if the market allows us to get that rate, our net rate in California will rise. If competitive market pressures prevent us from achieving that rate well then it’s not likely to rise by as much. We are concealing margin in other parts of the state where the book of business is performing very well and we wish to remain competitive. So, I really can’t give you a pick for that number because there are so many considerations, but broadly we are continuing to push rate in the South and concede rate everywhere else.

Got it. Last question, on - you mentioned briefly multi-line companies operating in the market. I'm curious - this is somewhat related - is the discussion on consolidation. Obviously, there's been a lot of discussion. We have seen a lot of consolidation on the Bermuda side, and I'm wondering how do you feel about that in terms of Bermuda looking at specialty? In terms of broadening their portfolios, what sort of role do you expect to play? And has there been any sort of change in tone in terms of approaches, et cetera, what you may or may not have seen over the past few months or quarters? Thanks.

I can’t comment on what’s in the minds of people in Bermuda. Certainly our markets don’t lack for competition and the returns are relatively attractive and improving, to what extent that influences M&A activities or those looking for specialty platforms, I can’t comment. I also would say that I’m not noting any substantial change in trends.

Got it. Okay, that's all I have. Thanks for all the answers.

Thank you for your question. The next question comes from the line of Mark Hughes, SunTrust. Please proceed.

Thank you. Good morning. When we think about the second quarter, you have given a lot of puts and takes in terms of the growth initiatives, but you're still doing the repricing in Southern California, at least through June. Do you think you would see stability at the top line in terms of new business, perhaps, in the second quarter? Or is that a second-half event?

Mark, this is Steve. That realistically is a second half event, we are still working through that renewal cycle that started at the tail end of the second quarter of last year, and we are going to still see the impact from that first year initiative, which will offset to some degree the growth that we will continue to see in states outside of California, so realistically that’s a second half not a second quarter impact.

On the expense ratio, Terry, you had mentioned the 1 point impact. What was that? Was that from a little lower premium that had a point impact, or is that some other factor?

Yes a couple of comments there. Yes you are indeed correct. The increase in the expense ratio is largely driven by the reduction in net earned premium. As Dough mentioned, in his closing remarks we have exceeded expectations on expenses in aggregate terms. Quarter-on-quarter we are, or year-on-year should I say we are in line with what we incurred last year. I would also make one other observation, our expenses on a quarterly basis have an uneven profile throughout the year. So, you would notice that historically because of the variety of factors largely driven by employee compensation and benefit, professional services costs, those types of things, the first quarter and the second quarter tend to be at a high level than the third and the fourth. So, we are very focused on expense management. The current quarter in absolute terms came in lower than what we expected in terms of expenses and we are continuing to manage that closely as we move forward.

Do you see, perhaps, a similar seasonality this year to what you had last year?

Yes, I think that would be fair. If you looked at 2014, we would expect a similar pattern.

And, likewise, the tax rate, should we assume at this level through the balance of the year? I know that depends on overall levels of profitability, but I think you've made some judgments about that when you set the tax rate for this quarter. So, should we assume a steady tax rate?

So, a couple of comments on tax. Effective tax rate has risen this quarter to 22.5% I believe the same quarter last year was around 10.5%. We determine our effective tax rate on a quarterly basis by projecting annual taxable income. If you were to look at note four in our consolidated financial statements for the quarter, which will be included in our 10-Q to be filed with the SEC later today, you will see that there is a reconciliation of our tax expense between the federal statutory rate of 25% in our net effective rate. The reconciling items are what you would typically expect to see, so there are dividends received, deduction untaxed investment income and the amortization on the deferred gain on the LPT. The other items that have featured historically in our effective tax rate had been releases from pre-privatization reserves, which are non-taxable and adjustments to the deferred gain because of changes in our expectation of loss reserves for that book-of-business. Those two items are very difficult to predict and I really couldn’t give you any guidance on that.

Right. If you had to shade it - difficult to predict, I understand, would it be more likely to be kind of back to the lower level? Or it could go either way?

I think it is fair to say that we would expect tax rate to be in the low 20s, as we continue our current strategy.

Right. If there is some volatility, would it be more likely to be on the down side?

The volatility I think would be driven by those two items that I just mentioned, and I really can’t predict them.

Okay. The competition from the state fund, Doug, I think you had mentioned it, [indiscernible] perhaps that the state fund raising rates was a good thing. How are you viewing their competitive posture now?

Mark this is Steve. It’s a little premature at this point. Those rate changes went into effect April 1. We are getting some information and I would consider it more anecdotal at this point. I would be in a much position to answer that question at the end of this quarter, next quarter.

What are the anecdotes telling you?

There is more of a movement towards in their tier 1 pricing, which is their preferred pricing to be much more selective in terms of the risks that get the benefit of that tier one pricing. That's clearly a theme that we're hearing at this point.

Right, which would be a positive, I presume?

Correct.

Okay, thank you very much.

Welcome.

Thank you for your question. [Operator Instructions] And you next question comes from Matt Carletti, JMP Securities. Please proceed.

Hey, thanks. Good morning. Just had a few questions. The first one, on the accident-year loss ratio, really nice movement over the last several quarters. And I was hoping, Doug, maybe you could kind of put it in perspective. We, five quarters ago, when you were talking on the Q4 call in early 2014, after kind of the events in Southern California, you made a comment that you'd be very cautious or very slow in recognizing improvement going forward. And so, we've seen 10 points of accident-year loss ratio improvement since then. And so, I guess, if you could provide some color just on, has the improvement been, in the numbers you're seeing even quite a bit greater than what you're showing, and there is a lot of caution there, still? What are you assuming in terms of frequency and severity trends in setting the loss pick radar for this year? Are you assuming what you're seeing in the market? Are you assuming things get worse as the year goes on? I think any color you could provide there would be great.

Sure. I will answer that question. I stand by my original comments when we see things happening we will be quick to take it up, and slower to take it down and as we've been able to bring it down it's been a result of the actions that we took specifically in Southern California. I will poke myself again, we knew what it was, we know where it was, and we knew what we were going to do about it. And that's exactly what's happened and things had gone at the pace we expected them to go. When you think about 2015, we continue to take those actions we are nearly through the first year now. So that is on target. I think as we continue to expand at a more rapid rate outside of California and adhere to our demand on profitability in Southern California that absence some other external event we should be able to show continued improvement.

Okay, great. I mean, in kind of saying that, I mean, is there, when you're setting or making the pick for 2015 here in Q1, I think the comments before, that frequency was down and severity was up slightly, both medical and indemnity, are you assuming - I'm not looking for numbers, but are you assuming down severity, flat severity, up severity, as you think about the year? And likewise, what sort of - what are you thinking about in terms of - I'm sorry, frequency. What are you thinking about in terms of severity, as well?

You know as we put our plans together we do it state by state, quarter by quarter and what I can tell you is that at the end of the first quarter we saw that our rate expectations were in line with the plan and our loss expectations were in line with our plan. So, we have a plan that takes us to the balance of this year. Incorporated within that our expectations around trend, which would include both frequency and severity, but again that's done on a state-by-state basis. Clearly, we are seeing lift in the loss ratio because of improvements in frequency and severity, as well as lift from the rate side. So it is a combination of everything. It is not only one or several, at this point everything as contributing to an improved result.

Okay, great. Thanks. And then one quick one for Terry, if I can. Back to the expense ratio or more so, the - thinking about it in dollars, would it be fair to assume roughly flat expense dollars? Forget about quarters, but just say annually, 2015 versus 2014? Or is there a reason to think that there should be some savings or some addition? And then, I can work out with what the ratio is based on growth assumptions.

Well I think we try to answer this in the last quarter where we said we were on a run rate in terms of expenses. From a ratio perspective, we would expect that to continue going forward. Part of the challenge that we have is that we obviously are looking to manage our expense profile very, very closely, but at the same time we are seeking to make fairly significant investments in our operating business model that's going to drive longer term benefits for this business and for our shareholders in terms of an overall return. So part of the change that we and others often have is trying to balance short-term versus long-term and so that's part of the process, but I think it would be fair to say that we are trying as best as we can to keep our expense profile level.

Great. Thanks very much for the answers.

Thanks for your questions. And the next question comes from [indiscernible] from Goldman. Please go ahead.

Good afternoon gentlemen. Had a quick question on the capital structure. Over the past obviously few years, you guys have been dealing with Southern California and changing the profile of the geographic distribution et cetera and there has not been buyback in place for quite a while that dividend kind of staid stable, at some point as you guys are clearly stabilizing the numbers, which look a lot better by the way, so you guys are doing a - seems you have done a lot of progress, a lot of great things happen there, but at what point you guys will start getting back to the mode of returning some of the Capital, obviously ROE is not yet at the levels that most shareholders would find acceptable and so at some point we would expect that some of that capital structure will start changing back to their historical profile with a little higher dividend and maybe yeah some share buyback embedded in it.

This is Terry Eleftheriou. We obviously periodically, re-evaluate our capital plan to assess the most optimal use of cash capital. Consistent with our overall strategy to deliver increases in shareholder value over the longer term, our current capital plan, its focus is to continually invest in our operator operating subsidiaries obviously preserve our A minus rating, maintain our dividend, and provide a little financial flexibility for our business that we need to maintain to take advantage of opportunities as and when they arise. We are presently re-evaluating that plan. We do not have any plan to undertake a stock repurchase program, if that was to occur we would obviously make the appropriate announcement.

Okay, but from the standpoint of shareholders would you agree that you guys are a lot, you know over the last two or three years you needed some money to contribute down to the subsidiaries, but at some point as shareholders a lot of the guys that asks questions were analysts and they have a different kind of question profile and from us, standpoint of us as shareholder obviously we are looking for not only improvement in kind of short term results, but more of an alignment of our understanding of what the long-term capital structure will look like and when the returns for on equity will get back to more historical values. But good quarter and I appreciate you guys taking my question.

Thank you.

Thank you for your question. And we have no further questions. So, I would now like to turn the call over to Doug Dirks for closing remarks.

Thanks very much. Thank you for joining us all to day. Again, we see a strong start to the beginning of 2015. We’ve got a very detailed plan, we will continue to execute against it. We look forward to speaking to you again next quarter. Thank you all very much.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.