Good day, ladies and gentlemen and welcome to the Employers Holdings, Incorporated quarter three 2016 earnings conference call. [Operator Instructions]. As a reminder, this call is being recording. I would now like to introduce you for your host for today's conference, Vicki Mills, Vice President, Investor Relations. Ma'am, you may now begin.

Thank you, Donavan. Good morning and welcome, everyone to the third-quarter 2016 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 Terry Eleftheriou, our Chief Financial 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 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 our call today. We are pleased with our strong [technical difficulty].

[Operator Instructions].

Donavan, can you hear us?

Yes.

Okay, Doug, do you want to continue?

I'm sorry, we've had an audio problem. I'm going to restart my commentary. We achieved the lowest accident year loss ratio in our history as a public company. For the third quarter, our operating earnings of $0.57 per diluted share declined $0.06 relative to last year's third quarter, primarily due to a higher effective tax rate. Our operating return on equity in the quarter was 8.2% or 1.7 percentage points lower than the same period last year. And our combined ratio before the LPT was 95.2%, which represents an improvement of 40 basis points and is one of the most favorable combined ratios in the company's history. In the first nine months of this year, our operating earnings of $1.57 per diluted share increased $0.12 or 8% year-over-year. Our operating return on equity was 7.8% or 10 basis points higher year-over-year due to improved underwriting performance. And in the first nine months of the year, our combined ratio before the LPT improved to 96.9% or by 1.6 percentage points compared to the same period last year. Our third-quarter and our year-to-date results reflect continuing positive trends, largely driven by our strategic initiatives to target profitable classes of business in all of our markets, to diversify our risk exposure, and to emphasize the early settlement of claims. These positive trends include lower payroll exposure in the Los Angeles Basin, favorable shifts in business mix by state and territory, growth in in-force policies and premium outside the Los Angeles Basin, high renewal rates despite a robustly competitive marketplace, and strong reserve salvage from accelerated claim settlements, most prominently in Southern California. Other trends observed throughout the year have been stable or improving loss costs in the industry which have been accompanied by generally lower rates in largely rational but competitive markets. These…

Thank you, Doug, and good morning. Net written premiums of $163 million were down $3.5 million or 2.1% year-over-year for the quarter. This decrease was driven by a $5 million decrease in final audit premiums. During the quarter, new business premium increased 12.9% year-over-year for the quarter. This new business growth has occurred despite declining rates in the majority of states we do business in, as well as a very competitive market environment. Several of the initiatives we have discussed on earlier calls are driving this increase in new business. In addition to our new business growth, we have increased our renewal premium outside of the Los Angeles Basin. On a year-over-year basis, renewal premium outside of this market has increased 2.5% for the quarter. This growth, despite declining rates, can be attributed to policy unit retention rates on existing business which continue to be higher than traditional norms. Both our third quarter and year-to-date results reflect other continuing strong trends driven largely by our strategic initiatives to target profitable classes of business in all of our markets, to diversify our risk exposure, and to emphasize the early settlement of claims. These positive trends include favorable shifts in business mix by state and territory, as well as sustained growth in new business submissions. In addition, excluding the Southern California Basin, we have increased both in-force policies as well as premiums. From a claims standpoint, we have had strong reserve salvage from accelerated claim settlements, most prominently in Southern California, as well as a reduction in claim frequency. As mentioned earlier, all of these trends, and specifically those related to revenue growth, have occurred despite continuing rate decreases in most states, along with strong competition from both regional and national competitors. We expect these headwinds to continue in the future. Finally, during the third quarter, we entered the state of Massachusetts. We are leveraging longstanding national distribution partnerships as we write business in this state because we know these partners have a clear understanding of our risk appetite. This follows our move into New York in the first quarter of this year and is in line with our vision for the future to be writing business in all of the continental United States with the exception of the monopolistic states. And now I will turn the call back to Doug.

Thanks, Steve. Again, we are pleased with our strong results in the third quarter which reflect the continued successful execution of our strategic underwriting, pricing and claims initiatives. We will work to retain our best business and seek new business opportunities that meet our desired return objectives by continuing to focus on disciplined, data driven risk selection and pricing across all of our markets. And with that, Operator, we’ll now open up the call to questions.

[Operator Instructions]. And our first question comes from Mark Hughes with SunTrust. Sir, your line is now open.

Thank you very much. Good morning. On the competitive front, I think you had referenced competitive but largely rational. My reading of your commentary is you’re a little less pessimistic perhaps compared to prior quarters. Am I over reading it or is the competition steadier let's say?

I wouldn't say that we're seeing much change in the competitive environment. It continues to be competitive everywhere we do business, but we tend to see the pricing to be largely rational. It's not consistently rational in our view. We do see competitors in the market that are willing to write business at prices that we can't and won't. But again, largely we're finding the markets to be rational. There's not a lot of what you might characterize as crazy pricing occurring in the markets.

You talked about the new business premium up 13% year-over-year. That sounds pretty strong. I think your retention has been quite good. When we think about your top line gross premiums written, excluding the audit pressure this quarter, largely steady the last six months. Do you think that's a good starting point as we think about the next few quarters? Or are the new business trends enough to drive the top line ahead?

Mark, this is Steve, I'll take that question. Some of the initiatives that we've talked about on the last several earnings calls, continue to gain momentum. So I think those are some of the tailwinds that clearly have led to the increase in new premium in this quarter over the prior quarter of 2015. However, when we look at, particularly when we look at the NCCI states and we look at 2017, one of the headwinds that we are facing is there are more states in 2017 that will be taking rate decreases than we saw in 2016 and the rate decreases are deeper than what we saw in 2016. So I think despite some of the initiatives that we put in place, and they'll continue to gain momentum, there are those strong headwinds that won't subside in 2017 and in some cases will be even stronger. So we're going to have to see how that plays out.

On the current accident year losses, very nice improvement. Is there any way to characterize how much of that was from the mix shift out of California versus just better underlying loss experience?

Mark, clearly the shift of our business out of Los Angeles, where we see higher rates of litigation than we do in other states or other territories, has had a positive impact. You are also aware of the fact that we've had a strong emphasis in the last couple of years of focusing our sales efforts on pursued classes of business. And those are classes that have lower loss ratio results and are more profitable for us than other classes of business. So I think it's a combination of some of our shifting of our business mix from certain territories within California as well as an emphasis outside of California on more profitable classes of business. Both of those are large contributors to the success that we're having.

And then last -- well, actually, one quick question, the audit premium, down $5 million, what was it in this quarter last year, absolute number?

Mark, this is Terry. So the -- let me give you the numbers. In 2015, the third quarter final audit premium was $21.8 million, this quarter it was $16.8 million. So down by $5 million.

Still quite strong. And then the settlement activity in California, is this all related to the uptick in severity that you saw say 2013/2014? More lawyers being attached to claims? Are those settling more quickly or better than you would have expected or is this a separate issue?

We've had a concerted effort within the organization to close out -- we targeted certain types of claims at certain points in the lifecycle of those claims and we've had that initiative in place now for about two years and we've had a lot of success with that. It's not limited to that timeline. We've actually had higher closing ratios this year compared to prior years, and a large percentage of those closures are in that Southern California market. And most of those claims were in litigation. So there's clearly some correlation there between the improvement that we're seeing and the closure of those claims with the reserve salvage that's occurring as well.

I'll ask one more. I apologize. The underwriting expense, you were up a little bit year-over-year, but you've had this pattern of kind of declining expense through the first three quarters the last couple of years. Last year in the fourth quarter you had a step up in terms of underwriting expense. The year prior to that it was another step down in the fourth quarter. Any hints as to what we might expect this year?

Mark, this is Terry. Our underwriting expense, if we look at essentially the last two years, tends to range between 18% to 21% of our earned premium. The higher end of that range typically occurs in the fourth quarter historically because of certain employee benefit costs that are incurred. I can't really tell you what I think the fourth quarter is going to be, but it's going to be within that range is my expectation.

No reason to think it's going to take a meaningful step up though, is that fair?

From what level?

From the 3Q level if we think about it in absolute terms, the 31.7.

Let me give you a little bit more insight into the third quarter. There are certain things that are fairly volatile in the expense number and in particular premium taxes and assessments. In the third quarter, we had a lower level of expected premium tax and assessments in part because of our rate changes in certain states. And in particular, one particular state we had to refund an amount that we previously paid. So, those types of things, the volatility of that does occur quarter on quarter. If you look at the year-to-date we're probably in line, but it does produce some level of volatility, as much as about a million dollars in any given quarter. So those are things that are difficult to predict.

That's helpful. Thank you.

Our next question is from Amit Kumar of Macquarie. Your line is now open.

Thanks, and congrats on the quarter. Just a few quick follow-ups. First of all, just going back to the discussion we had in last quarter on the large losses, has there been any update on that front?

So a couple of things. This is Steve, Amit. So the large losses that we experienced in the second quarter, to be concise in responding to your question, they've developed as we've expected them to. There's really no more color on that.

Okay, and nothing more on that front, right, I mean in terms of other things developing? Because I think you had mentioned at that time I think it was -- I'm trying to think what the losses were exactly. But you haven't seen any change on that side or anything new or any change in trend lines?

No, I mean we've said before, we said it on the last earnings call, that the type of business that we're in we're occasionally going to have large losses. They occur -- we'll have a large loss in most quarters. This quarter was no exception. But none that exceeded the retention built into our third quarter planning assumptions.

That's good to know. The other question I had, maybe to tie it to the NCCI comments you made in terms of the business, when you look at the underlying trends, the underlying loss ratio, do you get the sense that based on where the market is, there is room for additional improvement going forward? Or based on the plusses and minuses, is it more static from there? How should we think about that?

What we continue to see nationally in our book, and I think what's underlying the NCII data as well as the independent bureaus, is a declining frequency. And that's been a long-term trend and we don't believe that there's any reason to think that that's going to change. So as long as you've got declining frequency in what has been a relatively and somewhat remarkably benign severity trend, there doesn't seem to be a lot of pressure on the loss side right now. Now obviously, that creates scale problems for the industry because as losses fall, subject premium will fall with it. But that's not the worst problem to have to deal with.

That makes sense. That's all I have for now. Thanks for the answers and good luck for the future.

[Operator Instructions]. Our next question comes from Cliff Galant from Philadelphia Financial. Your line is now open.

Good morning. Thank you. I just wanted to get a better handle on sort of the trends on your profit margins in LA County. It sounded like there were a few things that were happening at once. I know you guys were raising prices in that area, [gift] count is down double digit. But I also think you mentioned something like a drop in frequency, and I know that you've been speeding up your claims statements there. So I'm just wondering directionally what kind of improvements are you seeing in that part of your business?

So let me talk generally about Los Angeles. A couple of years ago, we initiated some underwriting activities that were designed to remove from our book the most problematic risks we were writing in LA. That was a 12-month initiative where we non-renewed approximately $20 million worth of business. The actions we've taken since then have really been aimed at pricing. We've defined return targets and have set our prices accordingly. And to the extent that we're able to achieve that pricing in Los Angeles, we continue to actively write business. If we cannot achieve the desired returns in Los Angeles, we are, and have shown a willingness, to walk away from the business. But at this point the re-underwriting efforts are complete and now we're using pricing to determine how much business we write in LA. And at this point, that's no different than the way we approach it anywhere else in the country. LA is -- the issues in LA from our standpoint have been dealt with and now we are operating just as we do everywhere else in the country.

That's great. On the policy count in that area, I think it was down something like 13.9% I think in the LA area. Are you seeing that bottom or any sense of trend on that?

Let me start and then I'll turn this over to Steve. So the policy count in LA continues to fall. We have seen that taper off perhaps a bit. Again, as we completed our underwriting activities and have now moved to pricing objectives in LA, it seems to be having less impact.

Yes, Cliff, this is Steve. Just following up on Doug's comment, it is starting to stabilize and one of the points that we clearly want to emphasize is, there is good business to be written in Los Angeles, and we're writing good business in Los Angeles. It’s just that as Doug alluded to earlier, a couple of years ago we had some legacy issues with our book that we cleaned up. We have taken a very hard stance on making sure that we get the right price. But we're stabilizing in Los Angeles compared to where we were a couple of years ago and we are seeking out profitable business in that territory like any other part of the country that we do business in. We've shifted around some of our partnerships in Southern California, eliminated some partners that were not aligned with our objectives and added some new ones, and I expect those trends to have a positive impact on our results in Los Angeles in the future.

It sounds great. I'm sorry, one other question. This is sort of embarrassingly simple, but when you guys make an announcement like that you've entered a new state like Massachusetts as you did, what exactly does that entail? A – Steve Festa: Let me start with the most current news, Massachusetts. So we are now writing business in the state of Massachusetts and generally, and Massachusetts is no exception to this, we start off writing business with existing partnerships. So for example, as you know, we’ve had longstanding partnerships with several payroll partners. And the business we’ve written so far in Massachusetts has really been limited with those partners, but we are adding independent agents domiciled in the state and as well as border state agents that do business with us. But we are very careful to make sure that we start off when we enter a new state with existing partnerships that understand our risk appetite, have been partners with us for quite some time, and then we appoint, as we’re doing in Massachusetts and other states in the future, we appoint new agents after a careful screening process. Q – Cliff Galant: That’s great. Thank you very much.

And our next question is from Matt Carletti of JMP Securities. Your line is now open.

Thanks, good morning. We've covered a lot of ground already, but I think I've got one left. On capital, I know you've been buying back some stock, but as I look at say premium to equity leverage, it’s a very crude measure of operating leverage, but it's what we have to go on, it's been going the other way. The earnings have picked up. The equity balance has grown. The market has kind of stabilized so the top line has been a little more stable and we've seen that ratio come back a little bit. It's in the 0.7 range. So two questions are, one, what's your long-term target to where you'd like to see that? Where do you think you could comfortably run the business whether that be through profitable growth or giving capital back to shareholders? And two is, how much of a handcuff or a hindrance is A.M. Best's continued negative outlook on the ability to get there?

I'll respond to the second part of that first. As to A.M. Best, there is no handcuff there relative to capital. We continue to run very strong and improving capital ratios. So the negative outlook is not influencing our capital decisions. Where do we see it going forward? I think the challenge we have, along with the rest of the industry, is with economic growth below 2%, declining frequency in our line of business, there's not a lot of demand capital, particularly given our profitability and the profitability of the line generally. So it does force us to rethink what the opportunities are for deployment of capital. So what have we done? We increased our quarterly dividend at the beginning of this year and we've authorized and are executing a share repurchase agreement. Certainly, we will reevaluate the adequacy of those actions as we move into year-end and into next year. But it is a challenge. There's just not a lot of attractive growth opportunities at the moment and the business continues to generate very high levels of profitability.

Is there -- and maybe I'm looking at the wrong metric and help me if you can, but I look at your net premiums to equity or stat surplus, however you want to look at, and we're hovering in the plus or minus 0.7 range. Is that -- could you write at 1 to 1 in the current environment? And if so, what are the steps to get there with the backdrop that you're giving which is I agree a tougher economic backdrop that's not going to provide a lot of easy growth opportunities?

Certainly at the -- talking specifically to the premiums, the surplus or the capital ratio, given where the combined ratios are, it would be attractive to be writing at a higher amount of leverage than 0.7 to 1. I think the issue there is we've indicated it's a very competitive marketplace where pricing is rational. And we're not at a point where we think it makes any sense to put business on the books solely to improve the leverage ratio, particularly given the yield on the portfolio right now. I don't happen to think cash flow underwriting ever makes much sense. It certainly doesn't make any sense in the current market conditions.

Yeah, I agree. I'm asking it more from the other side of that equation, that is there an opportunity to increase the capital return to reduce the denominator more quickly? And I recognize that you are in the middle of a share repurchase and you bumped the dividend, but high class problem to have. You’ve grown the equity faster through good results and so then -- while the top lines remain stagnant. So, I guess that's more the angle I was coming at it. Not suggesting that you grow in a market that that wouldn't be appropriate, but that is there any opportunity to ramp up the share repurchase more quickly or up the dividend more quickly? Any thoughts on that would be appreciated

So look at from a share repurchase standpoint, we've always viewed that as opportunistic. We are price sensitive too on how much stock we're willing to repurchase, and that will always be the case. But yes, if the current trends continue, we expect that we’ll be generating capital that doesn't have an immediate need in the business.

Okay, great. Thank you for the answers and congrats on a nice quarter.

And our next question is from Samir Khare of Capital Returns Management. Your line is now open.

Good morning. I was just wondering, and pardon me if you've already addressed this, but if there was some reserve impact or if you anticipate some impact on your Florida reserves owing to the judgments that have just come out?

We've evaluated that and we don't see the need to adjust our reserves in Florida. We are comfortable with where they're at even after the recent Supreme Court decisions.

Okay, and then just help me understand what makes your -- is it that your book is less susceptible because it’s smaller insureds? Is it because you guys have been quicker payers in claim settling?

Exactly. That's exactly the point. Based on the markets that we write business in, we just don't see the trends that the entire state sees with respect to litigation rates. Also where our business is concentrated within the state tends to be in areas with lower litigation rates than other counties within the state. So all of those play into how our book of business can be different than the industry as a whole

Understood. And just looking at competition for a second, are you seeing a change in the way the national insurers are competing on workers' comp, perhaps extending the classes of business they play in or increasing their commissions?

Yes on both fronts. We've seen some of the national players increase commissions in several states. That trend continues. The other thing that we've seen, and we've talked about this before, is particularly in the last year, year and a half, we've seen more of a focus with some of the national competitors in the small business space. They're becoming more aggressive in that space than they have historically been. So both of the points that you reference ae trends that we're seeing with our national competitors.

All right. And then should we expect that Employers will actually -- your company will increase the commissions as well to compete on the business that they like? Or do you guys have a …

No, we have not been doing that, and if you look at our third quarter results, when you see the increase in our new business premium, it hasn't really hampered our efforts. We're focused on other initiatives that we've talked about before to help drive our business. Increasing commissions is not something that we feel is necessary.

Okay. And then just competitively, how is the State Fund, California State Fund? How are they behaving? Are they increasing their appetite? Are they decreasing it?

We don't compete with them very often. We just -- and even if there was competition in the past, it's not as much as it had been. So I don't really have a good handle on that because they're really not -- when we compete, it's not the State Fund that we're usually bumping up against.

All right. Thanks for the answers.

And our next question is from Mark Hughes with SunTrust. Your line is now open.

Thank you. My questions were answered.

I'm showing no further questions at this time. I'd like to turn the call back over to Doug Dirks for any closing remarks.

Thank you all for joining us today and participating in the Q&A. We very much appreciate that. We looking forward to talking to you again in February with our year-end results. Thank you all and have a good day.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone have a great day.