Good morning, ladies and gentlemen, and welcome to the Fourth Quarter 2019 Employers Holdings Inc. Earnings Conference Call. [Operator Instructions]. I would now like to turn the conference over to your host, Ms. Lori Brown, General Counsel. Please go ahead, madam.

Thank you, Nora. Good morning, and welcome, everyone, to the 2019 Fourth Quarter and Year-end 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 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. In our earnings press release and in our remarks or responses to questions, we may use non-GAAP financial metrics. Reconciliations of these non-GAAP metrics to our GAAP results are included in our financial supplement as an attachment to our earnings press release, our investor presentation and any other materials available in the Investors section of our website. Now I will turn the call over to Doug.

Thank you, Lori. Good morning, everyone, and thank you for joining us on our call today. With me today are Mike and Steve. We will outline our financial results and our operating initiatives. We'll also discuss the ongoing evolution of the workers' compensation market in general and employers place within it. 2019 was a very successful year for Employers. Over the past few years, workers' compensation has seen numerous changes, including improving loss cost trends, associated pricing declines and a shift in the desired transaction speed of both our agents and online-focused customers. We are in a unique spot as a monoline workers' compensation rider focused on low-risk hazards, and we see these trends firsthand. We are comfortable that the initiatives we've been putting in place will position us for success now and into the future, and we believe that we can continue to produce satisfactory results while pursuing this strategic transformation. I am very pleased with the 2019 results. We delivered an 8.6% return on adjusted stockholders' equity while continuing to execute well on our plan for the aggressive development and implementation of new technologies and capabilities. We are dedicated to making the process of securing workers' compensation insurance easy and are utilizing technology and data to access, quote and bind risks more quickly and efficiently. We also believe that we have a better read on pricing trends in our market, which, in the long-tail business, can be challenging to time exactly right. We have operated through multiple workers' compensation cycles and have faith in our ability to properly assess risk changes and rate adequacy. In today's market, we are addressing an increasingly challenging pricing environment with underwriting discipline and operational improvements. We understand that there is a delicate balance in terms of managing rate adequacy while attempting to grow market share. In response, we have recently completed our nationwide platform with the additions of Alaska and Hawaii and are pleased that California now represents less than 50% of our in-force premium and policy count. This is not a commentary on the current state of the California market but rather reflects our belief that geographic diversity is an important element of our strategy. Finally, in 2019, we launched our Cerity brand, which now offers direct-to-customer workers' compensation insurance in 34 states and the District of Columbia. To date, we have not received the necessary approval from the State of California to launch Cerity. Recall that California is the largest workers' compensation market in the United States. Although Cerity is very much in its infancy, we believe that the addition of this digital product solution is very important to positioning employers for success in a rapidly changing marketplace. With that, Mike will now provide a further discussion of our financial results. Steve will then discuss our pricing initiatives and changes in the marketplace. And then I'll return for a few brief closing remarks. Mike?

Thank you, Doug. I'll echo Doug sentiments that 2019 was a very successful year for Employers. Before I discuss financial highlights, I want to mention that beginning with this earnings release, we have separated our operations into 2 distinct reporting segments, Employers and Cerity, and we will continue to do so in our future earnings releases and filings with the SEC. While Cerity could represent a very small percentage of our top line, we believe that presenting its operations separately provides the best means of transparency to allow investors to monitor its progress and development. Our fourth quarter results contributed nicely to our success throughout 2019. Our net investment income increased steadily, and our accident year results were broadly in line with our expectations. Renewal premiums remained strong, but our top line was challenged by declines in new business writings in California where we continue to act as a price leader in achieving rate adequacy. Our losses in LAE were $98 million for the quarter, an increase of 12%, and included $11 million of favorable prior year loss reserve development versus $25 million of favorable development a year ago. For the year, our losses in LAE were $366 million, a decrease of 3%, and included $78 million of favorable prior year loss reserve development versus $66 million of favorable development a year ago. The favorable prior year loss reserve development recognized throughout 2019 related to nearly every accident year but was more heavily concentrated in accident years 2015 through 2017. Commission expenses were $20 million for the quarter, a decrease of 4%, and were $88 million for the year, a decrease of 6%. The decreases were primarily due to a reduction in agency incentive commissions, which were directly impacted by the decrease in premiums written. Underwriting and administrative expenses were…

Thank you, Mike, and good morning. Net written premiums for the year of $691 million were down $51 million or 6.9% from the prior year. This decrease occurred as a result of decreases in year-over-year final audit pickup as well as decreases in new business written. With respect to the decrease in final audit pickup, we continue to see positive payroll growth, but not to the extent that we did in 2018. For the year, our average net pickup rate was 6.81%, which is down from last year's figures. It is premature at this point to forecast how 2020 will trend. New business premium decreased 6.9% year-over-year driven by a decrease in California, which was principally the result of our increased rates, which went into effect as of July 1, 2019. Outside of California, our new business growth was $11.6 million. The overall market continues to be very competitive, and declining rates in our states continue to be a headwind. From a policy count production standpoint, nationally, our new business submissions grew 20.6%, our quotes increased 26%, and our new business bound policies increased 9.7%. Each of these production metrics were historical highs for our organization. On a year-over-year basis, our in-force policy count increased 7.8%. Renewal premium for the year increased $21.2 million or a 4.4% increase over the prior year. Our unit retention also improved. Our year-end unit retention rate of 94.9% was up from 94% at year-end 2018. With that, I'll turn it back to Doug for final remarks.

Thanks, Steve. Overall, we remain confident that the initiatives we are developing as well as those we have recently put in place are positioning Employers for success in a changing marketplace for workers' comp. Our aggressive development and implementation of new technologies and capabilities increased our underwriting expenses in 2018 and 2019. And we expect that they will continue to moderately increase our underwriting expense in 2020. However, based on present pricing and loss trends as well as actions we are taking to improve underwriting profitability, we expect that the additional underwriting expenses we incur in 2020 will be offset by a reduction in current accident year losses and LAE. We are now in that part of the cycle where the temptation is to solve short-term problems without consideration for long-term consequences. The landscape is littered with failed workers' compensation companies that did just that. The time to fix the expense ratio by driving top line growth isn't when pricing is the softest. Inevitably, the bad loss experience that follows dwarfs the gains achieved on the expense ratio. In the current market, we will continue to be a disciplined underwriter, carefully monitoring changes in pricing trends and growing only when we believe we can do so profitably. We will also remain laser-focused on enhancing our agent and partner interactions while continuing to develop and market Cerity, so that we can provide our customers an exceptional experience that allows them to choose the time, means and manner in which they interact with us. Ultimately, our objective is to be properly positioned and fully prepared for the cycle change. Finally, I would like to take the opportunity to thank our employees for their outstanding efforts throughout 2019 and our agents, partners and customers for their business and continuous support. And with that, operator, we'll take questions now.

[Operator Instructions]. Your first question comes from the line of Mark Hughes of SunTrust.

Doug, could you expand on -- I think you had said the initial underwriting expense would be offset by reduction in current accident year losses. Is -- did I hear that properly? Is that to say that accident year combined ratio, you look to be steady in 2020?

So Mark, I'll take that. So what Doug said specifically is that we do expense -- okay, we do expect our expenses to be up moderately, just a small amount, in 2020 versus that of '19, not the ratio, but the level of expense. And we would expect that our current accident year ratio pick for next -- for this year will offset that amount.

Right. Which is to say accident year combined ought to be fairly steady?

We'll make that determination in the first quarter, but we, right now, think that it will be a reduction, which would offset the additional expense in 2020.

Okay. And I guess, this works into the additional expenses you've been incurring for your digital initiatives. I think it's been -- you've described roughly 4 points. So one would, I guess, given what you said, expect that to continue, maybe be a little bit higher in 2020 and then offset by the losses. Is that the right way to think about it?

Exactly.

Okay. And then to look a little further into the future, would one assume that this is the last year of the full press, so to speak, in that the expense load might taper in subsequent years? Or is it too soon to tell?

I don't want to say it's too soon to tell. We've got another full year ahead of us yet next year. We're still in pursuit of an implementation of the policy administration system. The reason that question is somewhat difficult to answer, Mark, is because we're talking about things that get expensed and capitalized exactly when they hit the income statement can be very difficult to forecast. It's somewhat a function of what the expense is and a function of when things are put into service. So it's really difficult to give good guidance on that. But we still have quite a bit of work that we'll be doing into 2021. The ultimate objective here clearly is to drive greater efficiency and scalability. And really, my comments about positioning us for a change in the cycle is we want all of this done, so that when the market turns and we have an opportunity to get the rate that we think is required, which is much more challenging today, we're going to be ready for that, and then we can scale this business up. And at that point, if the expenses are flat to down and premium is growing, then we get some lift on the expense ratio.

How do you -- that is good detail on the expenses and the loss outlook. How do you think about the top line in 2020? I think your in-force is actually stable compared to this time last year, your renewal premium is up, new business is down. Steve, what's your crystal ball say about 2020?

Mark, we're going to continue to see the headwinds in 2020 that we saw the prior year with respect to continued rate declines with the exception of 1 state. The 2020 filings that we've seen all continue to show rate decreases. So that's going to continue to be the headwind that we see. I do want to point out that from a new business policy count growth standpoint that our new business policies were up 9.7% this year, the revenue was down because of the continued rate declines. But a big driver for our growth in policy counts, which frankly position us very nicely for when the market does turn. But some of the new states we've gone into is impacting that growth. But also, some of the initiatives that we've already deployed in 2019, especially in the second half of the year, we saw a correlation between those initiatives being launched and the ease of doing business with us, in particular, on the small business accounts that we write. We saw a corollary uptick in that new business policy count growth. So my expectation is that we'll continue to see that in 2020. But from a revenue standpoint, that will be offset by these continued rate declines.

And then a final question. The -- your rate positioning in California versus peers, you took the rate increase in July. Have -- has anybody else followed suit? Do the subsequent loss frequency severity, does it support your decision to push up rate in California?

So we're not seeing -- as we speak today, Mark, we're not seeing any actions being taken by our competitors at this point. I will tell you, though, that we are starting to hear some commentary from some of our -- in particular, national multiline competitors about whether the continued rate decreases in California are sustainable or not, including a comment made by a senior executive at a conference recently where they were "hopeful" for a bottoming out of rate declines in California where there's been a lot of rate declines in the past several years. So I don't know that those commentaries are going to necessarily overnight lead to changes in terms of what they're doing from an action standpoint, but there's definitely more noise being heard out there with respect to how sustainable these rate declines are in California. As we said on an earlier call, the average charge rate today in California for the industry is as low as it's been since 1976.

[Operator Instructions]. Your next question comes from the line of Amit Kumar of Buckingham Research.

Two questions, and maybe I'll just spell out the two questions I have. The first question goes back to the discussion on reserve releases. Can you maybe expand on that? And were there any reserve additions in the older AOIs, which were more than offset by releases from the recent years? I think you mentioned a few years. And the second question is a separate question, going back to the discussion on Cerity. Longer term, what size could this be? How are you thinking about sort of the top line that could come from this platform?

Amit, I'm happy to take the first question regarding reserves, but could you repeat your second one? You broke up on us a little bit. It was hard for us to hear.

Yes. The second question is on Cerity. So when you look at the platform, once it's up and running, what sort of premiums it could generate longer term. I'm not looking for guidance. I'm just trying to get a better sense now that you've obviously have had all these expenses. Once everything is up and running, could this be a $100 million, $200 million, $50 million? How should we sort of think about that?

All right. So I'll take the first one regarding reserves. And what we've seen really over the last 8 quarters is favorable development over nearly every accident year with concentrations in certain accident years. But yes, from time to time, we do have a small amount of adverse development in a given calendar year, but generally speaking, that is due to a unique circumstance, like a change in life expectancy for somebody that's been seriously hurt. But really, there's no years that we're trying to fill, and it's virtually all accident years, if that helps you.

Okay. So what you're saying is when we look at the Schedule P that comes out in a few weeks, you were saying that you -- we will see most of the prior periods develop favorably, and we will not see material additions. I think that's what you're saying.

Well, Schedule P is not that straightforward, but the Schedule P for this year should be more straightforward than it has been in other years. And I'm happy to take that discussion with you off-line to explain some of the anomalies they're in. But I think that you'll find that the Schedule P is going to be much more consistent with your expectations in this calendar year.

Got it.

And Amit, this is Doug. As to your second question, I know you're not looking for guidance, and I don't plan on giving it, but what I will say is that as we look at how this market develops, if it develops like other online markets have, we would expect the growth to be more of a hockey stick than some linear growth in the business. We've seen that with other carriers and other lines, and so we don't have any reason to think this will be different. We think this market eventually does take shape. There's certainly much more commentary about it today than there was a year ago when we launched. We continue to believe that this is a critical component of a long-term strategy that the failure or the absence of this product offering will not position the company well for what we think is coming in this market. The change that's occurring is occurring very rapidly, and you simply have to have this product offering. As you can see from our materials, this does add cost to the expense ratio. It's even more burdensome because of the flat-to-declining top line, but we continue to be committed to this investment and to the strategy.

I mean the only follow-up to that would be if you look at the numbers versus the estimates and the stock is down 7%, so clearly, I think investors are struggling to look at those two metrics and figure out the trajectory. I mean what would give investors any confidence as an outsider as to what's the time line on the strategy?

So I would say if you were to ask us how things were progressing, we would say that it's slower than we had expected, but we didn't have a high degree of confidence in our ability to project timing. I mean it's just -- you can't launch a new product into a new market and think you're going to get it exactly right. And if you do, you shouldn't be impressed with your ability to get that right. So again, this is a long-term commitment. To the extent that investors don't see or appreciate the long-term value that can be created from this, then they probably look for another investment. We are absolutely convinced that this is an essential part of a workers' compensation strategy going forward. The expenses are front-loaded. They have to be. The market didn't exist when we launched the product, so that doesn't trouble us at all.

Yes. That's a fair point. And then final question on -- I know in the opening remarks you mentioned the approval in California was, I think, taking longer or it had -- I mean, can you just give more color what exactly is going on, on that front? And is there any expectation when we will get that approval? Or has that been sort of ticked down the road?

So nothing -- there's nothing unique about what's happening in California. The insurance regulatory process can be lengthy even for seasoned companies that have multiple insurance companies already writing in a state. It's almost as if you start fresh every time you roll out a new company, and so it's a very cumbersome regulatory process. And that's not unique to California. Frankly, California is generally pretty good to work with. But it takes time. I would tell you that we expect it any day now. If you'd asked me a month ago, I would have said we expect it any day now. That's just the nature of the beast. There is nothing here that's concerning. It just is a long process.

You have a follow-up question from the line of Mark Hughes of SunTrust.

I wonder if you might give us any thoughts you might have around Cerity and the marketing approach that you're taking, what you're finding to be effective and then kind of your target market. I know you have thoughts of opening up the number of types of end markets that you're pursuing, just to the extent that you're not giving away any sensitive information, just sort of curious, a little more detail there.

Sure. In terms of the marketing approach, there's a lot of testing going on here, and we're trying different approaches. We know that paid search works. We also know that paid search is not a commercially viable, long-term strategy. So you can grow the business. You can produce the business. But essentially, you're going to give away all if your margins were paid search. So we're looking for other ways to find customers. And it's early but we're optimistic that there are other ways to do this sort of the way we had initially launched. And if you look at what other participants in this market are doing, my sense is, from what I'm seeing from others is that we're all trying to understand what the best marketing approach is. Again, it's a market that's still taking shape. It requires some experimentation. I see very mature companies that are continually experimenting with their marketing approaches. If you think about the direct writers of auto, they're -- it's very evident to me that they are continually refining their marketing approach, just trying to meet whatever their growth or profitability objectives are. You should think about this no differently. In terms of where we might go with the market, we have an excellent platform built. And at least as we talk to potential partners, I think they've all walked away quite impressed that this is a best-in-class solution. So we are exploring other avenues through which we might be able to produce business on this platform. But again, it's early. These things do take time. But we're optimistic that once we figure out what works, then we're ready to turn it on and go.

Mike, on reserves, do you happen to have the reserve salvage number in front of you? I think you've talked about that in the past? And then maybe compare that with your reserve gains that you've recognized so far.

So Mark, you normally see that in our investor presentation, and we haven't quite gotten to that yet. But if I had to guess based on where we've been and where I think we are, the reserve salvage number is probably at about $250 million. And if memory serves me right, the cumulative reserve releases since that point, which are in the new presentation that we just provided you, has been about $186 million over that same period.

[Operator Instructions].

All right. We're not seeing any additional questions in the queue. So thank you all for your participation today. We appreciate it very much. We look forward talking to you in a couple of months with our first quarter 2020 results. Thank you, all. Have a great day.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day. You may all disconnect.