Good afternoon, ladies and gentlemen, and welcome to the Q1 2021 Employers Holdings Inc. Conference Call. At this time, all participants are on a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Lori Brown. Please go ahead.

Thank you, Angela. Good morning, and welcome everyone to the first quarter 2021 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. Presenting today on the call will be Kathy Antonello, our Chief Executive Officer; and Mike Paquette, 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 only at the time of the call and will not be updated to reflect subsequent developments. The company also uses its website as a means of disclosing material non-public information and for complying with disclosure obligations under the SEC's Regulation FD. Such disclosures will be included in the Investors section of the company's website. Accordingly, investors should monitor that portion of the company's website in addition to the following the company's press releases, SEC filings, public conference calls and webcast. 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 on our website. Now, I will turn the call over to Kathy.

Thank you, Lori, and thanks to everyone for joining us today. On today's call, Mike and I will outline our financial results for the first quarter of 2021, and discuss our observations of the current workers compensation market. Employers has performed well throughout the COVID-19 pandemic and the first quarter of 2021 was no exception. While our topline was adversely impacted early in the first quarter by a meaningful year-over-year decrease in new business premium. We are very encouraged by the strength of our writings in March and April, including those of Cerity. The recent improvement and submissions quotes and binds is directly correlated with increased hiring and expanded re-openings across most states. With respect to our renewal book, our policy retention rate remained very strong at 94% for the quarter. This was offset to some degree by lower average policy sizes and modest rate decreases. And overall our renewal premium was down 11% on a year-over-year basis. We closed the quarter with another record number of policies enforced which demonstrates that our policyholders are enduring the pandemic and small businesses are shopping for workers compensation coverage. As widespread vaccination continues and the labor market improves we are optimistic that rising payrolls will serve to increase premium. In support of this anticipated recovery we have continued to pursue and advance the significant investments we've made in delivering a superior customer experience for our agents. Due to declines in both frequency and severity for lost-time claims, we've lowered our current accident year loss in LAE ratio on voluntary business to 63.6% down from 65.5% a year ago and 64.3% at year-end. In addition, we continue to experience favorable loss reserve development in nearly every prior accident year. Regarding our expenses several first quarter events are worth noting. We underwent a reduction in force which impacted approximately 7% of our workforce. We ourselves set bon farewells to a few of our executives, including our former CEO, and subsequently realign the organization to increase efficiency and generate cost savings. As a result, our first quarter underwriting and general administrative expenses of $46.6 million will be the high watermark for 2021, and you will see immediate and significant expense reductions for the remainder of the year. With that, Mike will now provide a further discussion of our financial results and then I will return to provide my closing remarks. Mike?

Thank you, Kathy. During the quarter, we delivered a 4.8% annualized return on adjusted equity and the combined ratio of 93.9% within our largest operating segments Employers. However, these favorable operating results were somewhat muted by our lower top line and net unrealized investment losses on our fixed maturity investments. Our net premiums earned were $134 million, a decrease of 20% year-over-year. The decrease was due to lower written premiums as Kathy mentioned, as well as a reduction in our estimated final audit accruals to reflect the premium that we expect to return to our policyholders as a result of lower payrolls. Our losses and loss adjustment expenses were $70 million, a decrease of 33%. The company recognized $13 million of favorable prior year loss reserve development on its voluntary business during the quarter which related primarily to accident years 2017, and prior versus $3 million of favorable prior year loss reserve development a year ago. Commission expenses were $17 million, a decrease of 21%. That decrease was primarily due to lower earned premiums. Underwriting and general and administrative expenses were $47 million largely unchanged from a year ago. During the first quarter, we recognized a one-time $2.3 million acceleration in share-based compensation in connection with the retirement of our former CEO, Doug Dirks. Also as Kathy mentioned previously future quarters will reflect an immediate reduction in expenses from actions taken and completed during the first quarter. Our other expenses were $2.9 million representing employee severance costs associated with our first quarter 2021 reduction in force. This action was taken to better align our expenses with our current levels of revenue. From a reporting segment perspective, our Employers segment had underwriting income of $8 million for the quarter versus a million a year ago and its combined ratios were 93.9%…

Thank you, Mike. As Mike mentioned, our Cerity operating segment which offers digital workers compensation insurance solutions directly to consumers is gaining traction and is written $0.5 million in premium thus far in 2021. While the low-to-medium hazard direct-to-consumer market is relatively immature and Cerity is an early entrant in this space. We believe that it's technological and intellectual capabilities will support our future growth initiatives and provide immediate access to workers compensation insurance for those customers seeking an online experience. I am excited and proud to lead this remarkable organization and my primary goal for the company in 2021 remains unchanged. As we prepare to fully capitalize on the upcoming labor market improvement we will continue to maintain underwriting discipline and actively manage our expenses. Our balance sheet and capital position are very strong and are highly supportive of these initiatives. Employers is in a unique spot. As a mono-line workers compensation writer specializing in America's small businesses we can react to these trends appropriately and efficiently and are confident that we are well positioned for continued success. And with that operator, we will now take questions.

[Operator Instructions] Our first question is from the line of Mark Hughes with Truist. Please go ahead.

Yes, thank you. Good morning. The improvement in new business through the quarter January and February saw the recovery in March and April. Was it -- it seems like there has been opening, but I'm not sure how dramatic it is been. Do you feel like there is some other factors that are contributing to the strength you've seen here lately?

Yes, good morning. I would say another factor that might be contributing to that is the rate decrease that we took in California in February. California is about 45% of our book currently. So that's remained flat since year-end. We reduced rates as I said, effective February 1st and we also lowered our minimum premiums, and I think the combination of lower rates and also less restrictions on businesses in California. That's beginning to have an impact. Like you said, we did have a tough January, but then a milder February in California, but year-over-year, new submissions quotes and binds were all up in March with policies bound up around 35%, and new business premium was up over 40% for the month of March. So that was definitely another contributor.

Right. And then, is that continued into April?

That has continued into April. Yes.

Okay. Pricing overall putting your kind of price actions in California on to the side, I think last year, if I'm understanding it properly your renewal pricing was down about mid-single digits. I think Q1 similar. It seems like some folks are suggesting pricing and workers' comp is flat or maybe up slightly, but I'm just sort of curious how you see it overall?

Yes. So, Mark from our vantage point the environment remains pretty competitive. The pricing that we're seeing country wide continues to be pretty soft for both small and middle market accounts. And we really haven't observed any material signs of market hardening as a result of the pandemic yet. And feel that on both national and regional competitors are fairly aggressive in pursuing new business. I've seen, what you're seeing. I've also seen some data from some of the rating surveys that show that work comp rates are increasing ever so slightly, but our average pricing across our renewal book showed an overall price decrease, like you were saying into the first quarter into the lower the single digits versus the rate level that we had an effect for the same businesses a year earlier. But we are watching closely for any signals of hardening market. But I'm really yet to see anything in comp that's even remotely comparable to what we're seeing -- to what others are seeing in other lines and what they're experiencing there.

Yes. How do you think the loss costs will come out for 2021, the NCCI it's been down high single-digits these last few years, how do you think it will look for this year?

Yes, it's hard to say what we're seeing so far for the filings that were effective early this year. They are still negative filing for reduced loss costs, but not to the same degree, that they were filing in the past. So it's possible that this will continue to moderate, but it's hard to tell at this point.

Yes. Then one final question. Mike, on the audit premium, any thoughts about 2Q? I think you point out that the folks who had not done midterm endorsements are looking at audit premium, and they're getting refunds. Is that phenomenon going to continue into 2Q? I'm just trying to think the timing of when those policies expire, and when you have kind of exposure to that phenomenon? Is it in the 2Q mid-year?

Mark, we were -- we are in a negative position right now to the tune of about $2.7 million. I don't think it's unreasonable to expect that to occur for the next quarter, or so to some extent, but we won't know until we get into the audit premiums that will occur which is what will base our estimate on. So, we have very little information for the second quarter thus far in terms of the premium audit. But the 2.7 that we have at March 31 is designed to take into account the audit premium return we're expecting for those policies that have earned through that date. So, a little too early to tell, but you'll have to stay tuned.

It doesn't say that sort of an accrual for your, all that you expect, because I assume other policies will be expiring incrementally over the next few months, and they might have the same phenomenon. Do you accrue for that, or do you just wait and go on and, see what happens?

Well, it's not so much a forward-looking accrual. It's really designed to detect what the pickup, or the amounts owed would be for the premium that has earned through the balance sheet today.

Okay, all right. Very good. Thank you.

[Operator Instructions] Our next question is from the line of Bob Farnam with Boenning & Scattergood. Please go ahead.

Good morning. So a couple of questions. One is on the accident year loss ratio. Now it sounds like you saw a continuation of favorable claims trends in the first quarter. My thought is as businesses start to open and the economy expands what's going to happen to claims trend going forward and set loss ratio likely to tick up over time?

Yes, good morning, Bob. Yes, you're absolutely right. I mean that would not be any different from what we've seen in prior recessions, seen it when frequency has dropped during that period and then as things start to pick up again, there is a chance that well, I mean it's likely that frequency will return back to normal levels, which were -- normal levels were decreases in frequency on a year-over-year basis. But I would not expect the levels of decrease that we're seeing now will continue into the future.

How would you characterize the severity trend these days? And as the opening of the economy impact severity, or is it just more of a frequency is for you?

Yes, that's a good question. And there's a lot of uncertainty around that right now. So the severity itself, we did see this quarter, severity was negative, just like frequency, but you would expect that to perhaps turn around, just like the frequency when things start to open up again. I think the major uncertainty there is whether or not employees will continue to work from home, or whether they'll be coming back into the office? Will they be driving as much in the past? There is so much uncertainty there that it's hard to predict. But I can assure you that it will be different from what it is right now.

Okay. Yes, I agree with you there. So in terms of your policy size is declining. Does that makes it more business be going through the alternative distribution channels rather than the traditional. Like what, and my question is basically regarding the commission rate there because they have a higher commission rate in the alternative distribution channel. So, do you see that continuing to grow because of the smaller policy size. Does that have an impact?

I'm sorry, you want to take that? Yes, you were breaking up there a little bit. I think your question was, do you think we're going to continue to grow in the alternative distribution space. Was that the question, Bob?

Yes, it was in light of the fact that you're policies are smaller. And I wasn't quite sure if the alternative distribution channel was more directed towards smaller risks, or that's not true?

Yes, generally speaking I would say that is true. And that business is growing and we are seeing some business that wasn't alternative distribution before moving into that space. So yes, I would expect that channel to grow in the future.

Okay. And again, so if that channel grows your commission rates for the alternative distribution are slightly higher than your core book. So you think that the commission rate would go up a bit?

It could slightly, yes.

Okay. And last question for me. It sounds like you non-renewed accounts in this quarter. Just can you give us some details as to what was going on with there?

Yes. So we did have one account. It was an account that was underperforming all written through the same group, and we've decided to non-renew that, because they were underperforming. We were on that account for about three years, and decided that was in our best interest.

Was it underperforming last year and the year before too? Or is that something that's just started to come around this year?

It was underperforming, yes for several years, and increases in pricing had not improved that situation. So we have non-renewed that.

Okay, great. Thank you.

[Operator Instructions] And we have a question from the line of Mark Hughes with Truist. Please go ahead.

Yes, thank you. I wonder if you could just expand a little bit more on what you're seeing at Cerity? I think you described having a bit more success in premium levels are still pretty modest. I wonder if you could talk about the -- any observations you might have on the marketing, the paid search that sort of thing where you might be seeing some movement?

Yes, Mark. So Cerity does continue to gain some traction as we said. This year we're going to be focused on expanding our underwriting market into some more classes and enhancing the back-end capabilities. So that we can handle increasing policy close at Cerity. And then we're going to continue to experiment with our digital marketing. Most of the competitors in this space quickly pivoted to utilize an agent distribution channel to increase the revenue, but Cerity has really stayed true to its original vision and it's remained a pure direct-to-consumer platform. So a lot of testing, a lot of experimenting in the marketing there. We're going to refine our marketing towards with an eye towards reducing the cost of lead generation, which is the key in this space and hope that we can continue to see improvement there. I can share that one of the areas where they seen successes in the janitorial space. So we're going to continue try to find markets that are quickly growing and emerging and they are kind of focusing in on a micro level on their marketing.

Yes. Any other classes that you see expanding than more classes any others sub with the mentioned how meaningful do you think that will be?

Well, what can I say is that when I say they're expanding their underwriting appetite it's to broaden. They went out with a pretty narrow underwriting appetite, and when they broaden it it's to be more like the Employers segment appetite. So they will remain focused on has a groups, A through G likely not getting into a lot of riskier class codes yet, which is quite frankly where a lot of online shoppers are looking to find coverages and contracting and some of the heavier classes. But right now they are still focused on the lower hazard classes.

Thank you very much.

Thank you.

[Operator Instructions] We have a question from the line of Bob Farnam with Boenning & Scattergood. Please go ahead.

Yes, just one question on the share repurchases, because I know the stock has appreciated quite a bit over the quarter and, it looks like you did really repurchased shares during the quarter. I know you had some in the beginning in the quarter, but not towards the end. So I'm just kind of curious what your thoughts are in the share purchase going forward?

Sure, Bob. I'll take that. So we did have a pretty dramatic increase in our stock price in the last quarter, and we did have a 10b5 out there to buyback some shares, but we underestimated how much the stock would appreciate. So that did not perform. We still view share repurchases as attractive. We do think that it's in our best interest to manage our capital base. And we do expect to continue to buyback shares, although not at the pace that you saw for last year. Last year we spent about $100 million. You won't see that for this year, but I am definitely interested in continuing the share repurchase plan throughout the year.

Okay, very good. Thanks.

And I'm showing no further questions at this time. I would like to turn the call back to Kathy.

Thank you, Angela, and thank you everyone for joining us this morning. We look forward to speaking with you again, next quarter.

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