Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Third Quarter 2020 Employers Holdings, Inc. Earnings Conference Call. [Operator Instructions]. At this time, I would like to turn the conference over to Ms. Lori Brown, General Counsel. Thank you. Ma'am, please begin.

Thank you, Howard. Good morning, and welcome, everyone, to the Third Quarter 2020 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 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 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 nonpublic information and for complying with the disclosure obligations under 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 following the company's press releases, SEC filings, public conference calls and webcasts. 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 Doug.

Thank you, Lori, and thank you all for joining us today. Our third quarter results were good, considering the continuing challenging macroeconomic environment, and our exiting year results were broadly in line with our expectations. Our new business writings were down sharply earlier in the year, but have rebounded since June. We are currently experiencing significant year-over-year increases in new business submissions and binds in nearly all the states in which we operate, with the notable exception of California, which continues to lag all other states. Despite the increases in new business that we have experienced year-to-date, our new business premium has fallen, driven primarily by a significant decline in policies with premium greater than $25,000. Excluding California, our policies in-force were up 1.5% over the previous quarter and up 12.9% year-to-date, while in-force premium was down 3.4% for the quarter and down 4.6% year-to-date. Unlike most other lines of property and casualty insurance, where pandemic-related changes and exposure resulted in broadly applied premium credits, workers' compensation insurance is self-adjusting to actual exposure for the policy period, either through midterm endorsements or final audit adjustments. Midterm premium endorsements processed in the quarter were a net positive, but final audit adjustments were a negative $15.7 million. The net reduction in our final audit accrual year-over-year is currently $45.5 million, which represents nearly 50% of the decline in our net written premium year-to-date. Earlier this year, regulatory actions mandated or requested that we suspend cancellations of policies for nonpayment of premium. These orders or requests were for different lengths of time, varying by jurisdiction and have now mostly expired. And we have since resumed routine cancellation activities in most jurisdictions. As a result, our year-to-date results reflect a clearer picture of our anticipated uncollectible premium and bad debt, which proved to be…

Thank you, Doug. During the quarter, we delivered a 5% annualized return on adjusted equity and a 13% annualized increase in our book value per share, including the deferred gain. Each represents a solid result, given the ongoing negative impact of the COVID-19 pandemic on the U.S. economy and on small businesses specifically. Although our operating results for the third quarter were good, our top line continues to be adversely impacted by meaningful decreases in new business premium, principally related to larger accounts, as well as reductions in final audit premium. Our net premiums earned were $144 million, a decrease of 18% year-over-year. Since premiums earned are primarily a function of the amount and timing of associated net premiums written, I'll let Steve describe the decrease in his remarks. Our loss and loss adjustment expenses were $77 million, a decrease of 17%, which was primarily due to the decrease in earned premiums. As Doug previously mentioned, we recognized $15 million of favorable prior year loss reserve developments during the current period. Also, our accident year - for the current accident year, the loss and loss adjustment expense ratio was 65.3%, which is essentially unchanged from our prior 2020 and 2019 indications. Commission expenses were $19 million, a decrease of 11% year-over-year. The decrease was primarily due to the decrease in earned premiums. Underwriting and general administrative expenses were $46 million for the quarter, an increase of 2% year-over-year. The increase was largely the result of higher premium taxes, assessments and bad debt expenses. From a reporting segment perspective, our Employers segment had underwriting income of $7 million for the quarter versus $22 million a year ago, and its combined ratios were 95% and 87%, respectively. Our Cerity segment had an underwriting loss of $4 million for the quarter, consistent with…

Thank you, Mike, and good morning. Net written premiums for the quarter of $130 million were down $36 million or 21.6% from the third quarter of 2019. The primary drivers for this decrease were new business premium and final audit premium accruals. New business bound policies for the quarter were up relative to the third quarter of 2019. You will recall that new business bound policies for the second quarter were down in comparison to the prior year, but June did show an increase. That increase has continued through the third quarter, and the growth has accelerated. For the quarter, new business submissions were up 14% year-over-year, and new business bound policies were up 25.4%. We continue to see a decrease in new business average policy size, which we attribute primarily to lower-than-usual payroll due to COVID-related impacts to business. With respect to renewal business for the quarter, we continue to see high policy unit retention rates. Unit retention rates for the quarter were slightly higher than the third quarter of 2019. This was offset to some degree by continued rate declines as well as lower payroll at renewal. As a result, renewal premium was down 6.3% when compared to the third quarter of 2019. Total written premium endorsements increased by $3.5 million quarter-over-quarter, a reversal of the trend noted last quarter. Final audit premium was reduced quarter-over-quarter due to decreases in actual and projected payroll. New claim volume continues to decline on a year-over-year basis. In comparing each month of the quarter to the prior year, July exhibited a 17% decrease in lost time claims, while August and September lost time claims each decreased 22%. On a year-to-date basis, lost time claims have decreased 22%. These decreases are being driven by less exposure caused by businesses being shuttered as well as lower headcount and hours worked in businesses that remain open. And now I will turn the call back over to Doug.

Thank you, Steve. The strong increase in new business activity that we are seeing in most states today is an encouraging sign as many of our targeted businesses have reopened and are resuming their operations and that the significant investments we have made in delivering a superior customer experience for our agents and insureds are contributing to growth in our business in an unprecedentedly challenging time. We continue to believe that the COVID-19 pandemic will likely be more of a premium event than a capital event and that Employers is in a strong position to weather these challenges and to capitalize on new opportunities that may arise as a result of the pandemic. And with that, operator, we'll now take questions.

[Operator Instructions]. We have a question or comment from the line of Mark Hughes from Truist. Your line is open.

Yes. Thank you. Good morning. Doug, you had given some numbers for both premium and policies in force that, I think, changed sequentially and then year-to-date. Could you repeat those? I didn't write them down fast enough.

All right. So let's start, Mike - Mark, with new business premium.

Yes. Yes.

Well, actually, let me give it to you this way. So this is what the script provided for. Excluding California, so this is non-California, policies in force were up 1.5% for the quarter. And year-to-date, policies in force are up 12.9%. In-force premium was down 3.4% for the quarter and down 4.6% year-to-date.

Those in-force numbers, are those ex-California as well?

Yes. That was all ex-California.

And then including California, do you have those in-force premium numbers now versus midyear versus 3Q last year?

Yes, I don't have those in front of me, Mark. Those will be in the queue, so you'll be able to see those when we file. Just to give you a sense, California lags significantly from all of the other states. And it's why we broke it out that way because some of the states, we're seeing fairly remarkable growth in policies under $25,000. So really, when you think about the results for the quarter and really for the year, if you exclude California and you exclude policies over $25,000, we're seeing some fairly significant growth.

What do you attribute that to? It seems like a bifurcated market where you're getting lots of submissions for small accounts. Is that just a recovery in the economy, something about your distribution? But at then the same time, you've got the larger accounts that you view is too competitive and so you stepped away from those?

Yes. Principally, when I look at the book today, so let's segment it by size and let's just draw that line at $25,000. The business below $25,000, we continue to see a very strong pipeline of submittals and binds and actually starting to see year-over-year increases in premium. So a lot of strength there. Completely different story when you look at California. Over $25,000, the story is fairly consistent across the country, both in terms of submissions, buyings. Premium is a little more difficult simply because there's quite a bit of volatility in average premium. We attribute that mostly to the competitive environment. As you know, we took some rate actions in California about 15 months ago, and it had an immediate impact, particularly on new business over $25,000. We've seen that across the country. And again, that's not a function of an unattractive claims environment. That's a function of competitive pricing. And we believed 15 months ago and continue to believe that the rate that is being achieved on business over $25,000 simply isn't attractive.

Mike, did you say the reserve development in the quarter was only 2010 and prior?

No. That - we were making a reference to what we did in the first quarter of this year. In the first quarter of this year, we saw a favorable developing - development emerging in nearly every accident year, but we chose only to look to years 2010 and prior. And we've maintained that in the - for the first quarter. In the second and third quarters, we saw and took the favorable development that had occurred since that period.

Okay. Thank you. And then one final question. The claims, Steve, that you described, down 17% in July. Is that - are those absolute numbers? Or is that adjusted for premium or exposures? That's one question. And then two is -- but your loss pick, you're clearly holding it steady. When are we going to know whether those little claims are going to translate into little losses? When are you going to have confidence? How do you see it now? And when will you make that final determination?

So your first part of your question, Mark, those are pure cases incurred – pure loss time cases incurred quarter-over-quarter that I provided to you. So they're not a reflection of a percentage of payroll or a percentage of premium, they're just pure numbers.

Yes.

And then I didn't really hear clearly your second part of your question.

Second part was claims are down, but your current exiting year loss pick is steady. What's up with that, is the basic question?

Okay. I'll take that one, Mark. So as you may recall, we do extensive reserve studies twice a year, midyear and at the end of the year. And on the off quarters, we do a comparison to expected. And so as we looked at the third quarter, we didn't feel that we needed to make an adjustment at this point in terms of where we are booking at the end of the second quarter. Obviously, when we get to year-end, we'll do a more extensive study. And to the extent that we observe favorable trends, we may choose to adjust our carried current year provision at that time. I will note that we are seeing declines in frequency and a relatively stable severity environment. And so the trends aren't discouraging in any way, but we are in a fairly volatile period of time, and we believe the most prudent thing to do here is to wait until year-end, do a full study. And at that point, we'll take a view as to where we stand.

Thank you very much.

Thank you. [Operator Instructions]. We have a next question or comment comes from the line of Bob Farnam from Boenning and Scatter. Your line is open.

Yes. Hi there. I just wanted to get an update on Cerity. And I just wanted to know, like, how is it performing relative to your expectations and the plan that you put forward when you rolled that out?

So relative to the expectation, and in this case, I'll make that a reference to premium. It is not meeting our expectations at the time we rolled it out. We are continuing to see growth, not at the rates we would have expected, but there is a slight pickup in the amount of business that is coming through that channel. We don't attribute that miss to COVID-19. That certainly didn't help. And as the economy is recovering, we're seeing a little bit of an uptick there. So that's relative to our expectation in terms of revenue. In terms of the technology and the platform we deployed, I would say what we've actually launched probably exceeded our expectations. It's a very solid platform. I think it positions us nicely. That market just hasn't taken shape yet at the rate we would have expected it to.

Do you - have you kind of updated your expectations as to when that might start to put through some positive numbers?

We're in the process of doing that right now, Bob.

Okay. Thanks for the color, Doug. Thanks.

Thank you. Our next question or comment is a follow-up from Mr. Mark Hughes from Truist. Your line is open.

Doug, on the Cerity, how much of the delay perhaps is a function of the paid search dynamics? I think you've talked in the past about how the paid search providers want to capture all the economics for themselves. How much of that is the constraint versus that market is just a little slower and developing than you had expected, the number of people actually in the market to buy that kind of coverage, maybe less than expected?

Yes. Let me touch on a few of the points there, Mark. We are learning as we expected to, what marketing spend is most effective. And early on, immediately after the launch, what we found is that paid search tended to be fairly expensive. And we were paying for opportunities that never ultimately resulted in the issuance of a policy. We've gotten quite a bit better at that. And so what we have seen more recently is that, in fact, paid search does seem to be the way to generate business. And we're finding more efficient ways to do that, making sure that the inquiries we get from those customers who are looking to buy directly from us are within our classes of appetite and that we're likely to have a greater chance of success. So we continue to tune that because we do think that paid search is going to have to be a part of ultimately what successful marketing looks like. But we have found that there are more efficient and effective ways to do that. So we can continue to experiment.

In California, with your approach to pricing, how far away are you from the market, so to speak?

Well, again, that goes back to the segmentation. Definitely, when you're looking at policies in that over $25,000 range. I suspect we're further out of the market simply because we don't think the market price is right. It may be the market price, but it's not a price that we'd be comfortable selling business at. Below $25,000, we're seeing very high retention rates, which suggest that our pricing really isn't out of the market. But when it comes to new business opportunities, it's still challenging in California. It is improving. So I think we're going to have to be patient here. Certainly, we're hearing the commentary in the market that maybe it's time for rates to start moving up. It would seem to us that California would be a logical place for that to start happening. But we're not seeing that yet, and especially in that business over $25,000. You've heard us comment in the past that we have a little bit more visibility into that business that we do, the small accounts broadly. And we continue to lose business by 20 to 30 points. And as you've heard me say many times, our price may not be right, but we're not wrong by 20 to 30 points. That's simply a market that's chasing top line in an otherwise difficult environment.

When do you -- I don't know if this question makes sense, but when do you lap that effect where you had trouble with the $25,000 and above? California has obviously been very tough for you. At some point, that's baked in the cake and your benefit from those smaller accounts becomes more clear in the top line. Any sense on that?

Yes. I am looking at that market. I don't think it's going to start emerging yet. It's just kind of at a very high level. At what point does the growth in the small policies exceed the loss in those over $25,000. We took this rating action in California 15 months ago. So we're already through 1 full cycle there. And then with the COVID-19 impact, I think it stretches it out a little bit. But I think as we get into next year, if current trends continue, we should expect to see the growth in those small policies offsetting whatever remaining loss is left in the larger accounts. In some states, that's already happening. It's not across the entire book yet. And that's why I say if things continue on the current trend, we could start seeing that next year. And remember that this isn't only a top line phenomenon for us. The larger accounts, historically, have generated worse loss results for us as well. So what I would expect is as we move into next year and as the economy continues to grow and small businesses start adding payroll and headcount, we're going to see much more growth in that business. Couple that with a very high retention rate and then a lessening impact from the large accounts. I think next year, actually presents an opportunity to be a fairly strong year for us.

Yes. Doug, maybe you ought to stick around. Just joking. One more question. When you look at those small accounts, and I think I might have asked this, and I'm sorry if you answered and I didn't pick it up. But is that the economy? Is that your distribution? What do you make of all these submissions coming in the door?

So there are a lot of likely causes to that. It's interesting to see how it's occurring geographically because when you look at it that way, I think you can see the COVID-19 impact. So you've got California that has essentially yet to reopen, and so that's very challenging. The Northeast, so you've got Connecticut, New York, Pennsylvania, New Jersey, they're actually looking quite a bit better at the moment. The best they've looked since March. They're not quite all the way back, but we're starting to see some favorable trends there. There are other parts of the country, and I would call out the Southeast and Texas where we're seeing very strong growth numbers, growth numbers, like I've never seen before. So I think some of that is a result of the economies opening up our -- some of the newer states, broader distribution channels. I think our ease of doing business, our customer experience has made this a much more attractive product than our competitors are offering. And I think that's driving a lot of the business as well. And we're very focused on driving that small account business because it generates better returns, it has higher retention rates, and it has less price sensitivity. We've been saying that for 20 years. We're now in the middle of the pandemic, and it continues to be the case.

[Operator Instructions]. I'm showing no additional questions in the queue at this time, sir.

Thank you. Thank you, everyone, for joining us today. I know these are difficult times. We are heads down working here. Everyone is still working from home. We continue to be able to provide a very high level of service in that environment. We remain optimistic about our opportunities in the future. We think our business model is very robust, very durable and very resilient. And I think we'll start seeing that as the economy recovers through this year and into next. Thank you, again, for joining us. We look forward to talking to you again in February when we report our full year results. Thank you, everyone, very much.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a good day.