Employers Holdings, Inc. Aktie

Good day, and thank you for standing by. Welcome to the First Quarter 2026 Employers Holdings, Inc. Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Matthew Hendricksen, Senior Vice President, Treasury and Investments. Please go ahead.

Thank you, operator. Today's call is being recorded and webcast from the Investors section of our website, where a replay will be available following the call. 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 the 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 disclosure obligations under the SEC's Regulation FD. Such disclosures will be included in the Investors section of our website. Accordingly, investors should monitor that portion of our website in addition to following our 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 measures. Reconciliations of these non-GAAP measures 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'll turn the call over to Kathy Antonello, our Chief Executive Officer.

Thank you, Matthew. Good morning, everyone, and welcome to our first quarter 2026 earnings call. Joining me today is Mike Pedraja, our Chief Financial Officer. I will begin by providing highlights of our first quarter 2026 financial results and then hand it over to Mike for more details on our financials. Before our Q&A, I'll come back to you with some additional thoughts. If I had to characterize this quarter in a single word, it would be discipline. We made a deliberate choice to prioritize underwriting quality over volume and the numbers reflect that conviction. Our underwriting expense ratio improved. Our actuarial estimates came in on target, and we returned $83 million to shareholders while growing book value per share, including the deferred gain by 8.9%.

That same discipline positions us well to capitalize on favorable market developments, including the continued shift in the California rate environment. The California Bureau voted earlier this month to submit a second consecutive double-digit pure premium rate increase to the commissioner, consistent with the underwriting conditions we have observed throughout the state. As we discussed last quarter, we expect pricing and underwriting actions will pressure growth throughout 2026. Our earned premium was essentially flat year-over-year, down 1%. The steps we took in certain jurisdictions and segments in 2025 are working as intended. New growth opportunities are now taking shape, including entering new underwriting segments, appointing new agents and our recently launched excess workers' compensation product.

Profitable growth remains our North Star. Our first quarter actuarial review confirmed the adequacy of our prior year reserves with no strengthening required. We recognized a current accident year loss and LAE ratio of 72%, which is consistent with our 2025 accident year ratio. After delivering a record level of $215 million in capital to our shareholders in 2025, we continued our commitment by returning an additional $83 million in the first quarter through share repurchases and regular quarterly dividends. We also completed the $125 million new debt issuance associated with the recapitalization plan through the cost-effective sources of $105 million from the Federal Home Loan Bank and $20 million from our credit facility, resulting in a weighted average pretax interest rate of 4.1%.

These capital management steps reflect our continued confidence in our financial position and commitment to delivering value to our shareholders. Along with our operational performance, these actions increased our book value per share, including the deferred gain to $51.26. We believe our focus on disciplined underwriting, prudent risk management and strategic investments continues to position us strongly in the workers' compensation insurance market. With that, Mike will now provide a deeper dive into our first quarter financial results, and then I will return to provide my closing remarks. Mike?

Thank you, Kathy. Gross premiums written were $181 million compared to $212 million for the prior year, a decrease of 15% due primarily to a reduction in new business writings. Our losses and loss adjustment expenses were $129 million versus $121 million a year ago. The current quarter did not include any prior period developments on our voluntary business and the current accident year loss and LAE ratio of 72% is consistent with our 2025 accident year ratio. Commission expense was $24 million for the quarter versus $23 million for the prior year, an increase of 3%, primarily driven by nonrecurring 2025 favorable adjustment. Underwriting expenses were $41 million for the quarter versus $43 million for the prior year, a decrease of 5%.

The improvement in underwriting expenses for the quarter was due primarily to our continued expense management efforts, including reduced personnel costs and other variable costs such as policyholder dividends. Excluding returns from private equity partnership investments, our first quarter net investment income exceeded last year's by $1.5 million. This outperformance was aided by the increased book yields and investment redeployment achieved through last year's investment rebalancing. Our fixed maturities maintained a modified duration of 4.4 with a strong average credit quality of A+. Aided by our investment rebalancing, our weighted average book yield was 4.9% at quarter end compared to 4.5% for the prior year.

Our adjusted net income, which excludes net realized and unrealized investment gains and losses and the benefit of our LPT deferred gain amortization was $10.3 million for the quarter compared to $21.3 million last year. During the quarter, we repurchased over 1.8 million shares of our common stock at an average price of $42.42 per share or $76.9 million. The average repurchase price represented a 17% discount to our book value per share, including the deferred gain. During the period from April 1, 2026, through April 28, 2026, the company repurchased a further 353,547 shares of its common stock at an average price of $42.21 per share. As we have highlighted, we aim to be good stewards of our shareholders' capital. At current price levels, we are convinced that Employers stock is meaningfully undervalued and executing share repurchases at these price levels produces a compelling return on investment and generate significant value for our continuing shareholders. With that, I'll turn the call back to Kathy.

Thank you, Mike. Yesterday, our Board of Directors declared a second quarter 2026 dividend of $0.34 per share, representing a 6.25% increase from the prior quarter. In addition, the Board approved a new $125 million share repurchase authorization through December 31, 2027. Operational discipline continued to drive results. Our underwriting expense ratio improved to 22.6% from 23.4% a year ago. As I highlighted last quarter, we are convinced that our utilization of artificial intelligence tools will be a force multiplier, allowing our colleagues to be more efficient and effective.

Last month, we brought together approximately 400 employees from across the country to introduce our strategy for implementing AI throughout the organization. The enthusiasm, both at the event and in the weeks since have been overwhelmingly positive, and we believe we are creating an innovative culture that will drive differentiated results. We have now moved from AI experimentation to deployment of products using AI. Our vision is that AI will play an increasing role in how we operate going forward. The capabilities that supported our rapid entry into excess workers' compensation are now being used to improve underwriting insights, automate premium audit and claims operations and engage our customers.

We are convinced that our monoline focus, relatively small size and flat organizational structure will be an advantage for us as we accelerate AI into every aspect of our company. We recently became the first insurance carrier to bring quoting directly into ChatGPT, made possible by our patented technology, which we designed to reach business case owners where and how they engage. Rather than waiting for the industry to define this channel, we defined it ourselves. That's the kind of culture and capability that distinguishes Employers, and it's what we will continue to build on. We believe Employers is well positioned and well capitalized to achieve our goals. With total capitalization of approximately $1 billion, a strong A.M. Best A rating and technology-enabled distribution that can reach customers where they engage, we are in a position to deliver lasting value for our shareholders, customers and colleagues. And with that, Daniel, we will now take questions.

[Operator Instructions] Our first question comes from Mark Hughes with Truist.

Can you talk about the competitive environment in California? You described the -- proposed another double-digit rate increase. How much are you realizing in the California market? Is the broader market? Is the competition? Did they follow suit with the first rate increase? How do you see things developing there?

Yes. So let me talk, if you don't mind, just about sort of pricing in general, and then we can get into California. When I think about pricing across workers' compensation, especially in guaranteed costs, I would say I used to characterize the pricing environment as competitive. I would now say it's closer to getting somewhat irrational in some jurisdictions and premium bands. And specifically, I would call out guaranteed cost middle market. We're seeing that there are some diligent carriers, and I think we are included in that group that are exiting certain states and classes.

Some of the states that I would mention, not specific to us, but just across the market that we've seen exits are New York, California, Massachusetts. So we are seeing some exiting of state jurisdictions in the market. We're also seeing tightening risk selection in states like Florida, where there's not a lot of pricing flexibility to begin with. For us, we pulled back significantly in Massachusetts, and we've also pulled back in certain class codes. We've also cut ties with a few MGAs that we feel were underperforming. I don't believe that all companies are being as forward-looking as we are in terms of rate adequacy in certain jurisdictions, including California. I would say it's also possible that the market in certain jurisdictions has really crossed over into what I would call cash flow underwriting.

You asked about the rate that we are achieving. When I -- when we look at our book of business and when we adjust for changes in the mix of business, meaning class code mix, and we compare the first quarter of 2026 to the first quarter of 2025, payrolls were up about 0.5% and our average rate on renewals countrywide increased about 6% so that's quarter-over-quarter '26 to '25. I would say a significant portion of that is coming from California and where we're getting double-digit rate increases on our renewals. When we look at where our opportunities for growth are, I would say that we would include segments where we have a differentiated distribution strategy, and I'm speaking to payroll partners and digital agents and marketplaces. We're still seeing a lot of growth opportunity there.

We've also identified some jurisdictions where we have opportunities to increase our market share. and where the pricing margins, we do feel remain very attractive. So we're focusing heavily on those areas. And I would include what I said in the prepared remarks that we are appointing more agents in the areas where we feel like there is better pricing margin and perhaps in certain states where we have entered that state maybe 4 or 5 years ago pre-COVID, but we feel like it's now a good time to increase our market share there. I would like to add that the fact that the top of our funnel, when we look at the submissions coming in, California does appear to be a hardening market to some extent because submissions were the highest that we've seen across the company and specifically in California, in Q1 of 2026 that we've ever seen.

So submissions at the top of the funnel, including both counts and premium are very, very high at this time. We're just being very specific about where we're willing to quote and where we feel like the pricing is unreasonable, we're just not playing there. In terms of growth also, I would say our appetite expansion effort has been huge. It's been an area of growth for us over the last 4 years since we started doing that, and we're going to continue to do that going forward and entering into new products like Excess and others that we have on the horizon.

Yes. I appreciate all that detail. When you describe closer to irrational, is that -- can you apply that broadly? You talked about specific jurisdictions that you're seeing pressure. But if you were to categorize the whole market, would that closer to irrational still apply?

I wouldn't broad brush it specifically. I would say the first place that we saw this happening, and this was even last year was in the middle market space, the first dollar middle market space became very, very competitive, continues to be competitive to the point where we're just not willing to quote in certain instances where we feel like the margin isn't there.

Yes. Yes. How about the outlook for reserve development? You've talked about only maybe 2Q, 4Q where you do the reserve development, you have the potential for a favorable or adverse, I guess. On a go-forward basis, would you say, at least for the time being, it's probably balance sheet, you'd be protecting the balance sheet rather than recognizing any favorable that might emerge? Or will that be more dependent on just what you see?

Yes. I think it'd be the latter. It's going to be more dependent on what we see and how compelling the numbers are. We -- you were correct in stating -- I mean, we do an actual versus expected analysis at the end of Q1 and Q3. At the end of Q2 and Q4, we do a full analysis where we reselect development factors, and it's a much deeper dive. We've always been -- said that in Q1 or Q3, if we saw something very compelling, we would likely make a move. I mean we wouldn't wait. This quarter, things came in. There are always puts and takes depending on how you divide the data. But this quarter, everything came in right around where we expected. So we did not feel compelled to make a change. But I think I would agree with what you said in the latter half of your question, which is we will wait and see how things develop in Q2 and make a decision then as to whether or not we would act on favorable development.

Mike, the audit premium impact in the quarter, how much did it help or hinder the growth?

Yes. So it was relatively small. So it was $5 million adjustments in the first quarter. So we are seeing premiums generally, the payrolls, as we talked about last time, just moderate. And so the payroll increases are not developing as they were after COVID. So we see a really moderating level of payrolls currently at that time, and we see that into the future.

Yes. Kathy, what are your spidey senses telling you about what NCCI is going to say in week or 2 about reserve adequacy, medical inflation, kind of the hot button?

Yes. I'm not deep into the numbers like I used to be. I don't have as much insight being an outsider from NCCI now. But my gut would say that the accident years -- the accident year 2025 will continue to show a slight increase, and that's been the case over the last few years. And then I would expect the level of redundancy for the industry as a whole to decrease. And then what was your -- inflation, I think, is that what was your third point. Yes. In terms of inflation, I can tell you, we're not seeing anything significant that's impacting our book of business. We continue to track our -- we have an internal prescription drug index, and it's up slightly, but it's not what I would call anything that's alarming. You would expect it to be up slightly. So I guess from what I'm expecting them to present, I wouldn't see anything significant come through on inflation or medical severity.

Our next question comes from Karol Chmiel with Citizens.

Just a question regarding the top line. With the quarterly decline and with the context of the planned multi-quarter nonrenewal of certain business classes, would you categorize this as ahead of expectations in terms of timing?

No, I think this is exactly as we expected and planned. And so last quarter, we tried to indicate that we expected to continue that level of teens type of reduction. We expect to have that same level of performance throughout the rest of the year.

Yes, I would agree. And having said that, we are opening new markets, new segments, like I was mentioning earlier in my response to Mark. So we're expecting something similar throughout 2026, but we'll be introducing new areas throughout the year, too.

That's a really good point. I think towards the end of the year, you'll start to see all the adjustments we've made flow through, and then we expect to see that transition start to be visible through the results.

[Operator Instructions] I'm showing no further questions at this time. I would now like to turn it back to Kathy Antonello for closing remarks.

Okay. Thank you, Daniel, and thank you, everyone, for joining us this morning, and we look forward to meeting with you again in July.

This concludes today's conference call. Thank you for participating. You may now disconnect.

Thank you, operator. Good morning, and welcome, everyone, to the fourth quarter 2025 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. 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 disclosures obligations under the SEC's Regulation FD. Such disclosures will be included in the Investors section of our website. Accordingly, investors should monitor that portion of our website in addition to following our 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 measures. Reconciliations of these non-GAAP measures 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 Kathy Antonello, our Chief Executive Officer.

Thank you, Matt. Good morning, everyone, and welcome to our fourth quarter 2025 earnings call. Joining me is Mike Pedraja, our Chief Financial Officer. During today's call, I will begin by providing highlights of our fourth quarter 2025 results and then hand it over to Mike for more details on our financials. Before our Q&A, I'll come back to you with some additional thoughts. I'd like to begin with how we are actively addressing the elevated frequency of California cumulative trauma claims. To be clear, this remains a California-specific issue. Claim frequency in our other states and within non-CT claims in California continues to trend favorably. We recognized early that the CT environment was creating a hard market in California, and we moved decisively. We have implemented rate increases and tightened underwriting restrictions on several classes of business. We are not waiting for legislative reform, though we do believe the growing impact on California businesses and public agency budgets will make the case for reform increasingly difficult to ignore.

While we're confident that these California pricing and underwriting actions, along with the steps we're taking across the country will strengthen our underwriting profitability, they are also likely to reduce written premium in 2026. It's worth highlighting that our Small Commercial franchise maintained strong retention rates throughout 2025, a clear sign the investments we've made in automation and ease of use are genuinely resonating. I'm also pleased to report that our standard fourth quarter full actuarial assessment concluded that no additional reserve strengthening or adjustments to our current accident year loss and LAE ratio was necessary. In addition to our internal analysis, we engaged a market-leading actuarial firm to independently assess our estimated ultimate loss and they concluded that our carried reserves were well within the range of reasonable estimates. We believe the outcome of these 2 analyses confirms the actions we took in the third quarter adequately addressed recent workers' compensation trends.

I'm excited to discuss our new excess workers' compensation product, which represents a strategic expansion of our capabilities. By leveraging our core workers' compensation expertise into the excess layer, we're creating new growth avenues while diversifying our risk profile. Our aggressive adoption of AI tools has accelerated the product's development, and I'm pleased to report that we are now accepting submissions. The early market response has been strong, and we expect this product will deepen our distribution partner relationships while expanding our addressable market. We continue to execute on our commitment to returning capital to stockholders by delivering $215 million of share repurchases and regular quarterly dividends in 2025. In January, we completed the $125 million capital recapitalization plan that we announced in the third quarter. These capital management steps reflect our continued confidence in our financial position and our commitment to delivering value to shareholders. Along with our operational performance, these actions increased our book value per share, including the deferred gain by 11% to $51.31. We believe our focus on disciplined underwriting, prudent risk management and strategic investments continue to position us strongly in the workers' compensation insurance market, which is evidenced by A.M. Best's recent reaffirmation of our insurance company's financial strength rating of A. With that, Mike will now provide a deeper dive into our fourth quarter financial results, and then I will return to provide my closing remarks. Mike?

Thank you, Kathy. Gross premiums written were $156.8 million compared to $176.3 million for the prior year quarter, a decrease of 11% due primarily to a decrease in new business writings and lower final audit premiums, partially offset by higher renewal business premium. Our losses in LAE were $134.4 million versus $113.2 million a year ago, an increase of 18.7% due primarily to an increase in the accident year 2025 selected loss and LAE ratio and the absence of favorable developments in the fourth quarter of this year. Commission expense was $25.8 million for the quarter versus $24.4 million for the prior year, an increase of 5.7%, driven by nonrecurring adjustments. Underwriting expenses were $39.8 million for the quarter versus $44.2 million for the prior year, a decrease of 10%. The improvement in underwriting expenses for the fourth quarter was due primarily to continued expense management efforts, including reduced personnel costs and other variable costs such as policyholder dividends and bad debt.

Net investment income was $31.4 million for the quarter compared to $26.7 million for the prior year, an increase of 17.6% due mostly to private equity investment return distributions and an overall higher book yield on our fixed income portfolio. As Kathy mentioned, we executed an investment rebalancing to address several strategic goals, including reducing our equity investment allocation to target levels and increasing our overall portfolio yield. Our equity investments, like most in the market, have appreciated very nicely and reached 16% of our investment portfolio versus a target allocation of approximately 10%. As part of the investment rebalancing, we also sold low-yielding fixed income securities to offset the associated equity gains and redeploy the proceeds into higher-yielding fixed income investments. The investment rebalancing accomplished several goals, including reducing our equity investments to target allocation, increasing our overall investment portfolio yield by a net 40 basis points, extracting an estimated net present value gain of $16 million and reducing our required capital. The sale of fixed income investments produced an after-tax realized loss of $40 million, which reduced net income and adjusted book value per share during the quarter. Our stockholders' equity and book value per share were not impacted by the investment rebalancing. Our fixed maturities maintain a modified duration of 4.4 with strong average credit quality of A+. Aided by our investment rebalancing, our weighted average book yield increased to 4.9% at quarter end compared to 4.5% for the prior year. Our adjusted net income, which excludes net realized and unrealized investment gains and losses and the benefit of our LPT deferred gain amortization was $14.5 million for the quarter compared to $28.7 million last year.

During the fourth quarter, we repurchased almost 2.4 million shares of our common stock at an average price of $40.94 per share or $97 million. The average repurchase price represented a 20% discount to our book value per share, including the deferred gain and adjusted book value per share. During the period from January 1 through February 18 of this year, the company repurchased a further 898,594 shares of its common stock at an average price of $44.28 per share. Our remaining share repurchase authorization is $53.1 million. As we have highlighted, we aim to be good stewards of our shareholders' capital. At current price levels, we are convinced that the employer stock is meaningfully undervalued and executing share repurchases at these price levels produces a significant return on investment and generate significant value for our continuing shareholders. With that, I'll turn the call back to Kathy.

Thank you, Mike. Yesterday, our Board of Directors declared a first quarter 2026 quarterly dividend of $0.32 per share. The dividend is payable on March 18 to stockholders of record on March 4. As evidenced by the recapitalization plan, we remain confident in Employer's financial strength and financial prospects, and we'll continue to manage our capital strategically. We returned $104.1 million to our stockholders in the fourth quarter through a combination of regular quarterly dividends and share repurchases at an average price that was highly accretive to our book value per share. Our focus on operational excellence is unwavering. In 2025, we drove our expense ratio down 180 basis points to 21.7%, and we believe it will continue to decline with our enterprise-wide deployment of AI. In addition to our new excess workers' compensation risk management tools, which are comprised of dozens of specialized AI agents, AI has helped us internally develop a significant claims platform enhancement and other new capabilities backed by our Agentic ecosystem. Our mindset around the adoption of AI isn't just about efficiency. It's also about creating a sustainable competitive advantage for the company.

As we look ahead, we're confident that we're operating from a position of strength, solid reserves validated by independent analysis, improving expense ratios, expanding product capabilities and a solid balance sheet. We believe we're making deliberate strategic choices to position employers for the future, and we're executing with discipline and urgency. We're absolutely confident in the path that we're on. Before we take questions, I want to take a moment to thank the entire employers team. This was a demanding year, and the way this team rose to meet it speaks volumes about who we are as a company. From our underwriting and claims teams navigating the challenging California market to the technology teams whose AI initiatives are already delivering measurable results to our finance, operations and support teams who keep us running efficiently every day, none of what we've accomplished would be possible without you. And with that, operator, we will now take questions.

[Operator Instructions] And our first question comes from Mark Hughes of Truist.

Kathy, anything about the trajectory of CT claims? It seems like once the lawyers get a new shiny object in front of them, they just keep piling in. Is the -- are you seeing any further acceleration? Is it -- is it on a relatively even keel?

Yes. That's a great question, Mark. We are seeing throughout 2025 that the acceleration of the frequency that we saw sort of in early '25 and throughout 2024 as those accident years as they emerged late. We're seeing that acceleration slow down and flatten quite a bit. So that has been good news. Having said that, CT claims as a percentage of overall claims is still quite elevated relative to what we've seen in the past. But what we are seeing now, I'm not ready to claim victory yet, is that the acceleration of the frequency has flattened.

Yes. And you mentioned in 2026, probably likely to see reduced written premium -- you talked about a hardening market, which implies that others are recognizing the issue, but it seems like there are still competitors taking share. Could you maybe just talk about that dynamic? Again, kind of hardening market, but you're still being cautious about it.

Yes. I mean when I talk about a hardening market, I think it's specific mostly to California, where the bureau took a rate increase. We're seeing -- we saw a significant increase that was also filed in Nevada. So most of it's happening sort of in the West. But I would characterize the California market as hardening. Generally speaking, though, I'd say across the country, the environment is still fairly competitive. We're seeing pockets though, carriers that are exiting certain states or certain classes of business, definitely seeing tightening of risk selection, especially in states where you don't have a lot of flexibility in pricing like Florida. I wouldn't characterize it as a major trend. I don't believe all companies are as forward-looking as we are in some of these aspects. But we're -- we've decided we're just not going to play in some of the areas where we feel like pricing margins have become too thin. I can give you just some high-level numbers of what we're seeing in our book. Countrywide in the fourth quarter, payrolls were basically flat for our renewal book, but we're seeing an average rate on renewal increase a little over 5% for our entire book.

How is that California versus non-California?

California is driving quite a bit of that. But we're seeing, like I said, certain states that are pushing rate higher. I mentioned Nevada earlier, but there are other states where it's more -- we're more focused on risk selection than on pricing being the lever that we're pulling.

Yes. What's your view on buybacks for 2026?

Yes. We still have quite a bit left in our share repurchase authority that the -- we did quite a bit, right, in the fourth quarter of 2025. And as we just mentioned in our prepared remarks in January and early February, I do expect it will return to a normal level of repurchase authority in 2026, absent some change, but we're trying to be very opportunistic in terms of when we buy our shares back.

And then your expense ratio, if top line is down in 2026, can you still get improvement in the expense ratio?

We are hoping to still get improvement. As I mentioned, we have a lot of AI initiatives that are underway. We put an AI road map in place in 2025 and are setting the stage to get all of our data into Databricks. We started utilizing AI, I don't know, a couple of years ago when we embedded a large language model in our new digital first notice of loss tool. We're rolling out Anthropics Ca to the entire organization. Our developers are enhancing their productivity by using AI code assistance. We've started with the claims area where we're incorporating AI into over 40 to 50 identified use cases. But I would say our latest achievement has -- is definitely our excess workers' compensation product that we just rolled out. We used voice transcription that was ingested by Claude to build the tool and it iterated daily for about 4 weeks, and we were ready to launch months earlier than we initially expected. The results were truly remarkable. We have more tools going in place in the first quarter that are more claims focused, a caseload summary tool for our claims adjusters that's going to provide better continuity of care when an injured workers claim gets passed from one adjuster to another. We have an Agentic assistant that we're hoping to put into production for our premium auditors. All of these things we feel like are going to help our expense ratio in the long run. These are real. These are not just tests that we have going on behind the scenes, and that's where we're hopeful we're going to get more expense savings.

And our next question comes from Karol Chmiel at Citizens.

I got two. First question is just regarding the gross written premium. You guys are stating lower new business growth. But if I just target California, is it a combination of lower new business plus nonrenewals? Is that right?

That's correct. That's how I would -- I think you're characterizing it correctly. We're seeing lower new business writings in California, and we've selected some classes of business that we are exiting, not just in California, but countrywide. Offsetting that are some of the rate increases that we've had. But -- and we have been, over the past 4 or 5 years, expanding our appetite. We expect that to offset some of the exiting -- some of the classes that we're exiting. But we do expect what we saw in the fourth quarter to continue throughout 2026.

And just a follow-up regarding the new products, can you just comment on how you would want to scale this new excess workers' comp and if there's any other products you have in mind for the rest of the year?

Yes. We do have other products in mind. We're not quite ready to announce those yet, but I think they will be similar to excess comp in nature and in our wheelhouse. In terms of scale, we are thinking we'll write our first business effective July 1. And we are going to take it a little bit slow, be careful like we've done in our appetite expansion effort, learn as we go. But we think over time that this could be a meaningful top line revenue growth driver for us as a company.

And our next question comes from Bob Farnham of Green Capital.

A couple more questions on the excess workers' comp.

Okay. So obviously, there are competitors that are already entrenched in this business. So how do you expect to win business? Is it more of the fact that you can do it more efficiently because of the use of AI? Or are there other factors do you think that can be successful for you?

Yes. We do feel like there are areas that we're going to focus on within the product that are not provided by other carriers in an efficient way. And I'm talking about loss control, the ingestion of the data. We do feel like we're going to be able to provide quotes in a faster manner because of the AI tool that we're going to be using for -- to ingest all of the data when we get a submission and to just process the loss runs that can go back 10, 15 years on excess work comp. This is part of our diversification effort. We've been researching new products for about a year and excess, we felt like was the right place to start because of our extensive expertise in work comp, we felt like it was just a natural extension of what we do now. We do feel like while there are carriers that are entrenched in the space, there aren't a lot of carriers that do it on a significant basis that it's a significant amount of their portfolio. So we felt like there was room for another carrier to enter the market. And we do feel like we're going to make a difference that is going to put us ahead of the pack.

Okay. Obviously, you've done a lot of research on this. So what type of performance does this product perform, I should say. So in terms of combined ratio, and is there a difference between the expense ratio component of the loss ratio? In other words, is it more of a higher expense ratio or lower loss ratio type product? And just kind of just trying to get a feel for going forward, like not necessarily in 2026, but when this gets up to full speed, what type of impact that might have relative to your traditional book?

Yes. I mean, I think relative to the guaranteed cost business that we've written for ever, the excess comp space, while it's a bit, what I would say, lumpier, overall, we feel like it's going to perform in the mid-80s in terms of a combined ratio. The way we've built it and the way that we are using AI to underwrite it, we do feel like our expense ratio will be strong and competitive in the space. And then the loss ratio is just typically less than what you would see in the guaranteed cost space.

Okay. And it's still driven by state loss costs in the same way that the primary workers' comp system is? Is it still priced kind of the same way?

The pricing is a little bit different. Yes, underlying the pricing, you still start with the state loss costs like you do with guaranteed costs. But because the self-insured retention can be anywhere from $0.5 million to $2 million, you're eliminating a lot of the frequency that comes along with the guaranteed cost book of business. So it's more severity driven than frequency driven. And we think that is one of the things that's a nice diversification play to put excess along with the guaranteed cost. It's very similar to large deductible.

Right, right. Okay. And last one for me. You may not be able to give any specification here, but all right. So once a few years down the road, when this is kind of up to speed, what do you envision in terms of the proportion of your total premium is going to be coming from excess versus the primary book?

Yes. It's a good question. We don't give guidance, as you know. But we would love to see this be 10% of our overall written premium over the next 4 to 7 years, say. And I know I'm being very broad in my projections there. I expect nothing -- so yes, that's kind of what we're hoping for, but we'll obviously keep everyone apprised of our progress there.

I show no further questions at this time. I'd like to turn it back to Kathy Antonello for closing remarks.

Okay. Thank you, and thank you all for joining us this morning. We very much look forward to meeting with you again in April.

This concludes today's conference call. Thank you for participating, and you may now disconnect.

Good day, and thank you for standing by. Welcome to the Q3 2025 Employers Inc., Employers Holdings, Inc. Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to turn the conference over to your speaker for today, Lori Brown. Please go ahead.

Thank you, Lisa. Good morning, and welcome, everyone, to the Third Quarter 2025 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. 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 disclosure obligations under the SEC's Regulation FD. Such disclosures will be included in the Investors section of our website. Accordingly, investors should monitor that portion of our website in addition to following our 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 measures. Reconciliations of these non-GAAP measures 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. And now I'll turn the call over to Kathy Antonello, our Chief Executive Officer.

Thank you, Lori, and good morning, everyone. And again, welcome to our third quarter 2025 earnings call. Joining me today is Mike Predraja, our Chief Financial Officer. .

During today's call, I'll begin by providing highlights of our third quarter 2025 results, and then I'll hand it over to Mike for more details on our financials. Prior to our Q&A, I'll come back to you with some additional thoughts. I want to begin by discussing the decisive actions we took during the quarter to strengthen our loss in LAE reserves.

When we spoke last quarter, I mentioned we had identified significant loss in LAE reserve redundancies in older years, and utilized this favorable development from accident years 2021 and prior to strengthen reserves for accident years 2023 and 2024.

We also provided our preliminary view of accident are 2025 and shared that the underlying driver of the need for an off-cycle third quarter reserve review, was the increased frequency of California a cumulative trauma claims in recent accident years.

During the third quarter, we completed a thorough reserve analysis, which included a detailed review of our complete book of business, and we compared our internal selection to those of an external actuarial review performed midyear. Our comprehensive and rigorous analysis indicated the need to increase prior year reserves by $38.2 million or 2.8% of net unpaid loss in LAE. Back to the years 2023 and 2024 were the primary contributors of the increase with AY 2024 increasing by $40.5 million 2023, AY increasing by $16.1 million, and accident years 2022 and prior decreasing by $18.4 million in total. In addition, we increased our AY 2025 loss and LAE ratio from 69% to 72%.

We strongly believe these adjustments fully address the recent trends we and the industry have seen in California. I want to emphasize that these adjustments are not a sign of broad deterioration in our book of business. With the increased frequency of California CT claims, our third without the increased frequency of California CT claims.

Our third quarter 2025 overall reserve position would have developed favorably. As we have discussed, the increased frequency in CT claims is a California-only issue. Frequency in other states continues to show a decreasing trend I now want to speak to why California CT claims for accident years 2023 and 2024 are impacting our reserves this quarter.

In California, older years continue to develop favorably, but more recent years have experienced a meaningful uptick in CT claim frequency. -- as there is typically a significant delay in CT claim reporting, the increased CT claim frequency trend did not fully emerge until well after the first 12 months of each accident year, making it more challenging to predict or detect the trend in real time through traditional reserving and pricing analyses.

In addition, the continued declining frequency trend of non-CT claims in California initially masked the increasing trend in CT claims and further delayed visibility. Given the uncertainty in the California CT environment, and more generally, our desire to utilize a more conservative approach across our complete book of business.

This quarter, we implemented refinements to our analysis of prior years. These refinements, which strengthened our reserves across all states were designed to build additional resilience on our balance sheet and significantly reduce future uncertainty. A comparison of our third quarter 2025 reserve selections to reserve estimates prepared midyear by an independent external actuarial firm, we enforced our conservative reserve position.

Now let's focus on accident year 2025. The increase in our AY 2025 loss in LAE ratio is due solely to the increasing frequency of California CT claims, as frequency in the rest of our book continues to decline. Comparing AY 2025 to AY 2024 at 3 months AY 2025 incurred loss ratio was higher than 2024, but at both 6 and 9 months, AY 2025's loss ratio was lower than 2024 at the same ages of maturity.

Other data points on both -- on both an accident year and a policy year basis point towards AY 2025 performing better than both 2024 and 2023. This suggests that underwriting and pricing actions we've implemented are having a positive impact. While we could have held the AY 2025 loss ratio steady at our second quarter selection, given the more conservative reserving approach mentioned earlier and recognizing the increased frequency in California CT claims, we decided to increase the accident year 2025 loss ratio.

We have implemented a 4-pronged approach in California to help mitigate the impact that CT claims may have on our book of business going forward. This includes targeted pricing actions, more aggressive claims handling and litigation management, underwriting refinements and continued geographic diversification. We are also actively engaged in California's efforts to pursue meaningful legislative reforms to better align California CT rules to those throughout the country. Having said that, our commitment to providing best-in-class care to all injured workers, whether their claim erodes from cumulative trauma or not is unwavering.

We are confident that the actions we have made are timely, appropriate and prudent and will better position the more recent accident years for the future. We believe that our current reserves are more than adequate. I'll now turn to discuss other highlights from the quarter. Our third quarter gross written premium increased by 1.4% compared to 2024 due to increases in renewal business premiums.

As I've stated in previous quarters, in this sustained soft workers' compensation market, we are prioritizing underwriting margin over growth and we've continued to undertake targeted pricing actions and implement enhanced risk selection to maintain underwriting margin. While competitive pressures have impacted our desire to grow at the same pace in certain classes, jurisdictions and policy sizes. We remain pleased with the continued growth in our small commercial business and our strong policy retention as evidenced by our 4% growth in policies in force this quarter.

We view the small commercial growth as validation that our clients value the investments we've made in automation and ease of use. Over the last 10 years, we've considerably increased our diversification by expanding geographically into a national carrier and into new distribution channels, while also expanding our appetite into new industries and classes. These initiatives are ongoing.

To further that diversification, we're excited to announce our first expansion into a new product. We have commenced the build-out of a new excess workers' compensation offering by hiring a talented experienced underwriting, underwriter and developing the infrastructure to distribute and manage this new product. We plan to start accepting submissions in early 2026.

Our entry into the excess workers' compensation market leverages our existing expertise and systems capabilities and customer base and will strengthen our relationships and offerings with our distribution partners. We earned $26.1 million of net investment income during the quarter, which was slightly lower than the third quarter of 2024. Our net realized and unrealized gains on investments increased to $21.2 million for the quarter compared to $10.9 million for the prior quarter. We continue to be committed to delivering operational efficiencies and automation of the entire customer journey.

In August, we made the difficult decision to undergo a reorganization which was designed to better align our resources with our current and future business needs and objectives. As a result of this action and broader expense reduction efforts, we reduced our third quarter underwriting expense ratio significantly compared to the third quarter of 2024. Despite the tremendous progress we've already achieved we now see further improvement potential as we implement our well-designed AI road map. As part of our relentless focus on value creation for our shareholders, Yesterday, we announced a $125 million debt funded recapitalization plan and an associated $125 million increase to our existing share repurchase authorization.

This expands our existing share repurchase authority to $250 million. In addition to a meaningful return on investment -- we believe the recapitalization plan will reduce our cost of capital, improve our return on equity and expand our earnings per share and adjusted book value per share. The recapitalization plan highlights our belief that our stock price is undervalued and our confidence in our balance sheet and future prospects. With that, Mike will now provide a deeper dive into our financial results, and then I will return to provide my closing remarks. Mike?

Thank you, Cathy. Gross premiums written were $183.9 million compared to $181.2 million for the prior year, an increase of 1.4% due primarily to renewal business premium growth. Net premiums earned were $192.1 million compared to $186.6 million for the prior year, an increase of 3% and due primarily to larger levels of 2024 written premium earning in 2025. -- during the period, our losses and loss adjustment expenses were $186.6 million versus $117.7 million a year ago. .

As Kathy just summarized, we increased our current accident year loss and LAE estimates in response to the rapid rise in cumulative trauma claim frequency in California. The current quarter loss in LAE includes a cumulative catch-up adjustment of $11.4 million to the carry 2025 accident year loss and LAE reserves at June 30, 2025, and to reflect the 72% current accident year loss and LAE ratio. As a result, the 2025 accident loss ratio for the quarter was 78.1%. -- in addition, we strengthened our reserves related to prior accident years by $38.2 million due to the increased frequency of California CT claims, and our desire to utilize an even more conservative approach across our complete book of business.

Commission expense was $23 million for the quarter versus $25.8 million for the prior year. Our commission expense ratio for the corresponding quarters was 12% and 13.8%, respectively. The commission expense and ratio decreases were primarily related to the increased proportion of renewal business which has a lower commission rate compared to new business and lower agency incentive accruals. Underwriting expenses were $39.6 million for the quarter versus $43.8 million for the prior year. Our underwriting expense ratios for the corresponding quarters were 20.6% and 23.5%, respectively.

The underwriting expense decrease was primarily a result of lower compensation-related expenses including reductions associated with the August reorganization Kathy mentioned, along with year-over-year declines in policyholder dividends and bad debt expense. Higher net premiums earned also contributed to the lower underwriting expense ratio. Net investment income of $26.1 million for the quarter was relatively flat compared to the prior year. despite a lower yield environment.

The current quarter net income results included after-tax realized and unrealized gains from our investments in equity securities and other invested assets, of $17.8 million and $63.3 million -- sorry, $6.3 million, respectively. The market value of our fixed maturity holdings has benefited from the lower interest rate environment reducing our accumulated other comprehensive loss included in our shareholders' equity by $16.6 million.

Our fixed maturities currently have a modified duration of 4.4 and and an average credit quality of A+. Our weighted average book yield was 4.6% at quarter end compared to 4.4% for the prior year. During the quarter, our average new money investment yield was 5.5% versus 5.7% a year ago. Our adjusted net loss, which excludes net realized and unrealized investment gains and losses, and the benefit of our LPT deferred gain amortization as compared to adjusted net income of $20.2 million a year ago.

Our 9-month year-to-date adjusted net income was $34 million versus $90 million last year. Due to market opportunities, we increased our level of common stock repurchases to $45.2 million in the quarter. We achieved the repurchases at an average price of $43.09 per share. which represents a 17% and 13% discount for our June 30, 2025, adjusted book value per share and our book value per share plus the LPT game, respectively.

Since September 30, we have repurchased an additional 243,000 shares of our common stock at an average price of $41.77 per share for a total of $10.2 million. As Cathy highlighted, we announced the Board's approval of a recapitalization plan authorizing a $125 million increase to the existing 2025 share repurchase program. Initially, we will utilize a combination of 3-year debt funding sources, including our existing borrowing facility at the Federal Home Loan Bank. We ultimately plan to fund the recapitalization with long-term debt.

With that, I'll turn the call back to Cathy.

Thank you, Mike. Yesterday, our Board of Directors declared a fourth quarter 2020 quarterly dividend of $0.32 per share. The dividend is payable on November 26 to stockholders of record on November 12. -- as evidenced by the recapitalization plan Mike just discussed, we remain confident in employers' financial strength and prospects and we'll continue to manage our capital strategically. After considering dividends declared, our book value per share, including the deferred gain increased 6.1% to $49.70 and our adjusted book value per share increased by 5.5% to $51.31 over the last 12 months. We returned $52.7 million to our stockholders this quarter through a combination of regular quarterly dividends and share repurchases at an average price that was highly accretive to our book value per share.

While our third quarter results were heavily impacted by the California GG claims trend, we believe our current loss and LAE reserves reflect the level of conservatism to which we are accustomed. We are relentlessly pursuing refinements in our underwriting and pricing approaches and seeking new opportunities like excess workers' compensation that will enable us to generate profitable growth in both new and renewal business. I am confident that the steps we've taken this quarter will position employers well into the future. And with that, Lisa, we will now take questions.

[Operator Instructions] The first question today will be coming from the line of Mark Hughes of Truist.

You mentioned 1 of your strategies would be to perhaps be more assertive on the litigation front. Is this something you can make yourself a harder target. And so the plaintiff's attorneys are not as enthusiastic about pursuing you as opposed to others? Or is that -- is it more of an administrative process that you can really control, so to speak? .

Yes. It's a good question, Mark. When -- when I talk about our targeted litigation strategies, it's internal. We're using analytics to determine the best course of action -- and those analytics are based on individual claim back. So we have a multi-disciplined team that we've developed internally that's focused solely on managing the CT exposure.

We've established some really aggressive targets to reduce the defense and cost containment portion of the claim to also reduce it possible the litigation because CT claims are more highly litigated than other claims. In fact, about 90% of them are litigated. And then also just to focus on the average cost per claim and bringing that down, if possible. We've identified and we've developed several defense tactics that are targeting specific firms that represent numerous hundreds and hundreds of CT claims, thousands across the industry that have no medical associated with them.

And then as I've said in the past, we're taking a leadership role in pursuing some legislative reform, working with different industry groups and so forth to really present some meaningful language to legislative committees that would bring California's CT legislation in line with other states across the country. So we really are sort of trying to attack this from a lot of different angles when you talk about the claim perspective. But as I said in my prepared remarks, we also want the industry to know that we're committed to paying cumulative trauma claims. There are legitimate cumulative trauma claims out there, and it's something that's very important to us to provide the best service to injured workers. .

Yes. the trend in terms of those claims, I think you talked about how you're taking underwriting pricing actions and that has helped the improvement or help for the 2025 accident year. How do we think about, say, going into 2026 and loss picks -- do you feel like you have enough of a handle on the trend that the trend is predictable at this point? I'm kind of mixing different ideas in this question. So I apologize for that, but I'm just trying to figure out whether -- is the trend stable enough? Have you taken enough actions, pricing, underwriting that you can get to a more predictable loss pick or what kind of loss pick can we expect -- is it going to be 72% from here? So like I said, I'm growing a little bit, but pick and choose it on those topics and would be -- would appreciate your feedback. .

Sure. So -- on the pricing side, we have -- we took action earlier than the California filing that went in was effective 1 million -- so we were ahead of the curve on that, and then we've taken a couple of targeted actions after that. We feel like we're in a nice position on the pricing side and have taken more rate than what the WCIRB filed with the bureau. So that's what we saw on the pricing side. On the underwriting side, we have more underwriters looking at risks that are flowing through as submissions and putting eyes on these risks to determine whether they have a higher exposure to CT claims. .

So we've lowered -- we typically -- we have a straight through quote processing system where our underwriters really only touch the more complex risk -- but we've lowered that threshold for California. So we have more eyes on it from an underwriter standpoint. From a trend perspective, I feel like -- the trend is settling. It is very difficult to know what will happen in the future. I don't expect our accident year pick to be much changed from what it is this year until we see these results flow through -- so when I say these results, I mean, the pricing actions, the underwriting actions, any changes that are made within California and so forth. We're going to continue to be conservative and hopefully be ahead of that trend. .

On the -- Mike, on the buyback, what is the interest rate that you expect on the borrowings, I think, of the Federal Home Loan line that you've got. What is the rate on it.

Yes, Mark, so that's why it's very exciting. The current rate is 3.7%. .

Okay. And does that flow .

No, that number is fixed. .

Okay. And then the -- how much capital do you have at the holding company at this point? .

Very several times, as you can imagine, we manage the capital effectively through the dividends from our insurance companies, but we have a sufficient level of capital at the holding company. We don't publish that number, but it's plenty to cover a decent portion of our expenses, including repurchases and dividends at the holding company. .

Okay. The -- how much is available under the share repurchases, $250 million in total? How much of that has been used on? .

So to date, on the existing plan, we used $65 million. .

Was that $65 million. 65. Okay. And then what would you anticipate in terms of the pacing on the 125 was the million this quarter? Is that a preview of things to come until you use the 125? Or how would you characterize it? .

I think I mentioned on the previous calls, we really look at the repurchases on a return on investment basis. And so we're going to be very disciplined -- and when -- if the stock goes down below and creates further opportunity will increase that activity. And so we will -- we're very focused on affecting this 125 recapitalization plan. So it's going to be market dependent, but we're disciplined and intend to affect it as soon as we can. .

Yes. And then 1 final question. The top line growth here kind of steady some puts and takes, obviously, some expansion in excess, but the tighter underwriting your rate increases. Is this kind of steady state for top line dynamics. I mean would we assume maybe flat to up slightly? Would that be consistent with where you were at in terms of taking these actions to help control the loss trajectory here? .

Yes. I mean I think you categorized it well by saying puts and takes. There are areas in which we are wanting to grow. And then there are areas in which we're perfectly fine turning down. business, and that varies by state. It varies by policy size. We are having a lot of success on the smaller policy side, and that's why size is, and that's why you're continuing to see the growth and policy count, but it's putting pressure on the top line because of the average policy size that we're writing is lower. So I would not expect tremendous growth over the next 12 months because, as I said in my prepared remarks, underwriting margin is what we are focusing on right now. .

Okay. Very good -- thank you. .

And the next question will be coming from the line of Karol Chimiel of Citizens

I've got 2 questions. The first 1 is really just regarding the cumulative trauma claims, statute of limitations and date of injury that is kind of part of the legal issue here. Can you comment on that? .

Yes. So the real issue underlying CT, and this is my opinion, in California is the fact that an injury worker can file a cumulative trauma claim post termination -- and the claim itself can stretch over multiple years and multiple carriers can be involved in that claim. So it's -- what we're seeing is a lot of these claims are being filed post termination now. They have much more indemnity on them than they used to. It used to be more of a medical phenomenon. -- that's the real issue in terms of what's going on with California CT. .

And then just a follow-up question in regard to the buybacks. I'm just looking at the model. And I'm just curious, will your investment leverage technically go up and maintain the investment balance as you buy back the shares? .

Well, because our investment balance should not be impacted, right? Because we're going to fund the repurchases through debt. So the investment leverage will stay -- so investments compared to equity will increase. So is that what you're asking, yes, the investment leverage will increase. .

[Operator Instructions] Our next question will be coming from the line of Bob Farman of Janney Montgomery Scott.

So what happens with the -- are you going to have a traditional fourth quarter reserve review as well, like internal and external? Or is this third quarter review kind of taking your annual look fee? .

Yes. And that's a good question, Bob. We are going to have a full fourth quarter review and get back on track. Third quarter was off cycle. We usually just look at actual versus expected then, but we wanted to definitively come out with something and look at it with a fresh eye -- and -- but we'll get back on track in fourth quarter, we'll have an internal review. It will also -- because this is the year that we've hired an external actuarial firm -- to review our reserves, they will also do a fourth quarter review, but we do not expect an impact from that fourth quarter review. .

Right. Is the external firm that's looking at the fourth quarter, are they the same 1 that looked at them at midyear?

Yes.

Okay. And was there -- I know you've had to discuss this thing, these types of things with AM Best. Like what kind of commentary have you gotten from rating agencies in regards to the the whole situation with the chemo trauma in California? .

Yes. Thanks, Bob. So we're very active and engaged with our rating agency partners and we've discussed Keenposted as far as the process, what -- from an operating perspective as well as a capital perspective. and they all continue to be quite supportive of where we're at, the actions we're taking, both from an operation perspective as well as from a capital perspective. .

Okay. All right. Good. Have you seen -- any change in medical cost trends? I know you probably asked every quarter about it, but what's going on with medical costs. I know we've been talking a lot about claim frequency, but how about the severity side. .

Yes. The severity side, what we're seeing, our overall claims severity values have generally held steady in the most recent years. there -- they continue to be, generally speaking, below pre-pandemic levels, and that's both indemnity and medical severity. -- in that number that are in that severity that I'm speaking to, but it's driven by lower medical severity. I've talked about in several calls that we monitor our own prescription drug costs -- we've seen slight increases in drug costs versus those that were in place pre-pandemic, but nothing that is really alarming on the pharmaceuticals.

So severity is not something that we are currently concerned about -- we did have some large losses in 2024. Those are more than adequately reserved for. But we're not seeing anything that is concerning to us right now.

Okay. So if in a recessionary environment, with the increase in unemployment or terminations and stuff, I understand they can file claims in California. But you see some similar issues in other states if unemployment starts to become -- it starts to go up? .

It's something that has been researched in the past, and there have been studies that show that, that could and has happened. The most prominent 1 was the study research that was done after the great Recession. Of course, that was a huge impact to the economy and unemployment and so forth. So I don't -- I wouldn't expect anything like that. Recessions are just very specific in terms of the industries and jobs that they tend to impact. So it's very difficult to answer your question other than generally. But it could - It just depends on the type of recession. .

Yes. I didn't expect an exact detailed answer for you on that one. It was just more of a broad question. So I -- I'm sorry to kind of monopolize the questions here. But I guess 1 last thing I want. Just can you talk a little bit more about the excess workers' comp product what size market is that? Who competes in that market and where you can add value? .

Sure. So -- the -- our entry into excess workers' compensation is part of our diversification effort. And as I said earlier, it's our first new product expansion. We've been researching new products for about a year now in excess was the right place to start for us. Given our expertise in workers' compensation, it's just a natural extension of what we do now and leverages the talent and the systems capabilities and so forth that we already have in place. So we're spinning this up in a very efficient way by hiring a team of underwriters and then we're utilizing a genetic AI to build out the underwriting platform and the CRM platform.

We don't -- we're going to go slow here. We don't expect -- we're not expecting something huge in 2026, because we're going to learn as we go -- but we do expect to get submissions in the door in early second quarter and binding by July 1, 2026. And -- there aren't a lot of excess workers' compensation providers that are large and have an extensive book of business. So we feel like this is a good place for us to enter. It's a good time in the market for us to enter it, and we're really excited about it.

And you're saying your producers are basically saying this would be a nice add-on just because Place any type of that type of risk to others. Is that sales .

Yes. We feel like there's just an opportunity for another entrant in the market and that we can provide some services that potentially don't exist right now. And we can absolutely leverage our extensive agency plant that we have in place. So there's not a lot of friction there for us to enter the market. .

.

And at this time, I'm not seeing any more questions in the queue. I would like to go ahead and turn the call back over to Kathy Antonello, please go ahead. .

Okay. Thank you, Lisa. Thank you all for joining us this morning, and I look forward to meeting with you again in February. Have a good weekend. .

This concludes today's program. You may all disconnect.

Good day, and thank you for standing by. Welcome to the Second Quarter 2025 Employers Holdings, Inc. Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Lori Brown, Chief Legal Officer. Please go ahead.

Thank you, Marvin. Good morning, and welcome, everyone, to the Second Quarter 2025 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. 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 the SEC's Regulation FD. Such disclosures will be included in the Investors section of our website. Accordingly, investors should monitor that portion of our website in addition to following our 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 measures. Reconciliations of these non-GAAP measures 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.

And now I'll turn the call over to Kathy Antonello, our Chief Executive Officer.

Thank you, Lori. Good morning, everyone, and welcome to our second quarter 2025 earnings call. Joining me today is Mike Pedraja, our Chief Financial Officer. During today's call, I'll begin by providing highlights of our second quarter 2025 financial results and then hand it over to Mike for more details on our financials. Prior to Q&A, I'll come back to you with some additional thoughts.

Our second quarter gross written premium decreased by 2.2% compared to 2024 due to a decrease in new business written premium within the middle market. Our focus on profitability over growth led to targeted underwriting actions and improved risk selection, which impacted our ability and desire to grow at the same pace in certain classes and jurisdictions. We are pleased that we continue to grow with our small commercial clients that value our investments in automation and ease of use.

Net premiums earned for the quarter increased 5.6%, primarily due to strong increases in net written premium in 2024. We ended the period with a record number of policies in force with a year-over-year growth rate of 4.6%. We earned $27.1 million of net investment income during the quarter, which was slightly higher than the second quarter of 2024. Our current accident year loss and LAE ratio on voluntary business was 69% versus the 66% we recorded in the first quarter of 2025. This increase was a prudent response to the rapid rise in cumulative trauma claims in California in the most recent accident years and the level of uncertainty around this new trend.

In addition, while we did not recognize any prior year loss reserve development for voluntary business this quarter, we did reallocate significant favorable loss development from accident years 2020 and prior to accident years 2022 through 2024 to reflect the increased frequency of cumulative trauma claims in California. We intend to perform a full actuarial study in the third quarter. I am pleased with the reductions we achieved in our commission expense ratio, which was 13.2% this quarter, down from 13.9% a year ago.

We also achieved reductions in our underwriting expense ratio, which was 21.7% this quarter compared to 22.4% a year ago. We continue to find ways to reduce expenses by automating processes, delivering customer self-service capabilities and utilizing artificial intelligence.

With that, Mike will now provide a deeper dive into our financial results, and then I'll return to provide my closing remarks. Mike?

Thanks, Kathy. Gross premiums written were $203.3 million compared to $207.9 million for the prior quarter, a decrease of 2.2%. As Kathy previously mentioned, declines in middle market new business offset new business premium growth within our smaller customer segment. Net premiums earned were $198.3 million compared to $187.8 million for the prior quarter, an increase of 5.6%.

During the period, our loss and loss adjustment expenses were $104.1 million versus $108.8 million a year ago. As Kathy discussed, we increased our current accident year loss and loss adjustment expense estimates in response to the rapid rise in cumulative trauma claims in California we are experiencing. As a reminder, in our first quarter 2025 reported loss and loss adjustment expenses were based on a loss and LAE ratio of 66%. Accordingly, the current quarter loss and loss adjustment expenses includes a first quarter catch-up adjustment of $5.5 million resulting in a 70.7% loss in LAE ratio.

Commission expense of $26.1 million was essentially flat compared to a year ago, and our commission expense ratio was 13.2% versus 13.9% for the prior period. The reduction in the commission expense ratio was primarily due to the proportional increase in renewal premiums, which carry lower commission rates as well as lower agency incentive commissions.

Underwriting expenses were $43.1 million for the quarter versus $42.2 million for the prior year. Our underwriting expense ratios for the corresponding quarters were 21.7% and 22.4%, respectively. The underwriting expense increase was primarily related to a reduced internal allocation of underwriting expenses to loss adjustment expenses resulting from a refinement in our internal assumptions. Excluding this allocation, underwriting expenses decreased by $3 million, primarily driven by lower compensation-related expenses and depreciation and amortization costs, offset by higher bad debt expense.

Increased net premiums earned contributed to the lower underwriting expense ratio. Net investment income was $27.1 million for the quarter compared to $26.9 million for the prior year. The slight increase was primarily due to higher yields on our fixed maturity investments. The total investment return for the second quarter was $57.5 million compared to $26.5 million for the prior year.

The current quarter net income results included after-tax realized and unrealized gains from our investments in equity securities and other invested assets of $14.8 million and $1.8 million, respectively. Our stockholders' equity at June 30, 2025, reflects $7.4 million of net after-tax unrealized gains generated from our fixed maturity investments during the current quarter. Our fixed maturity investments currently have a modified duration of 4.3 and an average credit quality of A+.

Our weighted average book yield was 4.5% at quarter end, which is consistent with a year ago. Our adjusted net income, which excludes net realized and unrealized investment gains and losses and the benefit of our LPT deferred gain amortization totaled $11.5 million, a 58.8% decrease compared to prior year's adjusted net income of $27.9 million.

During the second quarter, we repurchased $23 million of our common stock at an average price of $48.08 per share and thus far, have repurchased an additional 229,365 shares of our common stock in the third quarter at an average price of $46.44 per share.

With that, I'll turn it back to Kathy.

Thank you, Mike. Yesterday, our Board of Directors declared a third quarter 2025 quarterly dividend of $0.32 per share. The dividend is payable on August 27 to stockholders of record on August 13. We are confident in employers' financial strength and financial prospects, and we'll continue to manage our capital strategically.

Consistent with my first quarter message, we also continue to identify and implement refinements to our underwriting and pricing approach that we believe will result in profitable growth in new and renewal business. We are pleased that the California Insurance Commissioner, Commissioner Lara, recognized the increased frequency of California cumulative trauma claims through his approval of increased rates and are also encouraged by his call for legislative changes to combat this growing negative trend.

We have not experienced direct impacts from the ongoing tariff uncertainties, but we'll continue to closely monitor the cost of prescription drugs and medical services for potential changes. If any necessary headwinds emerge, we are cautiously optimistic that our deep relationships with our customers and agents, our product and service value proposition and our geographic and industry segment diversification will allow us to maintain our strong customer base and weather the storm.

I am also pleased with the team's continued focus on expense management and our prudent capital management. We continue to improve our key operating metrics, which is a clear indication of our success. After considering dividends declared, our book value per share, including the deferred gain, increased 12.8% to $49.44, and our adjusted book value per share increased by 8.2% to $51.68 over the last 12 months.

And finally, we returned $31.4 million to our stockholders this quarter through a combination of regular quarterly dividends and share repurchases at an average price that was highly accretive to our adjusted book value per share.

And with that, Marvin, we will now take questions.

[Operator Instructions] Our first question comes from the line of Mark Hughes of Truist Securities.

You clearly talked about this issue last quarter and it impacted your current accident year loss picks. I wonder if you could kind of just reflect on how this has emerged the last few quarters, couple of years and what you saw this quarter that triggered more significant action.

Sure. So let me just back up and kind of give you the backdrop. As you are aware, though, California continues to be about 45% of our book. And our results in California across the last few decades have consistently been more favorable than the industry. And we believe that, that will continue to be true. But overall industry results are worsening in California.

So we talked about the increase that Commissioner Lara approved. It was 8.7%. That was effective 9/1. And the drivers of that increase included things like medical loss development, increase in medical costs in 2024 and an increase in frequency, particularly in CT claims.

Now for our book of business, we did not see overall frequency in California begin to increase in total until late 2024. So when I say that, I mean across all accident years. So for example, for accident year 2023, the increase in frequency didn't occur until late 2024. And that's when we started taking action on the current accident year. And then as we discussed in the first quarter and then again this quarter, we've had significant favorable development in older accident years that we've pushed forward to the more recent accident years to reflect that.

The 2023 frequency, am I right in thinking that this is -- it really is just a function of California, the ability to report claims post employment -- and -- yes. No, I was just -- I was going to say why -- is it because the attorneys are just going that far back and advertising, letting people know that, hey, even if you separated in 2023, there is still opportunity. Is this -- can you correlate that with something that's going on in the broader environment? It seems unusual that the frequency would have been increasing across the state. You wouldn't have seen it. And then now you're starting to see it, and it's on older accident years as well. So clearly, these are events that are seemingly well in the past.

Yes. It's a very good question. So California is in an outlier in terms of the way that they treat cumulative trauma claims. They allow claims to be filed, as you mentioned, post termination. And they're the only state that allows cumulative stress in workers' compensation. So they have a much broader and much more liberal legislative -- the way it's written into law is much broader than any other state. So they're an extreme outlier there.

So we -- this post termination filing of claims does have high attorney involvement. So when the claim comes in the door, there's typically an attorney involved. The other trend that has been cited is the ability for attorneys to bring these cases remote. So this was previously Southern California, primarily Los Angeles area phenomenon. And we're now seeing it spread into the Bay Area and into Sacramento, and that's because they can handle these hearings remotely.

When did they make that change -- the ability to hear remotely?

Sometime during and after -- well, COVID was sort of the starting point for it, right? Because they wanted to enable hearings to keep things moving along to be remote. So COVID was the start of it, and now it's continued.

Yes. Okay. The frequency and severity, I think the -- I understand the severity is not that substantial on these, generally speaking. Can you talk about that and what you've seen over time with severity for these type of claims when they have emerged in your book?

Yes. I would say that's generally true. This is a frequency issue that we're seeing. It is not necessarily a severity issue. Now you can see severe CT claims, particularly legitimate CT claims are oftentimes severe, but there are a lot of nuisance claims that come in too.

But yes, it's really a frequency phenomenon. When we look at our book of business across countrywide, our lost time claim frequencies have continued to trend downward over the last several years. California, again, is the outlier. It's increased in the latest accident year again, and that's all driven by the CT claims. If we take the CT claims out of California and look at non-CT, we continue to see a nice decrease in frequency. And in some ways, that can mask what's going on when you put the 2 together. But when we adjust for wage changes, our overall claim severity values have really held steady in the more recent years, and they're still below pre-pandemic levels. And that's mostly driven by medical severity coming down still.

How confident are you that you've fully reflected the trend in your reserves? I know you alluded to the fact that you don't have quite as much visibility because it's a new phenomenon. But that being said, I think that contributed to your reserve actions in the current accident year increase, how confident are you that you've got this under control?

Well, we have put together over the last 6 months, we've implemented a multipronged approach to manage through this period. And we're confident that this approach is going to be impactful. We've implemented a combination of pricing actions, risk selection actions and claim management strategies. So getting to reserves, the claim management strategies are looking at these CT claims after they come in the door and actively managing those. From a reserving standpoint, it's changing -- it's a rapidly changing environment, and that's why we felt it was important to do another full study in the third quarter. We're very confident that accident year 2025 is in a good spot, and we continue to see really significant redundancies in those older accident years. So I am very confident that our book as a whole is in a good spot.

Yes. How do you see your book comparing to California as a whole, if you look at the state data, are you now seeing claims that are more consistent with the industry as a whole. You're still better than the industry? And then I'll ask this question and kind of a separate question is, do you think it's emerging more aggressively across the industry and across the state? Or was there something about your book that it was somewhat delayed and now you're having the -- having it happen to you, but the state maybe is more -- it's already at a point where this has hit its kind of run rate. Is this -- do you think the state more broadly is going to see an acceleration and you're kind of the early indicator? Or are you the laggard and you're finally kind of catching up with the state?

I don't think we're a lagger. Going to your first question, our book has consistently been better than the industry-wide average in California, and it continues to be significantly better than the industry-wide average. I don't think we're a laggard. I think these claims are typically very late reported.

I think when I look at how they're emerging in some of these older accident years, it's pretty consistent across the accident years, how they're coming in. So the ultimate way to solve this problem is for legislative reform. Commissioner Lara did write a letter to Governor Newsom asking him to work towards reform. And we are actively involved in working towards that also.

And I'm fairly confident that, that is going to occur. It's been a while since I've seen something kind of come to light and the state jump on it this quickly. And in his letter to the governor, he highlighted the impact on business in California when he was urging them to take action. So I think that's fairly unprecedented, and I'm very, very hopeful that they're going to move on this quickly. But having said that, we're not waiting on any legislative reform to occur. And we've got a well thought through plan internally to combat this.

Yes, yes. I'm going to be super rude and ask just 2 more, if that's all right. The magnitude of the reserve shift, I think you used the word significant. Are you able to size that or give -- throw any other adjectives at it, what that might have been between the older redundant accident years and then this -- the more recent years where you're seeing this phenomenon?

Yes. We were -- the older accident years this quarter, we had over $50 million of favorable development. And to be prudent and cautious instead of taking any action, we moved those reserves to the more recent accident years. So it was -- it's a significant number, and I have no reason to believe that, that will not continue because it has emerged like that for a long time now.

Very good. And then from a capital management perspective, could you talk about what you see as the kind of excess capital on the balance sheet? How much more conservative might you be in light of this trend that's emerging? And assuming you'd get the opportunity, I'm just looking at the market, it's not that volatile in your experience, it doesn't seem that volatile under the circumstances. But would you push the capital management in order to take advantage of the situation here?

Thanks, Mark. It's Mike. As Kathy discussed and has been well publicized by A.M. Best, we are ranked at the highest level of excess capital, and we're very proud of that dynamic. And we think it gives us a lot of flexibility. Our prioritization for excess capital is to support our organic and inorganic growth investments in technology. But assuming that we have those covered, thinking about capital management will be something to consider, especially when the return on investment significantly exceeds our cost of capital. So we'll be driven by an investment -- return on investment criteria and be very disciplined by it, but we see the opportunity that's out there and are considering all options.

Our next question comes from the line of Matt Carletti of Citizens Capital Markets.

Mark made it easy for me. So he covered a few that I was going to ask, so I'll make it really short, and it's just kind of the last follow-up I had on the CT claims. As you look across your book, is there anything you note in terms of where you're seeing it more, whether that be by account size or industry exposure, class code, whatever it might be? Is it -- or is it more kind of just -- or geography? I know you mentioned it had been an LA thing and it's moving up north, but just any observations you might have in terms of any nuances like that.

It's a good question. And the answer is other than the spread from a geographic standpoint, we don't see any other trend occurring. It's not within a specific class code or policy size. It's a broad-based trend other than it's the fact that it used to be highly concentrated in LA, and it has now moved into the Bay Area and Sacramento.

Okay. And then I guess one other, just you talked a little bit about deciding to do an additional reserve study in Q3 that you wouldn't normally do. And it sounds like that's just -- it's moving quickly and you want to stay on top of it. Will that reserve study will be kind of different or just be focused on the CT angle of things, would differ from kind of the more typical Q2 or Q4 studies? Or is it just kind of the same approach, but let's do it every 90 days to make sure that we're not missing anything as this develops?

It will be a very similar approach to what we did in Q2. But in Q2, we did start to look at things differently from a cumulative trauma standpoint. So it will be another point for us to reflect on. But generally speaking, yes, our approach to reserving has not changed and won't for the subsequent quarter.

[Operator Instructions] Our next question comes from the line of Bob Farnam of Janney Montgomery Scott.

Unfortunately, I'm going to ask a couple more questions on the cumulative trauma claims, even though Mark and Matt have covered it pretty well. I just wanted to verify a couple of things. So you do -- you say that there are cumulative trauma claims in other states. It's just that they're more narrowly defined and you don't see a change in frequency. Is that accurate?

That's accurate. And the reason the frequency is controlled in other states is because they are defined very narrowly in other states, whereas the opposite is true in California.

Right. Okay. And -- just one more verification. You're not seeing any change in your legacy classes versus your expansion classes. That's still -- it's kind of broadly based on both aspects.

Not at all. This has -- we have not seen anything different in our appetite expansion. If you're speaking narrowly to CT claims, we don't see any difference there. But I will also add that our expansion class codes are behaving favorably. So they're either very similar to or better than our original target class codes from, say, 4 years ago.

Okay. Great. And last question for me, just quickly, just the reserve study, that's internal only, right? You're not getting external actuarial opinions on what's going on?

We do have an external actuarial study that we do from time to time, but that will not be occurring at the end of the third quarter.

Okay. That's more of a fourth quarter thing.

Yes.

I'm showing no further questions at this time. I'll now turn it back to Kathy Antonello for closing remarks.

Okay. Thank you, Marvin, and thank you all for joining us this morning. I look forward to meeting with you again in October.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.