Employers Holdings 2026 Q2 Earnings Call

Please go ahead. Thank you, Bonnie.

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 non-public information and for complying with disclosure obligations under the SEC's Regulation FD. Such disclosures will be included in the investors section of 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 investor section of our website. Now I will turn the call over to Katherine Antonello, our Chief Executive Officer.

Thank you, Jeff. Good morning, everyone, and welcome to our second quarter 2026 earnings call. Joining me today is Mike Pedraja, our Chief Financial Officer. Attracting and retaining high quality executives and directors is always an important priority for us. And we're pleased to welcome Stephanie Bush to our board of directors and Jeff Lisenby, who you just heard from, as our new general counsel. I am confident that both Stephanie and Jeff will make meaningful contributions to our organization. As usual, I will begin by providing highlights of our second quarter 2026 financial results, and then hand it over to Mike for more details on our financials. Before Q&A, I'll come back to you with some additional thoughts. If I had to sum up the second quarter, I'd say it's the quarter where the benefits of our recapitalization became fully visible.

Diluted earnings per share grew 29% year-over-year, and adjusted earnings per share grew 46%, even though net income was essentially flat. The gap between net income and per share growth is the direct compounding benefit of the accretive share repurchases we've executed since undertaking the recapitalization. On the underwriting side, our net premium earned declined 12% year-over-year, while policies in force declined 5%. These amounts reflect the pricing and underwriting actions we've put in place to prioritize profitability over volume. Most of the decreases were directly related to the customer segments and geographies we targeted as part of our plan to concentrate on our core small business segment. We're currently focused on building new sources of growth, and in June, we wrote our first excess workers compensation policy, marking the successful launch of our new product line.

The success of this new product continued in July with over 200 policy submissions and 20 policies bound, producing $4 million in premium. It's a new lever for growth and one that complements our core book. Our second quarter actuarial review came in as expected. As a result, we made no change to loss reserves for accident years 2025 and prior. We also maintained our current accident year loss and LAE ratio, excluding the LPT on voluntary business at 72%, which is consistent with the full year 2025 accident year ratio. Our underwriting expenses declined to $40 million from $43 million a year ago, driven by our continued focus on innovation and a reduction in variable expenses.

Net investment income was $27 million, up 1% year-over-year, aided by a 40 basis point increase in our book yields, which was a result of the investment rebalancing we executed last year. We are laser focused on expanding our book value per share. With dividends, our book value per share, including the deferred gain, grew 9% year-over-year to $52.58. With that, Mike will now provide a deeper dive into our second quarter financial results, and then I'll return to provide my closing remarks.

Mike? Thank you, Cathy. Gross premiums written were $163 million compared to $203 million for the prior year quarter, a decrease of 20%, due primarily to a decrease in new and renewal business writings.

These decreases were partially offset by an increase in our ending final audit premium accrual and a $2.5 million premium restitution from a former policyholder. Our losses in LAE were at $122 million versus $140 million a year ago. The current quarter did not include any prior period losses or development on our voluntary business, and the current accident year loss in LAE ratio, 72%, is consistent with the full year 2025 accident year ratio. The $2.5 million premium restitution reduced our second quarter combined ratio by approximately 1.5 percentage points.

Commission expense was $22 million for the quarter versus $26 million for the prior year, driven by lower agency incentive accruals and a lower proportion of new business premium, which carries a higher commission rate. Underwriting expenses were $40 million for the quarter versus $43 million for the prior year, a decrease of 8%. The improvement in underwriting expenses for the second quarter was due primarily to our continued expense management efforts, including reduced personal costs, policyholder dividends, and bad debt expense. Our second quarter net investment income of $27 million was essentially flat year-over-year. Our fixed maturities maintain a modified duration of 4.5 with a strong average credit quality of A-plus. Aided by an investment rebalancing that Cathy mentioned, our weighted average book yield was 4.9% at quarter end, compared to 4.5% for the prior year, a 40 basis point improvement.

Our adjusted net income, which excludes net realized and unrealized investment gains and losses and the benefit of our LPT deferred gain amortization, was $13 million for the quarter, compared to $12 million last year. We remain committed to being good stewards of our shareholders' capital. During the second quarter, we repurchased 651,752 shares of our common stock at an average price of $42.43 per share, or $28 million. The average repurchase price represented a 17% discount to our beginning book value per share, including the deferred gain, and an 18% discount to our beginning adjusted book value per share. With that, I'll turn the call back to Cathy.

Thank you, Mike. Yesterday, our Board of Directors declared a third quarter 2026 dividend of $0.34 per share, consistent with the 6.25% increase we implemented last quarter. In addition to executing our underwriting strategy, we continue to make progress in our technology initiatives, including a major claims system upgrade, a new customer relationship management system, and the continued rollout of our AI tools. During the quarter, we achieved a 94% AI staff adoption rate and implemented several AI-assisted use cases with meaningful tangible ROIs. As the guaranteed cost workers' compensation market softened, our focus turned to building our excess product. We are now turning our attention to rounding out our workers' compensation offerings with other loss-sensitive products, including large deductible. We also see opportunities to leverage our prior success and expand our appetite further.

We are confident these new offerings will diversify our book, provide optionality during market cycles, and increase new business. We step into the second half of 2026 with genuine momentum at our backs. Our new business pipeline is accelerating, our renewal book continues to perform as designed, and our underwriting discipline remains solid. The California Insurance Commissioner's approval of a 6.6% advisory pure premium rate increase, effective September 1st, provides a significant opportunity for improved results in our largest market. Employers remains well-capitalized, well-positioned, and firmly focused on our North Star, which is delivering profitable, sustainable growth for our shareholders. With that, Bonnie, we will now take questions.