Employers Q4 2025 Earnings Call - California CT claims force underwriting tightening, launching excess workers' comp

Matt, Operator/Moderator, Employers: 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 of 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 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 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 Kathy Antonello, our Chief Executive Officer.

Kathy Antonello, Chief Executive Officer, Employers: 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 two 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 a 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 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?

Mike Pedraja, Chief Financial Officer, Employers: 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 and 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 non-recurring 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 first through February eighteenth 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 Employers’ stock is meaningfully undervalued, and executing share repurchases at these price levels produces a significant return on investment and generates significant value for our continuing shareholders. With that, I’ll turn the call back to Cathy.

Kathy Antonello, Chief Executive Officer, Employers: 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 Employers’ financial strength and financial prospects, and will 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. With that, operator, we will now take questions.

Operator: Thank you. To ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from Mark Hughes of Truist. Your line is open.

Mark Hughes, Analyst, Truist: Yeah, thank you. Good morning.

Kathy Antonello, Chief Executive Officer, Employers: Good morning, Mark.

Mark Hughes, Analyst, Truist: Kathy, anything about the trajectory of CT claims? 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? Has it, is it on a relatively even keel?

Kathy Antonello, Chief Executive Officer, Employers: Yeah, that’s a great question, Mark. We are seeing throughout 2025 that the acceleration of the frequency that we saw sort of in early 2025 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, you know, CT claims, as a percentage of overall claims, is still quite elevated relative to what we’ve seen in the past. But, you know, what we are seeing now, I’m not ready to claim victory yet, is that the acceleration of the frequency has flattened.

Mark Hughes, Analyst, Truist: Yeah. 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 but you, you’re still being cautious about it.

Kathy Antonello, Chief Executive Officer, Employers: Yeah. I mean, when I talk about a hardening market, I think it’s specific mostly to California, where, you know, the Bureau took a rate increase. We’re seeing, you know, 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. You know, 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’ve decided we’re just not going to play in some of the areas where we feel like pricing margins have become too thin. You know, 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.

Mark Hughes, Analyst, Truist: How is that California versus non-California?

Kathy Antonello, Chief Executive Officer, Employers: 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.

Mark Hughes, Analyst, Truist: Yeah. What’s your view on buybacks for 2026?

Kathy Antonello, Chief Executive Officer, Employers: Yeah, we still have quite a bit left in our share repurchase authority that, you know, 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, you know, absent some change, but we’re trying to be very opportunistic in terms of when we buy our shares back.

Mark Hughes, Analyst, Truist: Then, your expense ratio, if top line is down in 2026, can you still get improvement in the expense ratio?

Kathy Antonello, Chief Executive Officer, Employers: We are hoping to still get improvement. As I mentioned, we have a lot of AI initiatives that are underway. We put an AI roadmap in place in 2025 and are setting the stage to get all of our data into Databricks. We, you know, 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 Anthropic’s Claude 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 or 50 identified use cases. But I would say our latest achievement 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 four 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 gonna provide better continuity of care when an injured worker’s 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 gonna get more expense savings.

Mark Hughes, Analyst, Truist: Very good. Thank you.

Kathy Antonello, Chief Executive Officer, Employers: Thanks, Mark.

Operator: Thank you. Our next question comes from Tarun Kamal at Citizens. Your line is open.

Tarun Kamal, Analyst, Citizens: Yes, thank you. Hi, good morning. I got two questions.

Kathy Antonello, Chief Executive Officer, Employers: Hi, Tarun.

Tarun Kamal, Analyst, Citizens: Hey. Our 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 non-renewals? Is that right?

Kathy Antonello, Chief Executive Officer, Employers: 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, you know, some of the rate increases that we’ve had, but, you know, we have been, over the past four or five 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.

Tarun Kamal, Analyst, Citizens: Excellent. Thank you. And just to 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?

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

Tarun Kamal, Analyst, Citizens: Excellent. Thank you so much.

Kathy Antonello, Chief Executive Officer, Employers: Mm-hmm.

Operator: Thank you. Our next question comes from Bob Farnham of Green Capital. Your line is open.

Bob Farnham, Analyst, Green Capital: Hey there, and good morning.

Kathy Antonello, Chief Executive Officer, Employers: Good morning, Bob.

Bob Farnham, Analyst, Green Capital: A couple more questions on the excess workers’ comp. Can you still hear me?

Kathy Antonello, Chief Executive Officer, Employers: Yes.

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

Kathy Antonello, Chief Executive Officer, Employers: ... Yeah, 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 to ingest all of the data when we get a submission, and to just process, you know, the loss runs that can go back 10, 15 years on excess work comp. You know, 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, so 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 you know put us ahead of the pack.

Bob Farnham, Analyst, Green Capital: Okay. Obviously, you’ve done a lot of research on this. So what type of performance does this product perform, I should say? Is that how... So in terms of Combined Ratio, and is there a difference between the Expense Ratio component and the Loss Ratio? In other words, is it more of a higher Expense Ratio, lower Loss Ratio type product? And just kinda just trying to-

Kathy Antonello, Chief Executive Officer, Employers: Mm-hmm.

Bob Farnham, Analyst, Green Capital: Get a feel for going forward, like, not, not necessarily, you know, in 2026, but when this gets up to full speed, what, what type of impact that might have relative to your traditional book?

Kathy Antonello, Chief Executive Officer, Employers: Yeah. I, I mean, I think relative to the Guaranteed Cost business that we’ve written forever, 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, 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 this space. And then the Loss Ratio is just typically less than what you would see in the Guaranteed Cost space.

Bob Farnham, Analyst, Green Capital: Okay. And it’s still driven by, you know, state loss costs and, you know, the same way that the primary workers’ comp system is? Is it still priced kind of the same way?

Kathy Antonello, Chief Executive Officer, Employers: The pricing is a little bit different. Yeah, the underlying the pricing, you still start with the state loss cost like you do with Guaranteed Cost. But because the Self-Insured Retention can be, you know, anywhere from, you know, $500,000-$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.

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

Kathy Antonello, Chief Executive Officer, Employers: Yeah, it’s a good question. We don’t give guidance, as-

Bob Farnham, Analyst, Green Capital: Yeah

Kathy Antonello, Chief Executive Officer, Employers: ... as you know, but, you know, we would, we would love to see this, you know, be 10% of our overall written premium over the next, you know, 4-7 years, say. And I know I’m being very broad in my projections there.

Bob Farnham, Analyst, Green Capital: I expect nothing but broad right now. Yeah.

Kathy Antonello, Chief Executive Officer, Employers: So yeah, that’s kind of what we’re hoping for, but we’ll obviously keep everyone apprised of our progress there.

Bob Farnham, Analyst, Green Capital: All righty. That’s it. That’s it for me. Thanks.

Kathy Antonello, Chief Executive Officer, Employers: Thanks, Bob.

Operator: Thank you. I show no further questions at this time. I’d like to turn it back to Kathy Antonello for closing remarks.

Kathy Antonello, Chief Executive Officer, Employers: Okay. Thank you, Dee Dee, and thank you all for joining us this morning. We very much look forward to meeting with you again in April.

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