Good day, and thank you for standing by. Welcome to the Q4 2021 Employers Holdings, Inc. Earnings Conference Call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during that session, you will need to press star one on your telephone. Please be advised that today's conference is being recorded, and if you require any assistance during the call, please press star zero. I would now like to hand the conference over to your speaker today, Ms. Lori Brown, General Counsel. Ms. Brown, the floor is yours.
Thank you, Chris. Good morning, and welcome everyone to the Q4 2021 earnings call for Employers. Today's call is being recorded and webcast from the investor section of our website, where a replay will be available following the call. Presenting today on the call will be Kathy Antonello, our Chief Executive Officer, and Mike Paquette, our Chief Financial Officer. Statements made during this conference call that are not based on historical facts are considered forward-looking statements. These statements are made in reliance on the safe harbor provision of the Private Securities Litigation Reform Act of 1995. Although we believe the expectations expressed in our forward-looking statements are reasonable, risks and uncertainties could cause actual results to be materially different from our expectations, including the risks set forth in our filings with the Securities and Exchange Commission.
All remarks made during the call are current only at the time of the call and will not be updated to reflect subsequent developments. The company also uses its website as a means of disclosing material non-public information and for complying with disclosure obligations under SEC's Regulation FD. Such disclosures will be included in the investor section of the company's website. Accordingly, investors should monitor that portion of the company's website in addition to following the company's press releases, SEC filings, public conference calls, and webcasts. In our earnings press release and in our remarks or responses to questions, we may use non-GAAP financial metrics. Reconciliations of these non-GAAP metrics to our GAAP results are included in our financial supplement as an attachment to our earnings press release, our investor presentation, and any other materials available in the investor section on our website.
Now I will turn the call over to Kathy.
Thank you, Lori, and thanks to everyone for joining us today. On today's call, Mike and I will outline our financial results for the Q4 of 2021 and discuss our observations of the current workers' compensation market. 2021 was a very successful year for Employers, and I want to take this opportunity to acknowledge and thank our employees and business partners who have continued to deliver through difficult and rapidly changing times. It is their hard work and persistence that has gotten us to this point and allowed us to emerge stronger and more resilient. As I mentioned at the beginning of the year, as the new CEO, my primary goal for the company in 2021 was to fully capitalize on the upcoming labor market improvement while continuing to maintain underwriting discipline and actively manage our expenses.
I am happy to report that we achieved that goal. In terms of capitalizing on improving conditions, our gross written premiums in 2021 were up 2% versus those of a year ago. While pandemic-related shutdowns negatively impacted our premium writings during the H1 of the year, we turned a corner during the H2 of 2021, and our gross written premiums were up 15% year over year. This strong rebound primarily resulted from improved labor market conditions and our appetite expansion into new markets still within our established low hazard groups. Those included landscaping, residential, janitorial, and several artisan contracting classes. We ended the year providing coverage to a record number of in-force policies. The significant growth in policy count we experienced positions us well for premium growth as wages rise and employment levels improve.
These dual forces are expected to bring further improvement to our top line. In support of this expectation, we remain committed to providing a seamless customer experience for our independent and digital agents. Throughout the year, we continued our underwriting discipline and observed consistent declines in frequency for lost time claims. As a result, we maintained our current accident year loss in LAE ratio on voluntary business at 63.5%, down from 64.3% for all of 2020. We also reduced our loss reserves for prior accident years by $24 million this quarter, which related to nearly every accident year prior to 2018. In addition, I'm pleased to report that our commitment to actively managing our expenses resulted in a 10% year-over-year reduction in Q4 expenses.
This meaningful decrease was primarily a result of targeted fixed expense savings, employee reductions and departures, and a reduction in assessments. Finally, as a result of the growth in written premium and reduction in expenses that we have achieved in recent quarters, we began 2022 with a significantly lower expense ratio. With that, Mike will now provide a further discussion of our financial results, and then I will return to provide my closing remarks. Mike?
Thank you, Kathy. During the Q4, we delivered a 9.5% annualized return on adjusted equity and a combined ratio of 82.4% within our largest operating segment, Employers. For the quarter, our net premiums earned were $156 million, versus $152 million a year ago. This marked the second consecutive quarter in which our earned premium increased year-over-year. Our strong premium writings during the H2 of the year were due to appetite expansion efforts, continued strong new business writings, particularly in California, and further audit premium recognition. Our losses and loss adjustment expenses were $71 million versus $48 million a year ago. The increase was primarily the result of less loss reserve development recognized during the current period.
During the Q4 of 2021, we reduced our prior year loss reserves by $24 million, while during the Q4 of 2020, we reduced our current and prior year loss reserves by $46 million. Commission expenses were $21 million versus $19 million a year ago. The increase was the result of increased commissions on new business writings and a greater amount of earned premium. Underwriting and general administrative expenses were $39 million versus $43 million a year ago. The decrease resulted from targeted expense savings, employee reductions and departures, which reduced our fixed expenses such as compensation and professional fees, as well as a reduction in assessments.
From a reporting segment perspective, our Employers segment had underwriting income of $28 million for the quarter versus $45 million a year ago, and its combined ratios were 82.4% and 70.2% respectively. Our Cerity segment had an underwriting loss of $3.2 million for the quarter, down from an underwriting loss of $4.6 million a year ago. We remain very enthusiastic about Cerity's premium writings, which have consistently increased over the past several months and also into 2022 to date. Turning to investments, our net investment income was $18 million for the quarter, consistent with that of the Q4 of last year, and our average book yield was 3% at year-end.
Also at year-end, our fixed maturities had a duration of 3.4 and an average credit quality of A+, and our equity securities and other investments represented 14% of our total investment portfolio. Our net income this quarter was favorably impacted by $25 million of net after-tax unrealized gains from equity securities and other investments, which are reflected on our income statement. Our stockholders' equity and book value per share this quarter were each unfavorably impacted by $22 million of after-tax unrealized losses from fixed maturities securities, which are reflected on our balance sheet. During the quarter, we repurchased $8.9 million of our common stock at an average price per share of $39.63.
Since year-end, we've bought a further $3.4 million of stock at an average price of $38.33 per share. Our remaining share repurchase authorization currently stands at $24.5 million. Yesterday, our board of directors declared a Q1 2022 dividend of $0.25 per share, which is payable on March fifteenth to shareholders of record on March first. Now I'll turn it back to Kathy
Thanks, Mike. My primary goal for the company in 2022 is to achieve greater economies of scale by growing the top line for both Employers and Cerity, while maintaining the underwriting and expense discipline we achieved in 2021. Our balance sheet and capital position are very strong and are highly supportive of these key initiatives. As a specialist in small business workers' compensation, we are well-positioned to react to the favorable trends we're seeing and remain confident in our continued success. With that, operator, we will now take questions.
Thank you. As a reminder, to ask a question, you will need to press star one on your telephone. To withdraw your question, please press the pound key. Stand by as we compile the Q&A. Our first question comes from Matt Carletti of JMP. Your line is open.
Hey, thanks. Good morning.
Good morning, Matt.
Kathy, I was-
Hey, good morning. Kathy, I was hoping you might be able to kind of help us better understand the composition of the top-line growth. You know, I know California kind of reopened, you know, kind of latter part of the year, so I assume a bit of that attached to that. But more specifically, like how should we think about that kind of 14%-15%? And what kind of new policies or new business, kind of what is existing customers, you know, adding employees or hours? Are you seeing anything in terms of just straight wage inflation yet? And I'm of course making the assumption that it's not yet pricing. But if it is, you know, please correct me.
Okay. Yeah, sure. You mentioned California. California remains at 45% of our book. While we are seeing growth in California, we're also seeing growth in other states to an extent that we're maintaining you know that balance as California is in our book as in total. You know, I think I have mentioned in the past, we reduced rates in California effective February first. That combination of lower rates and appetite expansion, and as you mentioned, the lower restrictions on business has increased our California submissions, quotes and binds. That led to a pretty significant increase in Q4 California new business premium relative to Q4 of 2020.
As far as, you know, what we're seeing from, you know, other sources of premium growth, we did increase our audit accrual in the Q4. We had increased it to $4.7 million from 0 in the Q3. In the Q4, we brought that up to $12.3 million. That is also some of the growth that you're seeing there. We're continuing to see a favorable shift that I had mentioned in the Q3 earnings call, the shift from audit returns to audit pickups. To give you sort of an indication of how audit trends have changed, for the Q3, we had about $4 million of audit returns, but for the Q4, there was about $1.5 million of audit pickup.
Okay, that's helpful. Great. Just one other question, this one more around kind of the current labor market. I mean, it's you know, it seems to be a tight labor market in a lot of places. What are you seeing or do you have? I guess the question is, are you seeing anything or do you have any concern around you know, your insureds hiring people that are unqualified for a skilled position? Are we at that kind of point of a tight labor market? Are you not seeing that or not concerned about that?
You know, we're not seeing anything as of yet in terms of unskilled, you know, hires increasing or having an impact on our frequency or severity. You know, we really believe that the upward shift in employment levels and wages should impact our policies, where, you know, with our focus in restaurant and hospitality, really to a greater than average extent as the economy continues to improve, just as we were impacted to a greater extent when the economy deteriorated. We feel like we will be seeing that upward shift. You know, the January jobs report was really favorable, and there was a material revision to the November and December job numbers. The signals are that the recovery may have been a little bit steadier in the Q4 than experts had originally believed.
You know, that sort of dovetails with what we're seeing, and what I was just mentioning as far as what we're seeing with audit pickups, as opposed to audit returns. Not seeing anything at this point from an economic standpoint or hiring of unskilled labor that would be impacting our frequency or severity.
Okay, great. Well, thank you for the color and, you know, congrats on a nice end of the year.
Thank you.
Thank you. Our next question comes from Mark Hughes of Truist. Your line is open.
Yeah, thank you. Good morning.
Good morning.
Kathy, could you, I'm not sure whether you touched on the state of competition or if you could elaborate a little bit, kind of what are you seeing in the competitive environment now versus, you know, three, six months ago?
Yeah. You know, from a pricing standpoint, we would continue to characterize the environment as fairly competitive. I mentioned last quarter there's some irrational competitive behavior in the market from a few actors, and that is continuing into the Q4. Again, some of the market surveys are reporting that the Q3 pricing was kind of flat, maybe very low small decreases, like less than 1%. Our average pricing across our renewal book in the Q4 showed an overall rate decrease of about 5% for the three months into December thirty-first.
Okay. I think you mentioned in the release that January was strong. You mentioned that on the call as well. Sounds like a good chunk of your growth in the Q4 came from the audit. How do you think Q1 is shaping up? Maybe I'll ask, you know, how's new business growth looking in January? Is Q1 going to be another double-digit quarter? That's going a little too far, but I'm just trying to see what you might be able to share.
Yeah. We do feel like we had a strong January. We're continuing to see some of the trends that we saw in the Q4 in terms of favorable audit pickups and so forth. The market reopening seems to be you know showing some favorable results from new business written premium.
Okay. What's your sense of, when we think about NCCI loss costs, how do you think those will progress as the year goes forward?
Yeah, it's an interesting question. You know, when we look back over the last 12 months or so, the impact of bureau changes for the industries has been a decrease of about what I was saying we've seen in our pricing, which was about 5%. You know, those filings are reflecting the decrease in frequency and that would be a long history of a decrease in frequency. You know, I have to assume that adjustments are being made for the most recent points where we saw significant decrease in frequency during 2020, and that continued into 2021. It's hard for me to say what the filings are going to look like this year. I'm certain that they will take that into consideration, though.
Yeah. Relative to 2021, the frequency, was that down from 2020, or was that down from 2019 when you say that it was down?
Yeah. When looking at frequency for 2021, we've been comparing our accident year 2021 numbers to accident year 2019 because we wanted to remove any distortions of COVID in 2020. You know, we've been seeing frequency relative to payroll down more than 20% and relative to premium down about 15%. Those numbers are over two years, so they're not annualized. That's a two-year change.
I'm sorry, what were the numbers you just gave again? 15%?
For our book, we've seen frequency to payroll down about 20% over 2 years, and to premium about 15%.
Yeah. Okay.
Those are not annualized, so that's over a two-year change.
Pretty substantial. Severity, I think you up moderately. Can you throw any numbers at the severity?
Yeah. You know, I don't really have any numbers to share. I mean, what I can say is that on the severity side, we're not really seeing anything to suggest severity concerns in our California book. Non-California, we are watching a little bit closer because it's showing some upward movement. At this point, we really don't feel like we have enough information to call it a trend, but rather something that we're just keeping an eye on.
If I'm thinking about it properly, if your frequency to premium is down 15%, I assume that's why you're leaning into the market and getting a good growth. Is that a fair way to look at it?
I'm sorry, can you repeat that?
Yeah. I was thinking if your frequency to premium was down 15% and your severity is moderate, that sounds like a pretty good environment. I'm assuming that is contributing to your more growthy outlook and the growth you've seen lately.
Yes, absolutely. Yep.
Okay. Maybe the competition that you're seeing may be even if it's a little aggressive, may be rational with the frequency. I guess, you know, who knows how frequency will turn out this year. Okay.
Yeah. I mean, I would have to assume at some point frequency will return to normal levels. Those normal levels have been a decrease in frequency for quite some time now.
Yeah. Yeah. Okay. All right. Thank you very much.
Thank you.
Thank you. Again, to ask a question, you'll need to press star one on your telephone. To withdraw your question, please press the pound key. Our next question comes from Bob Farnam of Boenning & Scattergood. Your line is open.
Thanks, good morning. Mike, I know you've been working on lowering expenses for the last couple of years. I'm just curious, you've provided kind of a trajectory going forward, and I'm curious kind of what you expect in 2022 in terms of expenses. I don't know if you're mostly the way through with the expense savings or if there's still more to come.
Bob, we did kind of give you a little bit of guidance last year. I think the guidance was basically that the Q1 of last year was going to be our high water mark, and that turned out to be correct. Second, third, and Q4s were pretty stable. You know, right now we're watching our fixed expenses very carefully, and our goal is to try to maintain or reduce those in light of the additional premium writings that we have. Now, of course, variable expenses are things that we can't reasonably control. Those are premium taxes, assessments, bad debts, and policyholder dividends. As we go into 2022, as Kathy mentioned, we've got a much lower base of fixed expenses. We're going to do our best to maintain that or even reduce it.
what you're going to see in terms of the expense ratio for 2022 is going to be largely dependent on the increase in earned premium, and that's, I think, where you'll see the majority of the decrease for next year or for this year.
Right. Thinking of it in terms of expense ratio, if your fixed expenses are going to be staying consistent and you're growing the top line, then you would think that the expense ratio can still tick down a bit.
Yeah, we're in a position right now where we think we'll start to benefit from economies of scale associated with that increase in earned premium.
Right. Okay. Second question, I know I probably ask you every quarter, but Cerity, you know, still, you know, $3.5 million, $3.3 million of expenses seems flat with the Q3. Are there continued expense savings there, or you kind of got it to the position where you want it to be? I'm just so curious, you know, how far you think it's going to go before you can actually turn a profit there.
Well, we're not going to get into determining when we break even in that regard. That's a complicated exercise, and it's a little early to declare that. In terms of expenses, we are integrating Cerity a bit more into the Employers world for cost savings. That's been a big driver in terms of that reduction in expenses that you're seeing. In terms of what you're going to see for 2022, I think you can expect similar or the same with one exception, and that's going to be advertising. You know, depending on how we do in terms of our satisfaction with our advertising budget for this year, we may very well choose to spend more or less than what we've done in prior years.
If we do spend more and our expenses become higher in 2022 than 2021 for Cerity, we believe that we'll do that discretionarily, and we'll do that only upon seeing value.
Okay. I'm assuming that your advertising thus far has been one of the reasons why you're seeing the growth there.
We specifically went a little heavier with advertising than planned in the H1 of last year, and based on the success that we saw, we kept that going. You know, that amount, which was a significant reduction in terms of Cerity's expenses from 2020 to 2021, did include a higher advertising budget and spend. We're watching that. We've been very successful in January and February to date. Again, what's nice about the advertising, it's discretionary, and we'll only spend it to the extent we see value.
Okay. You mentioned, you know, Cerity's your the platforms of kind of sharing some sort of resources here. Can you just give us an idea of what synergies you are getting between Cerity and Employers and kind of what you expect going forward?
I'm not really going to get into what to expect going forward, but, you know, we are looking at their technology. Their technology is kind of ahead of ours, and we are now in the process of reevaluating our technology in light of what we're seeing there. Things like premium audit and other areas we can do centralized. It's really just taking a look at what we can do as a group as opposed to doing something similar or separately for direct versus agency business. It's really back office and platform related.
Okay, great. Thanks for the answers.
Thank you. I'm seeing no further questions in the queue. I will turn the call back to Kathy Antonello for closing remarks.
Okay. Well, thank you all for joining us this morning, and I look forward to meeting with you again in April.
This concludes today's conference call. Thank you all for participating. You may now disconnect and have a pleasant day.