Good day, ladies and gentlemen, welcome to the Q1 2019 Employers Holdings, Inc. earnings conference call. At this time, all participants are in listen-only mode. Later, we'll conduct the question and answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star then zero on your touchtone telephone. As a reminder, this conference is being recorded. I will now turn the conference over to your host, Ms. Lori Brown. Ma'am, you may begin.
Thank you, Valerie. Good morning, welcome, everyone, to the first quarter 2019 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. With me today on the call are Doug Dirks, our Chief Executive Officer, Mike Paquette, our Chief Financial Officer, and Steve Festa, our Chief Operating Officer. Statements made during this conference call that are not based on historical fact 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 at the time of the call and will not be updated to reflect subsequent developments. In our earnings press release and in our remarks or responses to questions, we may use non-GAAP financial metrics, including those that exclude the impact of the 1999 loss portfolio transfer, or LPT. Reconciliations of these non-GAAP metrics 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. I will turn the call over to Doug.
Thank you, Lori, thank you all for joining us on the call today. We had a strong and very successful first quarter, characterized by a 10.4% annualized return on adjusted equity, a nearly flat top line despite persistent rate-related downward pressure on renewal premium, an active program of stock repurchases, and a well-executed series of initiatives to transform and enhance the digital experience of our customers across all channels, including Cerity, our new direct-to-customer business. During the quarter, we more than doubled our net income and grew our adjusted income by 5.5% and book value per share, including the deferred gain, by 6.6%. We also produced a combined ratio before the impact of the LPT of 91.9%. As previously mentioned, our top line continues to be challenged by declining rates on renewal business, stemming principally from a continuing fall in loss costs across nearly all markets.
We experienced an average renewal rate decline of 11.6%. For the same period a year ago, our average renewal rate declined by 9.5%. Our top line is also feeling the effect of competitive pressures, most notably in our middle market business. As a result of these sustained rate pressures, we increased our first quarter 2019 accident year loss and LAE ratio on our voluntary business by two percentage points to 64.5%. Although this is our current best estimate of the expected loss ratio for 2019, it is based on only one quarter of actual experience and could change either up or down during the remainder of the year. Nevertheless, we continue to find the underlying loss environment for workers' compensation attractive and therefore supportive of continued growth. With that, I'll turn the call over to Mike for further discussion of our financials. Mike?
Thank you, Doug. Our first quarter loss and LAE ratio before the impact of the LPT of 52.1% was 3.4 percentage points lower than a year ago. During the quarter, we recognized $22.2 million of favorable prior period loss reserve development relating primarily to accident years 2014 through 2017. Our first quarter commission expense ratio of 12.6% was 0.8 percentage points lower than a year ago. Our first quarter underwriting and other operating expense ratio of 27.1% was 4.9 percentage points higher than a year ago. Expenses associated with our accelerated development and implementation of new digital technologies and capabilities contributed 3.9 points to this increase. The remaining one-point increase resulted from significantly higher than anticipated recoveries of bad debts a year ago versus those experienced in the current quarter. Net investment income for the quarter was $21.8 million, up 12% from a year ago.
Our pre-tax book yield on the portfolio was 3.4% during the current quarter versus 3.1% a year ago, reflecting an increase in short-term interest rates, as well as a modest shift made to the investment portfolio. At quarter end, our fixed maturities had a duration of 3.9 and an average credit quality of double A minus. Our equity securities represented 8% of the total investment portfolio. During the quarter, we benefited from $68.4 million of pre-tax unrealized investment gains. Our portfolio of fixed maturities increased in value by $47.2 million, which is reflected in our balance sheet, and our equities increased in value by $21.2 million, which is reflected in our income statement. These unrealized investment gains were a primary driver to our 6.6% year-to-date increase in book value per share, including the deferred gain.
During the quarter, we repurchased $27.4 million of our common stock at an average price per share of $40.90. Since quarter end, we've repurchased a further $10.4 million worth of our common stock at an average price of $40.80. Yesterday, the board of directors increased our share repurchase authorization by $50 million, such that our remaining share repurchase authority currently stands at $57.5 million. Now I'll turn the call over to Steve.
Thank you, Mike, and good morning. Net written premiums for the quarter of $209 million were down $1.4 million, or 0.7%, from the first quarter of 2018. The primary driver of this decrease was a reduction in final audit premium, which was affected by a change in California law effective in 2017, which impacted the quarter-over-quarter results by $3.3 million. Audit premium remained positive this quarter, indicating insured payrolls were better than estimated. New business bound policies increased 19.1% over the comparable period in 2018. This was as a result of significant increases in both submissions and quotes. Despite this double-digit growth in policies, new business premium was down $800,000, or 1.3%, over the prior quarter. This was driven by the continued rate reductions in the states we do business in, as well as increased competitive pressures for middle-market accounts.
With respect to renewals for the quarter, we continue to see high policy unit retention rates. In fact, these rates increased year-over-year from 93% at the end of the first quarter in 2018 to the current rate of 95.2%. This was a contributing factor to our renewal premium growth of 9.3%, or $12 million. Overall, on a year-over-year basis, we grew our in-force policy count by 8.3%, our in-force premiums by 4.7%, and our payroll exposure by 22%. Our average in-force policy size decreased by 3.4%, driven by California, which has seen a 42% reduction in approved advisory pure premium rates from January 1, 2015, through January 1, 2019. During the first quarter, we entered the state of Alaska. We have only one state left to complete our national footprint, and we expect to be writing business in the state of Hawaii in the coming months.
Now I will turn the call back to Doug.
Thanks, Steve. In summary, our first quarter results were largely consistent with our expectations. On a relative basis, workers' compensation continues to be an attractive line of business and consequently is particularly competitive at this time. Our strategy around small, low-hazard accounts has always recognized that this is business characterized by less competition, less price sensitivity, and higher persistency. In the current cycle, this continues to be the case, as evidenced by our very high unit renewal rate. We continue to closely monitor changes in the market and are prepared to react quickly to changing conditions to our advantage. We continue to actively pursue a broad array of digital solutions based on data, analytics, and technology that we believe will create a significant and sustainable competitive advantage for our company. With that, operator, we'll now take questions.
Thank you. Ladies and gentlemen, if you'd like to ask a question, please press star then one on your touch-tone telephone. Again, if you'd like to ask a question, please press star then one. One moment, please. Our first question comes from Mark Hughes of SunTrust. Your line is open.
Yeah, thank you. Good morning.
Good morning.
Good morning.
Steve, you described a lot of momentum in terms of submissions and quotes. Could you give us a sense of how long that should be sustained? I think I've asked this question before. The new initiatives you've put in place, how much momentum should that afford you in the coming quarters?
Yeah, Mark, I think we referenced this at the end of last year as well. Every month last year, we saw increases in submissions, quotes, and bound policies, and that trend has continued for the first quarter of this year. There have been a couple of initiatives that were released in the last few months that I think are having some impact on that. The lion's share of the initiatives that we've talked about in the past are still in progress, and the expectation is that they will have an even greater effect in terms of submissions, quotes, and binds in the future.
Great. The loss pick up a couple of hundred basis points. Is there some mix in that as well, or is that your judgment that at this point, losses are rising a little bit faster than premiums?
I think that's a fair statement, Mark. It's not consistent across the country, so I wouldn't say that we believe that everywhere the premium trends about pace the loss trends. There are certainly places where we suspect that if we're not there, we're approaching it fairly quickly. We're staying out in front of that and reacting accordingly.
The share repurchases in the quarter, obviously, pretty robust activity year-to-date. The authorization, I guess $58 million would be a modest number relative to. It's been a pretty good pace here recently. I wonder if you could kind of talk about your expectations in light of, like I said, the pace has been good, but what's the sustainability of that?
I'll take that, Mark. It's Mike. I've been saying for some time that we had a period in which it took a bit before our full liquidity could be restored, largely the restructuring that we did in 2016. We're now there. We have full dividend and paying capacity from the subsidiaries, and we've accumulated some cash as parent. Also, we had to sit on the sidelines for a bit because we had some initiatives, Cerity and others, that we felt needed to get out before we could feel good about buying stock. With the softness that we saw in the first quarter, we were opportunistic, and we bought back some shares because we think that they're undervalued currently. We'll continue to be opportunistic throughout the period.
Note that the $50 million that was approved yesterday does run all of the remaining authorization to June of 2020. We'll be deliberate and opportunistic about our capital management activities in the future.
I'll ask one more question, jump back in queue. The latest thoughts on Cerity, how much progress do you think you're making? What's your early observations on the activity?
Our early observations are very positive, and we just launched this, so it's going to take some time before the numbers are meaningful in the context of the entire entity. What we've built and our ability now to react quickly as we come to understand the market more completely is everything we need it to be. It's a product that will be robust. We're sitting on a large number of applications for certificates of authority so that we can quickly build this out nationwide. It is subject to the timing of a lot of this, and in fact, the ability to grow it more rapidly will be dependent on regulatory approvals. Our hope is that can all be done by the end of this year, but there's simply no way to handicap that.
Thank you.
Thank you. Again, if you'd like to ask a question, please press star then one on your touch-tone telephone. Our next question comes from Matthew Carletti of JMP Securities. Your line is open.
All right, thanks. Good morning. Mike, numbers question for you on last quarter on a lot of the technology initiatives you guided to an expense ratio you thought this year that might be about four points higher than last year. Is that still your current thinking? If you can give any color on how that might shape across the quarters, that'd be helpful. Thanks.
Well, I can understand that you might have been surprised by 3.9 points in the first quarter because we did lag what we had anticipated in the expense ratio for last year. The fact of the matter is we've been ramping up over the last five quarters, and we're now hitting our stride in terms of that expectation. I would expect at this fairly early stage that the four points will be relatively consistent throughout the year. Based on what we've seen through today, we stand by that estimate. Does that answer your question?
It does. Yeah, absolutely. Just a couple others. One on just if you could just touch on, dig a little deeper into the loss trends. What are you seeing in frequency and severity trends, more specifically?
Matthew, this is Steve. Frequency continues to be decreasing as expected. If you look at the loss cost filings that we're seeing in the states we do business in, we're seeing the same trends that the industry is seeing. Severity's been pretty moderate as well. We're not seeing any impacts of medical inflation at this point. That's where we stand today.
Great. Last question, if I can just your outlook on pricing. There's been some talk even thus far this quarter and this year on broader commercial lines seem to be taking a step in the right direction. Just some recent data points that maybe workers' comp headwinds or, well, still a headwind maybe lessening somewhat. What's your view in your book, and how right now would you expect that to unfold across the rest of the year?
Well, Matt, I would point to what the Rating Bureau of California decided just recently, which was to forego a mid-year loss cost filing. The trend was still down, but they chose not to make a filing, and we think that's worth noting. It would suggest we've not seen the bottom yet in terms of declining loss cost, but perhaps an expectation that they may be moderating from what they've been at previous levels, at least in California. That's not really a pricing answer. That really has to do more with what the underlying loss cost trends are. We think it will probably capture the industry's attention. The expectation that we're going to continue to see these expanding margins in workers' comp might not be appropriate any longer. I'm speaking more specifically to California.
I really don't have insight into the industry numbers yet for most of the rest of the country.
Yep. Great. Thank you, and best of luck rest of the year.
Thank you.
Thank you. Our next question comes from Mark Hughes of SunTrust. Your line is open.
Yeah. Thank you. Mike, could you talk about what years you pulled from for the reserve releases?
Yes. In the script, I mentioned that it was predominantly the years 2014 through 2017, some-
Okay.
Of the more current accident years.
Okay. The partner reacquisition, any update there?
No update, but we are optimistic that we'll get clearance from that soon. We recognize that this is not a great time of year for an insurance department to give us their full attention, but we've had consistent and positive dialogue, and it's just a matter of time.
Okay. Notionally, when we think about the amount of spending for the technology initiative next year, you described four points consistently through this year. How are you seeing next year shaping up just relative to that level?
It's too early to tell. Again, remember that what we're really doing here, as I mentioned in the comments, is we're accelerating the pace in which we're getting these things introduced to market. We're not necessarily spending more, we're just spending it faster because we think that that urgency is required in today's market, and we want to be a frontrunner. We'll continue to talk to you about that as we see what our progress is for this year. It's a little early to tell and predict what we're going to deliver for next year.
I'll ask the question about just the top line this year. A lot of moving parts around loss costs, your growth initiatives, et cetera. Do you think Q1 is kind of a pattern for the balance of the year? Kind of steady perhaps as a good bogey to think about?
Yeah. The first quarter is heavily influenced by January because it is the largest month of the year for premium production, January can be volatile. We had a particularly strong January, a weaker March relative to our expectations, so I'm reluctant, Mark, to provide any guidance there. Our expectation is there likely isn't a significant change in the top line. The influences there will be continuing declines in the renewal rates, potentially a slowing growth rate in new business. Again, that's going to be a function of the competitive environment, I just can't predict that out for the balance of the year.
Thank you.
Thank you. I'm showing no further questions at this time. I'd like to turn the conference back over to Doug Dirks for any closing remarks.
Very good. Thank you, everyone, for joining us today. It was a very strong quarter for us. I'm very optimistic about the impact that the various initiatives will have on our business. We are, as you all know and have heard today, moving as quickly as we can because we very much believe that these initiatives will create a competitive advantage that's compelling. Thank you all for participating today, and we will speak with you again with the second quarter results in July. Thank you all very much.
Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you for your participation, and have a wonderful day. You may all disconnect.