Employers Holdings Q3 2025: Contradictions Emerge on CT Claims, Reserves, and Underwriting

Date of Call: October 31, 2025

Financials Results

• Revenue: Net premiums earned $192.1M, up 3.0% YOY; Gross written premiums $183.9M, up 1.4% YOY
• Operating Margin: Accident year loss ratio (quarter) 78.1%; AY2025 loss & LAE ratio raised to 72% (from 69%); strengthened prior-year reserves +$38.2M; underwriting expense ratio 20.6% vs 23.5% prior year; commission expense ratio 12% vs 13.8% prior year; adjusted net loss $25.5M this quarter vs adjusted net income $20.2M a year ago

Guidance:

• Board declared Q4 2025 quarterly dividend of $0.32 per share payable Nov 26, 2025.
• $125M debt-funded recapitalization and $125M increase to share repurchase authorization (total $250M); repurchases to be market-dependent and ROI-driven.
• Plan to start accepting excess workers' compensation submissions in early 2026 and bind business by July 1, 2026.
• Full fourth-quarter internal and external reserve review planned; management does not expect incremental impact.
• Prioritize underwriting margin over top-line growth; expect modest/controlled growth next 12 months.

Business Commentary:

• Reserve Adjustments and CT Claims Impact:
• Employers Holdings, Inc. increased prior-year reserves by $38.2 million or 2.8% of net unpaid loss and LAE due to rising frequency of California cumulative trauma (CT) claims.
• Accident years 2023 and 2024 were primary contributors, with AY 2024 increasing by $40.5 million and AY 2023 by $16.1 million.

• The increase reflects the company's conservative approach and response to recent trends in CT claim frequency in California.

• Profitability and Shareholder Returns:

• The company achieved a net income of $26.1 million in net investment income and realized and unrealized gains of $17.8 million and $6.3 million, respectively.
• Employers Holdings returned $52.7 million to shareholders through dividends and share repurchases.

• The strong financial position and confidence in future prospects led to a $125 million debt-funded recapitalization plan and an increase in the share repurchase authorization to $250 million.

• Underwriting and Pricing Strategy:

• Gross written premiums increased by 1.4% due to higher renewal business premiums, despite competitive pressures.
• The company focused on underwriting margin over growth, implementing targeted pricing actions and enhanced risk selection.

• This strategic approach aims to maintain profitability amidst a soft workers' compensation market, prioritizing underwriting margin over aggressive growth.

• Operational Efficiency and Expense Reduction:

• The underwriting expense ratio was significantly reduced compared to Q3 2024 through a reorganization and broader expense reduction efforts.
• The company's operational efficiency improvements are ongoing, with additional potential through the implementation of an AI road map.
• These efforts are aimed at delivering operational efficiencies and automating the entire customer journey.

Sentiment Analysis:

Overall Tone: Neutral

• Management increased prior-year reserves by $38.2M and raised AY2025 loss & LAE to 72% citing California CT frequency, yet announced a $125M recapitalization and expanded buyback authorization, declared a $0.32 dividend, and emphasized confidence in the balance sheet and conservative positioning.

Q&A:

• Question from Mark Hughes (Truist Securities, Inc., Research Division): You mentioned being more assertive on the litigation front — can you make yourselves a harder target versus others or is it more administrative?
  Response: Implementing internal, analytics-driven, aggressive defense and cost-containment tactics plus targeted litigation strategies and legislative engagement, while committing to pay legitimate CT claims.

• Question from Mark Hughes (Truist Securities, Inc., Research Division): On the CT trend and actions (pricing/underwriting), do you feel trend is stable enough for 2026 loss picks — will AY pick remain ~72%?
  Response: Pricing and underwriting actions increase conservatism and visibility; trend appears to be settling but remains uncertain; do not expect a material near-term change to the AY pick until results flow through.

• Question from Mark Hughes (Truist Securities, Inc., Research Division): What is the interest rate on the Federal Home Loan Bank borrowing line and is it floating?
  Response: The current rate is 3.7% and it is fixed.

• Question from Mark Hughes (Truist Securities, Inc., Research Division): How much capital do you have at the holding company?
  Response: Management says holding-company capital is sufficient to cover expenses, repurchases and dividends but they do not disclose a specific published number.

• Question from Mark Hughes (Truist Securities, Inc., Research Division): Of the $250M repurchase authority, how much has been used to date?
  Response: Approximately $65.0 million has been used under the existing plan to date (plus $10.2M since Sept 30).

• Question from Mark Hughes (Truist Securities, Inc., Research Division): Is the $45M this quarter a preview of pacing for the $125M recapitalization?
  Response: Repurchases will be disciplined and market-dependent, executed on an ROI basis; pacing will depend on market opportunities.

• Question from Mark Hughes (Truist Securities, Inc., Research Division): Given tighter underwriting and targeted actions, should we expect steady/flat to slight top-line growth next 12 months?
  Response: Yes — selective growth by segment (notably small commercial) while prioritizing underwriting margin; do not expect significant top-line growth next 12 months.

• Question from Karol Chmiel (Citizens JMP Securities, LLC, Research Division): Can you comment on the CT statute-of-limitations/date-of-injury legal issue?
  Response: In California CT claims can be filed post-termination, span years and multiple carriers, and now carry more indemnity (not just medical), driving the issue.

• Question from Karol Chmiel (Citizens JMP Securities, LLC, Research Division): Will investment leverage increase if you fund buybacks with debt and keep investment balance?
  Response: Yes — repurchases funded with debt should leave investments unchanged, increasing investments-to-equity leverage.

• Question from Robert Farnam (Janney Montgomery Scott LLC, Research Division): Will you perform a traditional fourth-quarter reserve review or did Q3 replace it?
  Response: A full fourth-quarter internal and external reserve review will occur to get back on the normal schedule; management does not expect further reserve impact from it.

• Question from Robert Farnam (Janney Montgomery Scott LLC, Research Division): Is the external actuarial firm doing Q4 the same firm used at midyear?
  Response: Yes.

• Question from Robert Farnam (Janney Montgomery Scott LLC, Research Division): What feedback have you received from rating agencies regarding CT and your actions?
  Response: Rating agencies are engaged, informed and remain supportive of the company's operating and capital actions.

• Question from Robert Farnam (Janney Montgomery Scott LLC, Research Division): Any change in medical-cost trends or severity?
  Response: Severity has held generally steady and remains below pre-pandemic levels; modest drug cost increases noted but not concerning.

• Question from Robert Farnam (Janney Montgomery Scott LLC, Research Division): Could recession-related unemployment cause similar CT filing patterns in other states?
  Response: It could in some recessions depending on industry and job impacts, but it's situation-dependent and not assumed imminent.

• Question from Robert Farnam (Janney Montgomery Scott LLC, Research Division): Tell us about the excess workers' compensation product — market size, competitors and where you add value?
  Response: Excess WC is a natural extension leveraging existing WC expertise and systems; entering selectively, expecting submissions early Q2 2026 and binding by July 1, 2026, leveraging agency relationships.

• Question from Robert Farnam (Janney Montgomery Scott LLC, Research Division): Are producers receptive to adding excess WC as an add-on?
  Response: Yes — producers see it as a valuable, low-friction add-on and management believes there's room for another entrant.

Contradiction Point 1

Cumulative Trauma Claims Frequency and Trends

It directly impacts expectations regarding the company's risk profile and reserving strategy, which are crucial for financial planning and investor expectations.

Is the trend in California CT claims stable enough to predict future loss picks, and will the 2026 accident year have a similar loss pick as 2025? - Mark Hughes (Truist Securities, Inc., Research Division)

2025Q3: The trend is settling, and Employers have taken pricing and underwriting actions to address it. They expect their accident year pick to remain similar to 2025 until the effects of those actions are seen. - Katherine Antonello(CEO)

Can you discuss how the cumulative trauma claims issue developed over the last few quarters and what prompted the more significant action this quarter? - Mark Hughes (Truist Securities)

2025Q2: Cumulative trauma claims started to increase in frequency late in 2024, affecting the current accident year. This late emergence was also seen in other accident years like 2023, indicating the trend is not recent but is accelerating now. - Katherine Antonello(CEO)

Contradiction Point 2

Reserve Study and Actuarial Review Process

It highlights differing descriptions of the reserve study and actuarial review process, which are essential for maintaining accurate financial projections and risk assessments.

Is there a fourth-quarter reserve review, and is it different from usual procedures? - Robert Farnam (Janney Montgomery Scott LLC, Research Division)

2025Q3: Yes, there will be a fourth-quarter review, and while the third quarter was an off-cycle review, the fourth quarter will return to the usual internal and external actuarial review process. - Katherine Antonello(CEO)

Can you describe the magnitude of the reserve shift over time? - Mark Hughes (Truist Securities)

2025Q2: This quarter, we moved over $50 million of favorable development from older accident years to more recent years due to the increased frequency of cumulative trauma claims. We expect this trend to continue. - Katherine Antonello(CEO)

Contradiction Point 3

Cumulative Trauma Claims and Underwriting Actions

It involves differing statements on the stability of cumulative trauma claims and the effectiveness of underwriting actions, which are crucial for financial planning and investor expectations.

Are California CT claim trends stable enough to predict future loss ratios, and will the 2026 accident year have a similar loss ratio to 2025? - Mark Hughes(Truist Securities)

2025Q3: The trend is settling, and Employers have taken pricing and underwriting actions to address it. They expect their accident year pick to remain similar to 2025 until the effects of those actions are seen. - Katherine Antonello(CEO)

Can you provide specifics on loss trends and characterize their geographic scope? - Mark Hughes(Truist Securities)

2025Q1: Targeted pricing and underwriting actions are being refined. - Katherine Antonello(CEO)

Contradiction Point 4

Medical Cost Trends and Severity

It involves the stability of medical cost trends and severity, which are critical for financial forecasting and claims management.

Have you observed any changes in medical cost trends, particularly severity? - Robert Farnam(Janney Montgomery Scott LLC)

2025Q3: Overall claims severity has held steady, with below pre-pandemic levels. There have been slight drug cost increases, but nothing alarming. - Katherine Antonello(CEO)

What drives underlying medical inflation, such as frequency, severity, and treatment costs, among other factors? - Mark Hughes(Truist Securities)

2025Q1: Severity values have held steady, driven by lower medical severity. - Katherine Antonello(CEO)

Contradiction Point 5

Cumulative Trauma Claims and Strategy

It highlights changes in the company's strategy and approach to cumulative trauma claims in California, which are key to understanding their risk management and legal strategies.

Can you address legal issues related to cumulative trauma claims and the statute of limitations? - Karol Chmiel (Citizens JMP Securities, LLC, Research Division)

2025Q3: The issue with CT claims in California is that injured workers can file claims post-termination, and claims can span multiple years and carriers. CT claims have shifted from mainly medical to include more indemnity. - Katherine Antonello(CEO)

What is the magnitude of the change in the loss pick for the current accident year, and what factors in the marketplace are prompting this increase at this time? - Mark Hughes (Truist Securities)

2024Q4: We are making progress in our efforts to implement our CT claims strategy, which includes a focus on more effective data analytics and aggressive targets to reduce defense costs and litigation where CT claims are highly litigated. - Katherine Antonello(CEO)