The Wall Street Transcript recently interviewed Douglas D. Dirks, President and Chief Executive Officer of Employers Holdings, Inc. (NYSE:EIG) (formerly EIG Mutual Holding Company) and Employers Group, Inc. (formerly Employers Insurance Group, Inc.) Key excerpts follow:
TWST: Would you begin with a brief overview of Employers?
Mr. Dirks: Employers is a specialty writer of workers' compensation insurance, a $50 billion per year industry. Within this large industry, we sell workers' compensation insurance to small Main Street businesses engaged in low to medium hazard industries. We believe this customer segment is characterized by less price sensitivity and strong customer loyalty.
We are an established enterprise with a 95-year operating history that has produced consistently strong results through a disciplined and selective underwriting approach. We have a unique distribution network that includes traditional agents and strategic partners. Our strategic partners include ADP, the country's largest payroll servicing company, and Wellpoint, the country's largest health insurer. We have a strong balance sheet with conservative reserves that have developed favorably over time. We are headquartered in Reno and we're currently conducting business in 29 states from coast to coast.
TWST: Is the recession in the business environment having an impact on the insurance industry? What direct impact is it having on Employers?
Mr. Dirks: It is having an impact because we do business coast-to-coast, and business environments vary by region. For our company, the greatest impact from the economic slowdown has been observed in Nevada, where currently we produce about 10% of our total premium revenue, and the economic slowdown in Nevada is a phenomenon that we've observed now for a little over a year. Some of the other markets have held up fairly well. Our largest market is California — we do approximately 45% of our business in California — and the economy in California has held up reasonably well in the 12 months ending September 2008. It would not be unreasonable to expect tightening credit markets to impact new business growth and our revenue premium is based on total payroll, so as payrolls decline, premium will follow. We have raised rates in California 10% and will begin to write policies at those higher rates effective February 1, 2009.
TWST: How sensitive are you to the credit rating debate that the insureds are involved in? How strong today is Employers when it comes to keeping its credit rating or improving it?
Mr. Dirks: We have a very strong balance sheet and that has been the case for us historically. We've always been very prudent in setting our loss reserves and we've always invested our portfolio in a very conservative, prudent fashion. So we've been impacted less by mark-to-market changes than a number of other financial institutions have been exposed to in recent months. Particularly, a large portion of our portfolio is held in US Treasuries, US agencies and municipal securities. Even though the municipal securities have had a spread widening over the last quarter, we still believe they are very high quality investments that we fully expect to hold to maturity and realize the full value.
TWST: Are there any other negative dynamics that you are paying attention to today?
Mr. Dirks: In the property and casualty insurance industry, there are a couple of factors to look at; one is prevailing interest rates. And if you look at what the U.S. Treasury is paying today and realize that it is a large portion of most property and casualty insurance portfolios, when interest rates are at historic lows, it requires the combined ratio of insurance companies to drop to 100 or less, which means the industry has to produce some underwriting profit because it can't rely on investment income to offset underwriting loss. So that's one facet of what you are seeing in the property and casualty industry.
The second factor affecting workers' compensation in particular will be declining payrolls because of a slowing economy. The combination of these two factors will drive the need for successful insurers to have combined ratios at or near 100 or below.
TWST: Would you elaborate on the theme of the opportunities that lie before you?
Mr. Dirks: The opportunities we see are in a couple of areas. First would be organic growth. We are now doing business in 29 states. We have a unique approach to the market, focusing on small to medium-sized employers that are engaged in low to medium hazard industries, and we think it's a market opportunity that will continue to provide growth for us in the future. I do think that will be somewhat more challenging in the short run because of the economic situation, but long term, we believe it's a very viable strategy that will continue to provide growth opportunities for the company.
Also, we just recently received an A.M. Best Company rating for the two insurance companies that we acquired from AmCOMP. Those companies were not previously rated, and we believe that by bringing the A- (Excellent) rating into play, it will create additional business opportunities for those two legal entities.
TWST: What would be the three or four statements that would compel investors to review Employers Holdings and to include it in their portfolios and their longer-term investment strategies?
Mr. Dirks: I'll start with what I think is the most important theme for investors right now: a solid balance sheet. Again, it's a balance sheet that has conservatively stated reserves and conservative investments. I think that's extremely important, and that's not something we did in reaction to the market conditions, that's a fundamental belief of this organization that a strong balance sheet is essential to long-term success.
Second, I think there continues to be strong opportunity for growth in this organization albeit somewhat slower than we would have expected a year ago given the macroeconomic conditions, but again, a strong balance sheet, opportunities for growth and a very strong leadership team. We've got a group of people who have managed through insurance cycles in the past, know what it requires and know what is necessary for the long-term viability of the organization. So when you think about what you are investing in, you are really investing in a management team that can anticipate opportunities and risks going forward.
And then finally capital management. If you look at our overall capital management strategy, it's really been three pronged. One is to invest in growth because we believe in our strategy. Number two is to look for opportunistic growth, and we have done that through the acquisition of AmCOMP. And then finally, through a dividend program to manage that capital. You will see that we've previously had share repurchases, something that we are not averse to but we think, given the current credit conditions in the marketplace, it is prudent to conserve capital. Consequently, we've suspended the share repurchase program that our Board had authorized, and which was authorized through June 30 of 2009. Those are the items I think you can look to that describe the compelling investment thesis of this company.