Employers Holdings, Inc. — Q1 2024 Form 10-Q
Business and period: The company provides workers’ compensation insurance, primarily to small and select businesses, through its insurance subsidiaries. This filing covers the three months ended March 31, 2024; comparisons are with Q1 2023. The company now reports one operating segment, Insurance Operations, following the integration of its Cerity direct-to-consumer business into mainstream operations.
Financial performance
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Gross premiums written | $210.9 million | $194.9 million | +8.2% |
| Net premiums earned | $184.9 million | $172.7 million | +7.1% |
| Total revenues | $223.1 million | $206.5 million | +8.0% |
| Net income | $28.3 million | $23.6 million | +19.9% |
| Diluted EPS | $1.11 | $0.86 | +$0.25 |
| Net investment income | $26.8 million | $27.6 million | −2.9% |
| Net realized and unrealized investment gains | $11.4 million | $6.4 million | +$5.0 million |
| Operating cash flow | $0.6 million | $4.3 million | −$3.7 million |
Underwriting: The reported underwriting loss was $2.9 million versus $2.5 million. The combined ratio was 101.6% versus 101.4%; excluding the LPT Agreement, the company reports a 102.7% ratio in its underwriting-results table. Loss and LAE ratio was 63.0%, up from 62.2%, while the expense ratio improved to 24.8% from 25.7%. The filing also presents a 102.5% ex-LPT combined ratio in another table, so the reported ex-LPT figure is not consistent across the filing.
Balance sheet and liquidity: At March 31, total assets were $3.56 billion, total liabilities $2.54 billion, and stockholders’ equity $1.02 billion. Cash and cash equivalents were $114.2 million, down from $226.4 million at year-end; total investments were $2.38 billion. Unpaid losses and LAE were $1.87 billion, including $424.0 million of reinsurance recoverables. The filing does not provide a clear amount of conventional debt outstanding. Interest and financing expense was less than $0.1 million in Q1; the company has FHLB facilities and a $75 million revolving credit facility.
Cash declined by $112.2 million during the quarter, reflecting $97.7 million of net investing outflows and $15.1 million of financing outflows, partly offset by $0.6 million of operating cash flow. Management said available liquidity and capital are adequate for the next 12 months and longer term. It reported $73.4 million of immediate, unencumbered operating-subsidiary cash, plus publicly traded equities and highly liquid fixed maturities available within three business days.
Material changes and management commentary
- Premium growth reflected higher new and renewal business, expansion in offered business classes, and continued strong retention. In-force premiums including estimated audit premium rose to $757.5 million from $667.6 million a year earlier; policies in force increased to 127,484 from 122,684.
- Losses and LAE rose 8.5%, primarily due to higher earned premiums and a higher current accident-year loss estimate. Current accident-year loss and LAE ratio excluding LPT was 64.2%, compared with 63.5%. Prior-year development was slightly favorable ($0.1 million), all from assigned-risk business; no prior-year development was recognized on voluntary-risk business.
- Investment gains increased, largely reflecting equity-market performance. Net investment income declined as invested balances fell following the unwinding of the former FHLB leveraged investment strategy; financing expense also fell substantially for that reason.
- Accumulated other comprehensive loss widened to $96.9 million from $86.0 million, largely reflecting unrealized losses on available-for-sale investments. The company reported $131.0 million of gross unrealized losses on fixed maturities held in a continuous loss position for at least 12 months and said it did not intend, nor expect to be required, to sell those securities before recovery.
- The legacy LPT Agreement reduced reported losses by $2.1 million in Q1. The company’s right to receive a contingent profit commission runs through June 30, 2024; the related receivable was $14.4 million. Remaining LPT-covered liabilities were estimated at $287.1 million.
Outlook, risks and contingencies
No specific earnings or premium guidance was provided. Management expects liquidity needs to be met by operating cash flows, investment income and maturities, and said it does not currently foresee a need to suspend dividends, stop repurchases, raise additional capital or make material non-investment asset sales. The Board declared a $0.30 quarterly dividend on April 24, 2024, payable May 22, 2024.
Key exposures include uncertainty in loss reserves and claims severity, medical and wage inflation, interest-rate and equity-market movements, investment credit risk, and reinsurer collectability. A 100-basis-point rise in rates was estimated to reduce the fair value of fixed-maturity and short-term investments by $82.0 million before tax; a 10% decline in equity prices would reduce fair value by $22.4 million before tax. California accounted for 45% of in-force premiums. The current reinsurance program provides $190 million of per-occurrence coverage excess of a $10 million retention, subject to exclusions, through June 30, 2024.
Subsidiaries ECIC and EICN paid dividends of $23.3 million and $13.7 million, respectively, to their parent in Q1; neither can pay further dividends in 2024 without prior regulatory approval. Securities on deposit and FHLB letters of credit support statutory and reinsurance requirements. The company reported no off-balance-sheet arrangements. Management said ordinary-course litigation is not expected to materially affect results, liquidity or financial position, and reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Reconcile the filing’s differing ex-LPT combined-ratio disclosures (102.7% versus 102.5%) and assess underlying underwriting profitability.
- Monitor accident-year loss trends, reserve adequacy, claim severity and inflation, particularly given the higher current accident-year loss ratio.
- Review investment portfolio valuation and credit exposure, including the substantial unrealized fixed-maturity losses and sensitivity to interest rates and equity markets.
- Assess cash-flow conversion and liquidity after the quarter’s significant investment-related cash outflow, along with restrictions on subsidiary dividends.
- Confirm renewal terms and coverage following the June 30, 2024 expiration of the current reinsurance program and the LPT contingent commission period.