Employers Holdings, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Employers Holdings provides workers’ compensation insurance, primarily to small businesses, through its Employers and Cerity distribution segments. California accounted for 45% of in-force premiums.
Financial results and condition
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net premiums earned | $178.7 million | $147.1 million | $494.1 million | $418.0 million |
| Total revenues | $204.4 million | $168.3 million | $491.7 million | $503.3 million |
| Net income | $19.1 million | $15.0 million | $1.3 million | $64.5 million |
| Diluted EPS | $0.70 | $0.53 | $0.05 | $2.24 |
| Net investment income | $23.7 million | $18.4 million | $62.8 million | $54.9 million |
| Net investment gains (losses) | $1.9 million | $2.7 million | $(65.5) million | $29.6 million |
- Underwriting: Employers segment combined ratio was 98.3% for Q3 versus 98.1% a year earlier, and 96.8% for the first nine months versus 96.9%. Employers underwriting income was $3.2 million in Q3 and $15.8 million year to date. Current accident-year loss and LAE ratios were 64.1% and 64.0%, respectively.
- Cash flow: Operating activities provided $67.5 million in the first nine months, compared with $9.3 million used in the prior-year period. Investing activities used $97.7 million; financing activities provided $103.2 million. Cash, cash equivalents and restricted cash totaled $148.3 million at period-end.
- Balance sheet and liquidity: Total assets were $3.71 billion and stockholders’ equity was $919.0 million at September 30, 2022, down from $3.78 billion and $1.21 billion at year-end 2021. Accumulated other comprehensive loss was $158.9 million, versus income of $60.6 million at year-end, primarily reflecting unrealized investment losses.
- Debt and capital: Insurance subsidiaries had $182.5 million of FHLB advances outstanding, used to purchase an equivalent amount of collateralized loan obligation securities; the weighted-average rate was 1.78%. No borrowings were outstanding under the $75 million revolving credit facility, and the company reported compliance with its debt covenants.
Material changes and drivers
- Written premiums grew: gross premiums were $188.6 million in Q3 and $540.4 million for nine months, up from $152.3 million and $447.7 million, respectively. Management attributed growth to new and renewal business, strong retention, expanded business classes, and higher audit premiums. The company increased its final audit premium accrual by $9.0 million in Q3 as payroll exposure rose.
- Nine-month net income fell sharply, chiefly because investment results shifted from $29.6 million of gains to $65.5 million of losses. Rising interest rates reduced fixed-maturity fair values, while market volatility affected equity securities. Net investment income increased as yields and invested balances rose.
- Net favorable prior-period reserve development was $10.3 million for nine months, compared with $15.6 million in 2021; it was $0.3 million in Q3 2022. Higher earned premiums and a higher current accident-year estimate contributed to increased losses and LAE.
- The company recorded $219.5 million of other comprehensive loss, net of tax, for the first nine months. Fixed-maturity securities had $204.1 million of gross unrealized losses at September 30; management said it did not intend, and was not required, to sell affected securities below amortized cost.
Outlook, risks and other matters
- No specific earnings or revenue guidance was provided. Management said it expects rising payrolls, as labor-market conditions and wages improve, to support further premium growth. It cited a record number of in-force policies and stated liquidity was adequate, with no current expectation of needing a capital infusion or material non-investment asset sales.
- Key uncertainties include claim severity and reserve estimates, inflation in medical, litigation and wage costs, interest-rate and equity-market volatility, credit risk, reinsurance recoverability, economic disruption, and competition. Management considers its current accident-year loss estimate adequate but notes ultimate losses may not be known for many years.
- The investment portfolio’s fixed maturities had a duration of 4.0 years and a weighted-average quality of A+. A hypothetical 100-basis-point interest-rate rise was estimated to reduce fixed-maturity fair value by $88.9 million before tax. Equity securities had a fair value of $182.2 million; a hypothetical 10% price decline would reduce value by $18.2 million before tax.
- A new reinsurance program effective July 1, 2022 provides $190 million of coverage in excess of a $10 million per-occurrence retention, subject to exclusions. The legacy LPT arrangement had a deferred gain of $108.1 million and estimated remaining covered liabilities of $313.5 million.
- For the first nine months, dividends paid totaled $49.3 million, including a $1.00-per-share special dividend. The board declared a further $0.26-per-share quarterly dividend on October 26, 2022. Q3 share repurchases totaled $7.4 million. Management said pending or threatened litigation was not expected to materially affect results, liquidity or financial position; no material risk-factor changes were reported.
Important facts for investors to verify
- Whether premium growth and audit-premium accruals persist, and how payroll changes affect future earned premiums.
- Whether current accident-year loss assumptions remain adequate as inflation affects claim costs, and how reserve development evolves.
- Whether investment losses remain predominantly unrealized and how interest rates, credit conditions and equity markets affect portfolio value, capital and investment income.
- The cost, collateral requirements and liquidity implications of FHLB advances, along with restrictions on subsidiary dividends and the $57.3 million of unfunded private-equity commitments.
- The sustainability of shareholder dividends and repurchases relative to earnings, capital needs and regulatory constraints.