Employers Holdings, Inc. annual report, FY2020

Business context and reporting period

Employers Holdings, Inc. filed this Form 10-K for the fiscal year ended December 31, 2020. The company specializes in workers’ compensation insurance for small businesses, primarily in low- to medium-hazard industries, through its Employers and Cerity underwriting platforms. California accounted for 45% of in-force premiums at year-end. The filing also reports fourth-quarter results.

Financial performance and liquidity

• Employers segment underwriting income was $71.0 million; its combined ratio was 88.5% (below 100%, indicating an underwriting profit), versus 89.1% in 2019. Its underwriting expense ratio rose to 24.6% from 22.0%, mainly because premium volume fell.
• Net investment income declined 13.4% to $76.3 million. Net realized and unrealized investment gains were $19.0 million, compared with $51.1 million in 2019; gains on fixed maturities benefited from lower interest rates.
• Year-end cash and cash equivalents were $160.4 million; total investments were $2.76 billion. The company reported $20.0 million of FHLB advances and no borrowings on its new $75 million revolving credit facility. It said liquidity was adequate and did not foresee a need for a capital infusion.
• Net cash used in financing was $112.2 million. The company paid $30.8 million in dividends and repurchased $99.8 million of stock during 2020.

Material changes versus prior periods

• Net premiums written fell 16.9% and net premiums earned fell 11.6% year over year. In-force premiums declined 13.1%, while in-force policy count increased 4.8%; average policy size fell 17.0%.
• Net income decreased 23.7%. Lower premiums and investment income contributed; favorable prior-year reserve development and investment gains partly offset those effects.
• Employers’ calendar-year loss and LAE ratio improved to 51.1% from 54.4%, including $81.6 million of favorable prior-accident-year development. Current accident-year loss ratio was 64.3%, compared with 65.6%.
• Fourth-quarter net income was $64.0 million, versus $31.8 million a year earlier; diluted EPS was $2.19 versus $0.99. Fourth-quarter results included $39.7 million of favorable prior-year loss development and $21.3 million of investment gains.
• Stockholders’ equity increased 4.0%, supported by investment-related gains in other comprehensive income, despite $130.6 million returned through dividends and repurchases.

Outlook, commentary, risks and unusual items

• Management said in-force premiums were expected to remain suppressed until insured businesses resumed more normalized operations and staffing. New-business policy counts improved in most states after the initial pandemic disruption, but smaller policy sizes and fewer policies over $25,000 reduced premium growth; California remained a notable weakness.
• Management expected further reductions in net investment income as maturing and paid-down fixed maturities were reinvested at lower yields.
• COVID-19 reduced claim frequency in 2020, while per-claim medical and indemnity costs increased moderately. The company cited uncertainty around business closures, payrolls, claim trends, and state rules on COVID-19 compensability. It did not expect COVID-19 losses to trigger recovery under its current excess-of-loss reinsurance program.
• Key risks include reserve estimation uncertainty, inflation in medical and indemnity costs, California concentration, premium-rate competition, low interest rates and investment-market volatility, reinsurer credit or collectability, and dependence on distribution partners. ADP generated 12.9% of in-force premiums.
• The net loss and LAE reserve was $2.07 billion gross and $1.57 billion net of reinsurance. Management’s net actuarial range was $1.39 billion to $1.73 billion; actual outcomes may fall outside that range. The auditor identified reserve valuation, particularly IBNR assumptions, as a critical audit matter.
• The company recorded $0.8 million of lease-abandonment charges as it reduced office space following its work-from-home transition. It reported no material expected effect from pending litigation. Goodwill of $36.2 million was not impaired, though management noted a further decline in fair value could prompt reassessment.
• No specific earnings or premium guidance was provided. CEO Douglas Dirks planned to retire April 1, 2021, with Chief Actuary Katherine Antonello appointed as his successor; the COO and Chief Innovation Officer also announced departures in 2021.

Most important facts for investors to verify

• Whether premium and average policy-size trends recover, especially in California, and whether payroll adjustments and final audits alter reported premium.
• Whether favorable reserve development persists and how actual claim emergence compares with management’s assumptions and actuarial range.
• Whether claim frequency, COVID-19 compensability, and medical and indemnity severity develop as anticipated.
• How lower reinvestment yields and market movements affect investment income, portfolio values, and capital.
• Whether reinsurance recoverables remain collectible and the LPT collateral and contingent profit commission estimates remain adequate.
• Whether regulated subsidiary dividend capacity supports holding-company liquidity, dividends, and future repurchases; the company declared a $0.25-per-share dividend payable in March 2021.
• The auditor issued an unqualified opinion on the financial statements and internal controls; management and the auditor concluded internal control over financial reporting was effective at year-end.