Employers Holdings, Inc. — Q1 2016 Form 10-Q
Business and period: Unaudited results for the three months ended March 31, 2016, compared with Q1 2015. Employers Holdings provides workers’ compensation insurance, primarily to small businesses, across 33 states and the District of Columbia. California represented 57% of in-force premiums at quarter-end.
Financial performance
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Total revenue | $192.0 million | $177.2 million |
| Net premiums earned | $172.6 million | $159.0 million |
| Net investment income | $17.8 million | $16.9 million |
| Net income | $21.0 million | $14.0 million |
| Diluted EPS | $0.64 | $0.43 |
| Underwriting income | $8.7 million | $0.6 million |
| Combined ratio | 95.0% | 99.6% |
| Operating cash flow | $20.8 million | $24.9 million |
- Net income margin was approximately 10.9% of revenue, versus 7.9% in Q1 2015.
- Gross premiums written rose 9.6% to $190.7 million. Management attributed growth chiefly to higher final-audit premiums and gains outside California.
- The loss and LAE ratio improved to 62.2% from 66.8%; expense and commission ratios were broadly stable at 21.0% and 11.8%, respectively.
- Net income included $1.5 million of realized investment gains, after $5.3 million of other-than-temporary impairments on equity securities. Comprehensive income was $40.8 million, including $19.8 million of other comprehensive income.
- Cash and cash equivalents were $70.8 million at March 31, 2016, up from $56.6 million at year-end; restricted cash was $4.2 million. Investing activities used $6.8 million and financing activities provided $0.2 million.
- Total investments were $2.52 billion at fair value. GAAP stockholders’ equity was $803.7 million; total liabilities were $2.99 billion.
- Notes payable were $32.0 million. The company reported that debt was 3.1% of total capitalization, including the deferred LPT gain. Contractual notes-payable obligations totaled $60.2 million, including estimated interest.
Changes and management commentary
- Revenue increased 8.4% and net income increased 50% year over year. Underwriting results improved materially, with the combined ratio moving below 100%.
- Net premiums earned rose 8.6%. In-force premiums were down 3.6% year over year in California but up 4.1% in other states, reflecting the company’s stated market-diversification strategy. Overall in-force premiums declined 0.4%.
- Management said indemnity claim frequency declined year over year, while medical and indemnity costs per claim showed slight upward movement. The current accident-year loss estimate was 64.1% of earned premiums, compared with 67.7% a year earlier. Prior-year development was favorable by $0.3 million, versus unfavorable development of $1.7 million in Q1 2015.
- Adjusted stockholders’ equity, a company-defined non-GAAP measure, was $886.7 million, up from $866.7 million at December 31, 2015.
Liquidity, capital, outlook and risks
- Management believed holding-company liquidity needs for the next 24 months could be met by its cash, investments and subsidiary dividends; operating-subsidiary needs were expected to be met from operations, investment income and maturing investments. Holding-company cash and investments totaled $85.6 million; subsidiaries had $383.3 million of cash and cash equivalents and fixed maturities due within 24 months.
- The insurance subsidiaries joined the Federal Home Loan Bank of San Francisco in January 2016, enabling access to collateralized advances; none were outstanding at quarter-end. The reinsurance program provided $193.0 million of coverage excess of a $7.0 million per-occurrence retention and was effective through June 30, 2016.
- The board authorized a share-repurchase program of up to $50 million through February 22, 2018. The company repurchased 37,331 shares for $1.0 million during the quarter. A $0.09-per-share dividend was declared April 27, payable May 25, 2016.
- No earnings or revenue guidance was provided. Management’s outlook statements are subject to uncertainties, including long-tail claims and reserve estimates, reinsurance recoverability, investment-market and interest-rate changes, and workers’ compensation pricing and competition. Management reported no material change in disclosed risk factors or market risk since year-end.
- The company recognized $5.3 million of equity-security impairment, primarily related to the continued downturn in the energy sector. It reported that unrealized fixed-maturity losses were primarily interest-rate-related, not credit-related, and did not consider them other-than-temporary.
- The filing identifies the estimate of unpaid losses and LAE, reinsurance recoverables, premium recognition, deferred taxes and investment valuation as significant areas requiring management judgment. Pending or threatened litigation was not expected by management to materially affect results, liquidity or financial position.
- New accounting standards disclosed include ASU 2016-01, for which the company estimated a $62.4 million net-of-tax reclassification between retained earnings and accumulated other comprehensive income at quarter-end; the full income-statement effect was not yet estimated. The company had not yet estimated the impact of the new lease and stock-compensation standards.
Important facts for investors to verify
- Whether the improved current-year loss estimate and sub-100% combined ratio persist as claims develop, particularly given the stated upward movement in claim costs per claim.
- Reserve adequacy and reinsurance recoverability, including the assumptions underlying long-tail unpaid losses and the LPT Agreement.
- Premium and policy trends by geography, and whether growth outside California offsets California declines without weakening pricing or underwriting quality.
- The effect of equity-market exposure and the $5.3 million impairment, as well as the portfolio’s interest-rate, credit and liquidity risks.
- Holding-company access to subsidiary dividends, the use of the new FHLB borrowing capacity, and capital deployment through dividends and share repurchases.
- The eventual effects of ASU 2016-01 and other pending accounting standards; the $62.4 million estimate is a balance-sheet reclassification, not a stated earnings impact.