Employers Holdings, Inc. — Q2 2019 Form 10-Q
Business context and reporting period
Employers Holdings provides workers’ compensation insurance, primarily to small businesses, across 45 states and the District of Columbia. California generated 52% of premiums. This unaudited filing covers the quarter and six months ended June 30, 2019; comparisons are with the corresponding 2018 periods.
Key financial metrics
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net premiums earned | $175.5 million | $178.0 million | $350.3 million | $354.6 million |
| Total revenues | $204.3 million | $204.1 million | $424.6 million | $392.0 million |
| Net income | $40.7 million | $42.5 million | $92.6 million | $68.1 million |
| Diluted EPS | $1.25 | $1.28 | $2.84 | $2.05 |
| Underwriting income | $21.1 million | $25.6 million | $37.9 million | $44.0 million |
| Combined ratio | 88.0% | 85.6% | 89.2% | 87.6% |
- Q2 net investment income was $21.4 million, up from $20.3 million; net realized and unrealized investment gains were $7.4 million versus $5.7 million. For the first half, investment gains were $30.7 million, compared with a $2.4 million loss in 2018.
- First-half operating cash flow was $42.3 million, down from $86.2 million. Investing activities provided $42.5 million; financing activities used $81.0 million, including $43.1 million for share repurchases, $20.0 million for debt repayment and $14.7 million in dividends. Cash and restricted cash ended at $105.8 million.
- At June 30, total assets were $3.954 billion, total liabilities $2.833 billion, and stockholders’ equity $1.122 billion. Unpaid losses and loss adjustment expenses were $2.162 billion, with $484.2 million of reinsurance recoverables for unpaid losses.
- The company had no notes payable at quarter-end after repaying two $10 million surplus notes. It reported $105.9 million of cash and investments at the holding company and no outstanding advances under its Federal Home Loan Bank facility. Insurance subsidiary dividends are subject to regulatory limits.
- Quarter-end investments totaled $2.766 billion. Fixed maturities were 91% of the investment portfolio; their duration was 3.7 years and weighted-average credit quality was AA-. Equity securities were 9% of the portfolio.
Material changes versus the prior comparable period
- Q2 net income declined 4%, despite nearly flat total revenue. Lower premiums and underwriting income, and higher underwriting and operating expenses, offset improved investment income and gains. First-half net income increased 36%, aided by the stronger investment results.
- Gross premiums written fell 5% in Q2 and 3% in the first half. Management attributed the declines primarily to lower average rates; renewal rate decreases were 13.4% for Q2 and 13.1% year to date. In-force policy count and payroll exposure increased, while average policy size declined.
- The combined ratio worsened by 2.4 percentage points in Q2 and 1.6 points in the first half. Expense ratios increased, including from higher technology, compensation and professional costs; the loss ratio improved for the first half, while the Q2 loss ratio was slightly higher.
- Net cash from operations fell substantially year over year, while financing outflows increased because of repurchases and debt repayment. The company repurchased $43.1 million of stock in the first half; the buyback authorization was expanded to $100 million and extended through June 30, 2020.
Outlook, commentary, risks and unusual items
- Management gave no specific earnings or premium guidance. It said it expects to pursue profitable growth through disciplined underwriting, claims management, geographic diversification, technology investment and distribution partnerships. It cited favorable loss-cost and frequency trends, but noted competitive pricing pressure.
- Prior-year reserve development materially supported results: favorable net development was $23.7 million in Q2 and $45.9 million in the first half of 2019, mainly from voluntary business and favorable paid-loss trends. The current accident-year loss and LAE ratio rose to 66.2% in Q2 and 65.5% for the first half, from 62.5% in both 2018 periods. Reserve estimates remain uncertain and actual ultimate losses may differ.
- A favorable LPT reserve adjustment and higher estimated contingent commission added $1.8 million and $0.2 million, respectively, to Q2 net income. Management estimated that reserve development, LPT adjustments and equity-security gains collectively increased pretax income by $32.5 million in Q2 and $75.9 million in the first half.
- The company expected to close its acquisition of PartnerRe Insurance Company of New York on July 31, 2019, after receiving New York regulatory approval in June. The estimated purchase price was approximately $47.0 million of statutory capital and surplus plus $5.8 million; management expected to use cash on hand. The transaction would not include employees or ongoing business operations.
- A new reinsurance program began July 1, 2019, providing $190 million of coverage excess of a $10 million per-occurrence retention, subject to exclusions. Management stated that subsidiary liquidity needs over the next 24 months should be met by operations, investment income and maturities. It also cited risks from claims and reserve estimation, investment market movements, competition and dependence on regulated subsidiary dividends.
- Unfunded private-equity commitments were $48.0 million; the contractual-obligations table reports total unfunded investment commitments of $68.0 million. Investors should clarify the scope of the difference. Management reported no material change in market risk, no material change in risk factors, and no material expected impact from pending litigation.
Important facts for investors to verify
- Whether favorable prior-year reserve development and investment gains are sustainable, and how estimates of current-accident-year losses evolve.
- The effect of continued rate reductions on premium growth, policy retention and underwriting margins, particularly in California.
- Execution, final funding and regulatory implications of the expected PRNY acquisition, and whether the stated closing date was met.
- Holding-company liquidity and subsidiary dividend capacity, including the impact of buybacks and the declared $0.22-per-share dividend.
- The nature of the $68.0 million total contractual investment commitments versus $48.0 million of private-equity commitments disclosed elsewhere in the filing.