Employers Holdings, Inc. — Q3 2023 Form 10-Q
Business context and period. The company provides workers’ compensation insurance, primarily to small businesses, through its Employers and Cerity underwriting platforms. This unaudited report covers the three and nine months ended September 30, 2023; comparisons are with the corresponding 2022 periods unless otherwise noted. California accounted for 45% of in-force premiums.
Key financial results
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net premiums earned | $184.6 million | $178.7 million | $534.4 million | $494.1 million |
| Net investment income | $25.9 million | $23.7 million | $80.3 million | $62.8 million |
| Net realized and unrealized investment gains (losses) | $(7.1) million | $1.9 million | $10.7 million | $(65.5) million |
| Total revenue | $203.5 million | $204.4 million | $625.2 million | $491.7 million |
| Net income | $14.0 million | $19.1 million | $72.5 million | $1.3 million |
| Diluted EPS | $0.54 | $0.70 | $2.71 | $0.05 |
- Underwriting: Employers segment underwriting income was $4.1 million in Q3 and $28.6 million for nine months. Its combined ratio improved to 97.8% from 98.3% for Q3 and to 94.6% from 96.8% year to date. Cerity continued to report underwriting losses: $3.1 million in Q3 and $10.5 million for nine months.
- Loss experience: Employers’ current accident-year loss and LAE ratio was 63.3% in Q3, versus 64.1%; year to date it was 63.4%, versus 64.0%. Nine-month results included $20.0 million of favorable prior-year reserve development, compared with $10.3 million in the prior-year period.
- Cash flow: Operating cash flow was $21.8 million for nine months, down from $67.5 million. Investing activities provided $225.0 million, compared with $97.7 million used in the prior-year period; financing used $227.2 million, including share repurchases, dividends and FHLB repayments. Cash and restricted cash ended at $109.0 million.
- Balance sheet and liquidity: Total assets were $3.527 billion and stockholders’ equity $919.0 million at September 30, 2023. Total investments were $2.334 billion. The company reported $2.367 billion of cash and investments at operating subsidiaries, including $912.4 million of stated immediate, unencumbered liquidity. Management said liquidity was adequate and expected subsidiary needs over the next 24 months to be met from operations, investment income and maturities.
- Debt and capital: FHLB advances were $40.4 million outstanding, down from $182.5 million at year-end 2022; the stated weighted-average annual rate was 5.06%. No borrowings were outstanding under the $75 million revolving credit facility during the nine-month period, and the company reported compliance with its covenants. Share repurchases totaled $61.1 million; dividends paid were $22.5 million.
Material changes and management commentary
- Gross premiums written rose to $196.2 million in Q3 and $589.5 million year to date, from $188.6 million and $540.4 million. Management attributed growth primarily to Employers, citing new-business activity, strong retention, expanded classes and a $7.4 million Q3 audit-premium pickup. Total in-force premiums including estimated audit premium reached $722.1 million, versus $649.1 million a year earlier.
- Higher bond yields lifted net investment income, while higher market rates reduced fixed-maturity fair values. Fixed maturities had $200.4 million of gross unrealized losses at quarter-end; accumulated other comprehensive loss was $156.6 million, net of tax.
- Nine-month net income improved substantially from 2022, when investment losses were $65.5 million. Q3 net income, however, fell year over year, reflecting investment losses and higher expenses despite premium and investment-income growth.
- Nine-month expenses included a non-recurring $9.4 million net charge related to early termination of the former Reno headquarters lease. The board declared a $0.28-per-share quarterly dividend on October 25, 2023. No earnings or premium guidance was provided.
Outlook, risks and contingencies
Management said improving labor availability and wage inflation could support payroll and premium growth, while noting ongoing monitoring of policyholder payrolls, economic conditions and seasonality. Key risks include uncertain loss and LAE reserves, medical and wage inflation, interest-rate and equity-market movements, investment credit exposure, reinsurer collectability, economic and geopolitical disruption, and concentration in California. A reinsurance program effective July 1, 2023 provides $190 million of coverage in excess of a $10 million per-occurrence retention, subject to exclusions. The LPT agreement’s contingent profit commission entitlement runs through June 30, 2024; its remaining deferred gain was $100.2 million. Management stated that ordinary-course litigation was not expected to materially affect results, liquidity or financial position, and reported no material changes to previously disclosed risk factors.
Investor verification points
- Track reserve adequacy and the persistence of favorable prior-year development; ultimate claims costs remain uncertain.
- Assess fixed-income valuation sensitivity, unrealized losses, credit quality and the impact of further rate changes.
- Review premium growth, retention, payroll exposure and California concentration, alongside Cerity’s continuing underwriting losses.
- Monitor subsidiary dividend restrictions, FHLB repayments and collateral needs, and the company’s liquidity and capital available for dividends and repurchases.
- Confirm the final costs and ongoing savings associated with the headquarters lease termination and the LPT agreement’s runoff and commission terms.