Employers Holdings, Inc. — FY 2019 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2019, not a standalone fourth quarter. Employers Holdings provides workers’ compensation insurance primarily to small businesses in low-to-medium hazard industries. Its new Cerity digital platform began writing business in 2019. Nearly half of in-force premiums were in California. The company acquired PartnerRe Insurance Company of New York on July 31, 2019, renaming it Cerity Insurance Company; the acquisition added a licensed insurer but no ongoing business operations.
Key financial metrics
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Total revenue | $835.9 million | $800.4 million |
| Net premiums earned | $695.8 million | $731.1 million |
| Net income | $157.1 million | $141.3 million |
| Diluted EPS | $4.83 | $4.24 |
| Net investment income | $88.1 million | $81.2 million |
| Net realized and unrealized investment gains (losses) | $51.1 million | $(13.1) million |
| Operating cash flow | $123.1 million | $180.2 million |
| Total assets | $4,004.1 million | $3,919.2 million |
| Stockholders’ equity | $1,165.8 million | $1,018.2 million |
| Notes payable | $0 | $20.0 million |
The Employers segment reported underwriting income of $75.9 million and a combined ratio of 89.1% in 2019, versus $110.6 million and 84.9% in 2018. A ratio below 100% indicates an underwriting profit. Cerity recorded a $16.0 million underwriting loss, with only $0.1 million of written premiums. The 2019 effective tax rate was 18.9%. The filing does not provide a consolidated operating margin measure.
Cash, cash equivalents and restricted cash totaled $155.2 million at year-end. Operating subsidiaries held $2.869 billion in cash and investments; the holding company held $64.6 million in cash and investments. The company paid $28.9 million in shareholder dividends and repurchased $67.5 million of stock during 2019. It repaid $20.0 million of notes payable. Insurer statutory surplus was $1.021 billion, and each insurance subsidiary exceeded regulatory risk-based capital action thresholds.
Material changes versus prior period
- Revenue rose 4.4% and net income rose 11.2%, while net premiums earned fell 4.8% and net premiums written declined to $691.5 million from $742.8 million.
- Investment results improved substantially, from a $13.1 million loss in 2018 to a $51.1 million gain in 2019, including $46.5 million of gains on equity securities. Net investment income increased 8.5%.
- Underwriting and general and administrative expenses increased 18% to $187.5 million. The Employers underwriting expense ratio rose to 22.0% from 18.5%, reflecting technology investment and other costs.
- Favorable prior-year loss development increased to $77.5 million from $66.2 million. The current accident-year loss ratio rose to 65.6% from 62.6%.
- Stockholders’ equity increased by $147.6 million, including higher net income and a $79.0 million after-tax increase in unrealized investment gains.
- The company acquired CIC and repaid its remaining surplus notes. Cerity’s underwriting expenses increased to $16.0 million from $5.9 million as the digital platform developed.
Outlook, management commentary and risks
- Management expects technology and digital-platform development to continue increasing underwriting expense ratios in 2020; it expects future premium growth, improved loss ratios and operating efficiencies to more than offset these costs over time. No quantified earnings or premium guidance is provided.
- Renewal pricing declined 11.6% in 2019 versus the prior rate level. Management cited competitive conditions but said favorable loss-cost and frequency trends and claims initiatives support continued selective underwriting.
- Claims reserves are a major estimation risk. Gross unpaid losses and LAE were $2.193 billion, with net reserves of $1.660 billion. Management’s net carried reserves were within its actuarial range of $1.489 billion to $1.855 billion. A 1% increase in medical-cost inflation above the level implicit in reserves was estimated to add approximately $81 million to future net claim costs.
- California concentration exposes results to state-specific competition, regulation, litigation, economic conditions and natural perils. The company also faces pricing competition, and small-business payroll changes affect premiums.
- Reinsurance recoverables totaled $539.7 million, including $380.4 million related to the legacy LPT Agreement. The LPT trusts held $341.0 million in collateral. The company remains responsible to policyholders if reinsurers fail to pay.
- Other risks include investment-market and interest-rate volatility, catastrophe and terrorism losses, reinsurer credit risk, cyber and technology execution, and restrictions on insurance-subsidiary dividends. The company disclosed no off-balance-sheet arrangements; management said pending litigation was not expected to have a material effect.
- Management and the auditor reported effective internal control over financial reporting; the auditor issued an unqualified opinion on the financial statements.
Important facts for investors to verify
- How much 2019 earnings depended on favorable reserve development and investment gains, and whether those contributions recur.
- Whether current accident-year claims costs and renewal pricing remain adequate as competition and medical and indemnity severity evolve.
- Reserve assumptions and sensitivity, especially medical-cost inflation, California exposure and the large share of claims reserves in California and Nevada.
- Recovery and collateral adequacy for reinsurance balances, including the LPT Agreement and the acquired CIC liabilities covered by PartnerRe indemnities and guarantees.
- Whether Cerity can convert technology investment and expense growth into material premium volume and sustainable underwriting results; also monitor the stated 2020 expense-ratio outlook.
- Holding-company liquidity and the availability of subsidiary dividends, alongside capital returns, regulatory constraints and the remaining $28.3 million share-repurchase authorization at year-end.