Employers Holdings, Inc. — Q1 2017 Form 10-Q
Business and period: The company provides workers’ compensation insurance, primarily to small businesses, through subsidiaries operating in 36 states and the District of Columbia. California generated 56% of premiums. This unaudited report covers the three months ended March 31, 2017, compared with the same period in 2016.
Financial results
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Total revenue | $196.3 million | $192.0 million |
| Net premiums earned | $175.3 million | $172.6 million |
| Net investment income | $18.8 million | $17.8 million |
| Net income | $23.2 million | $21.8 million |
| Diluted EPS | $0.70 | $0.66 |
| Operating cash flow | $30.7 million | $21.6 million |
- Gross premiums written rose to $197.6 million from $190.7 million; net premiums written were $196.1 million versus $188.7 million.
- Underwriting income was $8.9 million versus $8.7 million. The combined ratio improved slightly to 94.9% from 95.0% (below 100% indicates underwriting profit). Loss and LAE ratio was 62.2% in both periods.
- Total comprehensive income was $31.2 million, down from $41.6 million, principally reflecting lower unrealized investment gains.
- Investing cash outflow was $32.9 million and financing cash outflow was $6.4 million; cash and cash equivalents decreased $8.6 million to $58.6 million.
- At March 31, total assets were $3.834 billion, total liabilities $2.966 billion, and stockholders’ equity $867.5 million. Notes payable were $32.0 million. Total investments were $2.611 billion at fair value.
- The company reported $60.6 million of cash and investments at the holding company and $2.620 billion at operating subsidiaries. It had no outstanding FHLB advances and no revolving credit facility.
Material changes and management commentary
- Revenue increased 2.2% and net income increased 6.4% year over year. Investment income rose 5.6%, attributed to higher invested assets and a modest portfolio-mix change.
- First-quarter renewal pricing was down 1.8% from the prior-year rate levels. Management attributed written-premium growth to final-audit premiums and new business; renewal premium was roughly flat as payroll growth was offset by lower average rates.
- Overall in-force premiums were down 0.5% year over year. California in-force premiums declined 1.5%; the Los Angeles area saw a 10.5% decrease in premiums and 13.3% decrease in policy count. Florida and other states grew.
- Management cited declining claim frequency and a slight downward trend in medical and indemnity costs per claim, reflected in the current accident-year estimate. Current accident-year loss ratio was 63.8% versus 64.1%. Management considers reserves adequate but notes ultimate long-tail claim costs remain uncertain.
- The investment portfolio was 91.8% fixed maturities, with 4.3-year duration and weighted average quality of AA-. Management said fixed-maturity unrealized losses primarily reflected interest rates, while recognizing a $0.2 million impairment on one equity security.
Outlook, risks and contingencies
- The filing provides no specific earnings or revenue guidance. Management said it believes the company is positioned for the current market cycle, citing its balance sheet and underwriting, claims, investment and capital-management strategies.
- Key exposures include competition and pricing pressure, workers’ compensation claim severity and reserve-estimation uncertainty, investment interest-rate, credit and equity-price risks, and dependence on regulated subsidiary dividends for holding-company liquidity.
- The current reinsurance program, effective through June 30, 2017, provides $190 million excess of a $10 million per-occurrence retention, subject to exclusions. The legacy LPT Agreement had $458.6 million of estimated remaining covered liabilities and a $171.9 million deferred gain at March 31, 2017.
- State deposits and reinsurance trusts restrict access to some investments. Management reported no material change in market risk, no material change in risk factors from the Annual Report, and no off-balance-sheet arrangements. Routine pending or threatened litigation was not expected to materially affect results, liquidity or financial position.
- The board declared a $0.15-per-share dividend payable May 24, 2017. No shares were repurchased in Q1; $28.9 million remained under the repurchase authorization.
Important facts for investors to verify
- Whether pricing reductions and California policy attrition continue, and whether growth elsewhere offsets them.
- Subsequent development of current and prior accident-year loss reserves, including the adequacy and collectability of reinsurance recoverables.
- Investment portfolio valuation, interest-rate sensitivity and credit quality, including equity exposure and unrealized losses.
- Holding-company liquidity and subsidiary dividend capacity under insurance regulation, as well as the renewal or replacement of the reinsurance program after June 30, 2017.
- The assumptions and continuing economic effect of the legacy LPT Agreement and its contingent profit commission.