Employers Holdings, Inc. — Q3 2015 Form 10-Q
Business context and reporting period
For the quarter and nine months ended September 30, 2015. Employers Holdings provides workers’ compensation insurance to small businesses through its insurance subsidiaries, operating in 32 states and the District of Columbia. California represented 57% of in-force premiums at quarter-end. The company reports one operating segment.
Financial results and position
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net premiums earned | $179.0M | $172.1M | $508.6M | $511.9M |
| Total revenues | $199.5M | $192.1M | $567.6M | $580.9M |
| Net income | $24.5M | $15.2M | $67.7M | $71.6M |
| Diluted EPS | $0.75 | $0.47 | $2.08 | $2.23 |
| Combined ratio | 94.1% | 101.6% | 95.1% | 98.1% |
Q3 underwriting income was $10.6M, versus a $2.7M underwriting loss a year earlier; nine-month underwriting income was $24.9M versus $9.5M. The loss and LAE ratio was 64.7% for Q3 and 63.6% year to date, compared with 71.1% and 67.0%, respectively, in 2014. Net investment income was $18.5M for Q3 and $53.8M year to date. Net realized investment gains were $2.0M and $5.1M, respectively.
Nine-month operating cash flow was $93.6M, down from $136.4M; investing cash outflow was $139.1M and financing cash outflow was $1.9M. Cash and cash equivalents were $56.2M at September 30, down from $103.6M at year-end 2014. Total assets were $3.806B, total liabilities $3.080B, and stockholders’ equity $726.0M. Notes payable were $92.0M; debt included a $60M credit facility balance and $32M in surplus notes. Adjusted stockholders’ equity, a company-defined non-GAAP measure, was $841.3M versus $786.9M at year-end.
Material changes versus comparable periods
- Q3 net premiums earned rose 4.0%, while the nine-month figure declined 0.6%. Gross premiums written increased 1.3% in Q3 but fell 2.4% year to date, reflecting strategic non-renewals and portfolio diversification.
- Nine-month net income declined 5.4%, despite improved underwriting results. 2014 included larger favorable LPT reserve and contingent-commission adjustments and higher realized investment gains.
- Management identified $12.8M of favorable LPT and tax-related estimate changes that increased 2015 nine-month net income: $6.4M from an LPT reserve adjustment, $2.6M from an LPT contingent commission adjustment, and $3.8M from reallocating reserves to taxable years. Comparable 2014 estimate changes increased net income by $32.9M.
- California in-force premiums were down 5.8% year over year, while in-force premiums outside California grew. California remained the largest concentration, though its share of in-force premiums fell three percentage points year over year.
Outlook, commentary, and risks
The filing provides no quantified earnings or revenue guidance. Management said it expects holding-company liquidity needs over the next 24 months to be met by available cash and investments and insurance-subsidiary dividends; it expects subsidiaries’ liquidity needs to be met by operating cash flow, investment income, and maturities. A $60M principal payment on the credit facility was due December 31, 2015. Management reported compliance with debt covenants.
Management described current accident-year loss estimates as adequate, while emphasizing that workers’ compensation reserves are inherently uncertain and ultimate long-tail claim costs may differ materially. Indemnity claim frequency declined year over year, but medical and indemnity costs per claim showed slight upward movement. Prior-year adverse loss development was $1.3M for the first nine months, related to assigned-risk business.
The investment portfolio had a fair value of $2.538B; fixed maturities had a 4.2-year duration and weighted-average credit quality of AA-. Unrealized investment losses were $26.6M, including $21.0M on equities; the company recorded $0.2M of equity-security impairment. Management attributed fixed-maturity losses primarily to interest rates and said it did not expect to be forced to sell impaired fixed maturities before recovery or maturity. Market risks were reported as not materially changed since year-end 2014. Management said there were no material changes to the previously disclosed risk factors, no off-balance-sheet arrangements, and no pending or threatened litigation expected to materially affect results, liquidity, or financial position. Disclosure controls were deemed effective.
Important facts for investors to verify
- Whether favorable reserve and contingent-commission trends under the LPT agreement persist; the company’s estimate adjustments materially affected reported earnings.
- Whether the lower combined ratio and improved underwriting income are sustainable, given loss-cost trends and California policy and premium declines.
- The timing and funding of the $60M credit-facility repayment due December 31, 2015, and any subsequent refinancing or facility changes.
- Developments in unpaid-loss reserves, reinsurance recoverables, and investment valuations, including equity-market exposure and the ability to hold securities through recovery.