Employers Holdings, Inc. — 2023 Form 10-K
Business and period. Specialty workers’ compensation insurer serving small and select businesses in low-to-medium hazard industries across most of the United States. The filing covers the fiscal year ended December 31, 2023; comparisons are to 2022 unless noted. California generated 45% of in-force premiums. In the fourth quarter, the company consolidated Cerity’s direct-to-consumer operations into its single Insurance Operations segment while retaining digital distribution capabilities.
Key financial results
| Metric | 2023 | 2022 | Change |
|---|---|---|---|
| Net premiums written | $760.6 million | $707.2 million | Up 7.6% |
| Net premiums earned | $721.9 million | $675.2 million | Up 6.9% |
| Total revenues | $850.9 million | $713.5 million | Up 19.2% |
| Net investment income | $106.5 million | $89.8 million | Up 18.6% |
| Net realized and unrealized investment gains (losses) | $22.7 million | $(51.8) million | Improved |
| Net income | $118.1 million | $48.4 million | Up 144% |
| Diluted earnings per share | $4.45 | $1.75 | Up |
| Operating cash flow | $49.4 million | $99.8 million | Down 50.5% |
| Total assets | $3.55 billion | $3.72 billion | Down |
| Stockholders’ equity | $1.01 billion | $944.2 million | Up |
Underwriting. Underwriting income was $36.2 million versus $21.0 million. The combined ratio improved to 95.0% from 96.9% (below 100% indicates an underwriting profit); excluding the legacy LPT reinsurance agreement’s effect, it was 96.0% versus 98.1%. The calendar-year loss and LAE ratio was 56.2%, including $44.9 million of favorable prior-year reserve development, compared with $33.5 million in 2022. The current accident-year loss ratio was 63.4%, versus 64.1%.
Cash, investments and capital. Cash, cash equivalents and restricted cash were $226.6 million at year-end, up from $89.4 million. Investing activities provided $377.3 million, while financing activities used $289.5 million. The investment portfolio totaled $2.28 billion; fixed maturities had a 4.5-year duration and an “A” weighted-average quality. GAAP stockholders’ equity was $1.01 billion; management’s non-GAAP adjusted equity was $1.20 billion, or $47.26 per share. The company returned $106.5 million through repurchases and dividends declared during 2023, including $77.1 million of share repurchases and $29.4 million of dividends declared.
Debt and liquidity. The company repaid all $182.5 million of FHLB advances in 2023. Its $75 million revolving credit facility expired December 15, 2023; there were no borrowings under it in 2023. Management said liquidity was adequate for the next 12 months and longer term, and did not foresee a need to seek additional capital. Insurance-subsidiary dividends to the holding company remain subject to state limits and approvals.
Changes and notable items
- Premium growth reflected higher new and renewal business, expansion into selected classes, strong retention and increased payroll exposure. New business premiums were $201.9 million versus $167.7 million; renewal premiums were $526.7 million versus $483.2 million. Policies in force reached a record 126,409.
- Investment income benefited from higher bond yields. The recovery in equity markets and more stable rates reduced, but did not eliminate, unrealized losses accumulated in 2022. Other comprehensive income was $52.9 million in 2023, compared with a $199.5 million loss in 2022.
- 2023 other expenses included a $7.6 million headquarters lease-termination payment, $2.6 million of asset write-offs and a $1.6 million write-off of capitalized cloud-computing costs, partly offset by a $1.0 million lease-termination gain.
- The company reported $11.0 million in other expenses and $5.8 million in interest and financing expenses, versus none and $3.5 million, respectively, in 2022. The effective tax rate was 20.4%, compared with 13.3%; 2022 included a $1.4 million tax benefit from repeal of IRC Section 847.
- The legacy LPT agreement covers pre-July 1995 claims. Estimated remaining covered liabilities were $291.7 million; estimated ultimate contingent profit commission was $69.6 million, of which $55.4 million had been settled. The commission period runs through June 30, 2024.
Outlook, risks and contingencies
Management expects improving labor availability and wage growth to support payrolls and premium growth, and cites continued appetite expansion and technology investment as strategic priorities. No specific earnings, premium or combined-ratio guidance is provided. Management expects to continue quarterly dividends, subject to Board discretion and regulatory, capital and operating considerations; future repurchases are also discretionary.
- Reserving uncertainty: Workers’ compensation reserves are long-tail estimates. Net unpaid losses and LAE were $1.46 billion; the actuarial range was $1.32 billion to $1.63 billion. Management estimated that a 1% increase in medical cost inflation above the rate embedded in reserves could add approximately $74 million to lifetime future medical costs, net of reinsurance.
- Geographic and distribution concentration: California represented 45% of in-force premiums. ADP, the largest distribution agent, generated 16.2%; its relationship is non-exclusive.
- Reinsurance and catastrophe exposure: The current program provides $190 million of coverage above a $10 million per-occurrence retention, subject to exclusions, through June 30, 2024. Nuclear, biological, chemical and radiological events are excluded from the company’s excess-of-loss coverage. The company remains liable to policyholders if reinsurers do not pay.
- Market and inflation risks: Interest-rate movements can affect fixed-maturity fair values and equity; inflation and wage growth may increase claims severity and operating costs as well as premium payroll bases. A 300-basis-point rate rise was estimated to reduce fixed-maturity and short-term investment fair value by $222.1 million, pretax.
- Other risks: Competition and pricing pressure, regulation, economic weakness among small-business policyholders, reserve adequacy, cyber incidents and limits on insurance-subsidiary dividends could affect results or capital returns. Management reported no material cybersecurity risk or incident in 2023. Pending litigation in the normal course was not expected by management to have a material effect.
Investor facts to verify
- Whether underwriting profitability excluding favorable prior-year reserve development remains robust, and how accident-year loss trends develop.
- Whether premium growth and retention continue without deterioration in pricing adequacy, particularly in California and higher hazard groups.
- How the June 30, 2024 LPT contingent commission settlement and remaining recoverables affect results and liquidity.
- Whether investment income is sustained and unrealized investment losses, credit exposures and portfolio duration remain manageable.
- Available holding-company liquidity, statutory dividend capacity and capital returns after the revolving credit facility’s expiration.
- Whether the Cerity integration achieves expected efficiencies and savings while preserving digital distribution growth.