Employers Holdings, Inc. — Q1 2023 Form 10-Q
Business context and reporting period. The filing covers the three months ended March 31, 2023. Employers Holdings provides workers’ compensation insurance, primarily to small businesses, through its Employers agency platform and Cerity direct-to-customer platform. California represented 45% of in-force premiums.
Financial results and position
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Net premiums earned | $172.7 million | $150.2 million |
| Total revenue | $206.5 million | $152.0 million |
| Net investment income | $27.6 million | $19.1 million |
| Net realized and unrealized investment gains (losses) | $6.4 million | $(17.3) million |
| Net income (loss) | $23.6 million | $(2.3) million |
| Diluted EPS | $0.86 | $(0.08) |
| Operating cash flow | $4.3 million | $16.8 million |
Gross premiums written rose 13.1% to $194.9 million; net premiums written increased to $193.1 million. Losses and loss adjustment expenses were $107.4 million, up 14.0%. Underwriting and general and administrative expenses increased 13.0% to $44.4 million. The company reported a consolidated underwriting loss of $2.5 million, compared with a $4.2 million loss. In the Employers segment, underwriting income was $2.1 million and the combined ratio improved to 98.7% from 100.0%.
Balance sheet at March 31, 2023: Total assets were $3.744 billion, total liabilities $2.770 billion, and stockholders’ equity $974.1 million. Investments totaled $2.590 billion and cash and cash equivalents were $86.7 million. Unpaid losses and LAE were $1.954 billion, with $440.3 million of reinsurance recoverables on unpaid losses. FHLB advances of $182.5 million were outstanding; the $75 million revolving credit facility had no borrowings. The filing reports no off-balance-sheet arrangements.
Changes versus the prior comparable period
- Net income improved from a loss to a profit, supported by premium growth, higher investment income, and a swing in investment gains and losses.
- Net investment income increased 44.5%, primarily due to higher bond yields and larger invested balances.
- Investment fair-value recovery produced $23.8 million of other comprehensive income, versus an $88.2 million loss in Q1 2022. Accumulated other comprehensive loss narrowed to $115.1 million from $138.9 million at year-end 2022.
- In-force premiums, including estimated audit premium, rose to $673.9 million from $623.9 million at March 31, 2022; policies in-force increased to 122,684 from 114,461.
- Operating cash flow declined to $4.3 million from $16.8 million. Financing cash flow was a $19.6 million use, including repurchases and dividends; the prior-year period included FHLB and credit-facility borrowings.
Outlook, risks, and unusual items
- Management reported record policies in-force and said new and renewal premiums and audit premiums were driving growth. It expects strengthening labor markets and rising wages to support payrolls and premium growth. No quantified earnings or revenue guidance was provided.
- Management considers capital and liquidity adequate and does not currently foresee a need to suspend dividends or repurchases, raise additional capital, or make material non-investment asset sales. It expects subsidiary liquidity needs over the next 24 months to be met through operations, investment income, and maturing investments.
- Risks include uncertain claim severity and reserve estimates, medical and wage inflation, interest-rate and equity-market volatility, issuer and reinsurer credit risk, and economic and geopolitical disruptions. A hypothetical 100-basis-point rise in rates would reduce the fair value of fixed-maturity and short-term investments by an estimated $92.4 million before tax; a 10% decline in equity values would reduce fair value by $20.4 million before tax.
- The fixed-maturity portfolio had $151.8 million of gross unrealized losses at quarter-end. The company said it did not intend to sell affected AFS debt securities before recovery, but recognized a $1.4 million net increase in the CECL allowance during the quarter, bringing it to $5.9 million.
- The legacy LPT Agreement produced $2.0 million of deferred-gain amortization that reduced reported losses and LAE. Remaining deferred gain was $104.1 million; estimated remaining covered liabilities were $303.9 million. The company’s contingent profit commission entitlement runs through June 30, 2024.
- The $182.5 million of FHLB advances carried a 4.87% weighted-average annual rate. The credit agreement was amended in February 2023, including replacement of the Eurodollar option with SOFR terms; the company reported covenant compliance.
- On April 26, 2023, the board declared a $0.28 quarterly dividend, payable May 24, 2023. Management said pending or threatened litigation in the ordinary course was not expected to materially affect results, liquidity, or financial position; no material risk-factor changes were reported.
Important facts for investors to verify
- Whether premium and policy growth persist, particularly given California concentration and reliance on payroll exposure and audit premiums.
- Subsequent development of current and prior-period claims reserves, including medical-cost and wage-inflation effects.
- Investment portfolio credit quality, unrealized losses, CECL changes, and sensitivity to interest-rate and equity-market movements.
- Availability of subsidiary dividends and liquidity, including the effect of restrictions on ECIC and EICN dividends for the remainder of 2023 without regulatory approval.
- Costs and terms of FHLB advances, the amended revolving facility, and the renewal status of the reinsurance program, which was effective through June 30, 2023.