Employers Holdings, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Employers Holdings provides workers’ compensation insurance, primarily to small businesses, through its Employers and Cerity underwriting platforms. California accounted for 45% of in-force premiums.
Financial results
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total revenue | $171.4 million | $211.4 million | $335.0 million | $338.4 million |
| Net premiums earned | $137.0 million | $151.5 million | $270.9 million | $319.4 million |
| Net investment income | $18.2 million | $19.9 million | $36.6 million | $39.8 million |
| Investment gains (losses), net | $16.0 million | $39.7 million | $26.9 million | $(21.4) million |
| Net income | $26.4 million | $59.6 million | $49.5 million | $24.7 million |
| Diluted EPS | $0.92 | $1.97 | $1.71 | $0.80 |
| Operating cash flow | Not separately reported for quarter | Not separately reported for quarter | $(25.3) million | $28.1 million |
- Q2 gross premiums written rose to $147.1 million from $140.2 million, but six-month gross written premiums declined to $295.4 million from $324.9 million. Net premiums earned fell 9.6% in Q2 and 15.2% for the half year.
- Employers segment combined ratio was 98.8% in Q2 versus 88.0%; for six months it was 96.4% versus 94.1%. Underwriting income fell to $1.7 million in Q2 from $18.2 million and to $9.8 million for six months from $18.9 million.
- At June 30, total assets were $3.84 billion, stockholders’ equity $1.20 billion, cash and cash equivalents $107.6 million, and investments $2.73 billion. Unpaid losses and LAE were $2.01 billion.
- Cash decreased $52.8 million in the first half. Investing activities provided $30.1 million; financing activities used $57.6 million. The company paid $14.3 million in dividends and repurchased $20.1 million of shares during the half year.
Changes, outlook, and risks
- Q2 net income declined year over year, principally alongside lower earned premiums and smaller investment gains. For the first half, net income increased, reflecting the shift from investment losses in 2020 to gains in 2021 and lower losses and expenses.
- Management cited lower interest rates as a reason net investment income declined. The average pre-tax book yield on invested assets was 3.1%, down from 3.2% a year earlier.
- Q2 current accident-year loss and LAE ratio improved to 63.7% from 65.5%, attributed primarily to lower indemnity claim frequency. Q2 included $8.0 million of unfavorable development in accident year 2020, largely from two catastrophic non-COVID claims, offset by favorable development in prior years. Management cautioned that claim reserves remain uncertain and COVID-related latent claims could emerge.
- Management described improved new-business submissions, quotes, and binds in most states during Q2 and a record number of policies in force, but year-over-year in-force premiums and new-business premium remained lower. Renewal pricing was down 5.3% in Q2 and 5.7% for the first half. Management expected recovering payrolls to support future premium growth, while noting that pandemic effects remain uncertain; the filing provides no quantified earnings or revenue guidance.
- Management said available liquidity was adequate and did not foresee a need to suspend ordinary dividends, forgo repurchases, seek a capital infusion, or make material non-investment asset sales. The holding company had $40.4 million of cash and investments; the $75 million revolving facility had no balance outstanding at quarter-end, and debt covenants were met. Insurance subsidiaries also had no outstanding FHLB advances.
- Key risks include COVID-19 effects on policyholder payrolls, collections and claims; inflation in medical, litigation, wage, and operating costs; reserve-estimation uncertainty; investment market and interest-rate exposure; and reinsurer credit risk. A new reinsurance program effective July 1, 2021 provides $190 million excess of a $10 million per-occurrence retention, subject to exclusions.
- Unusual items included $3.0 million of first-half employee severance costs from a reduction-in-force and higher corporate compensation costs associated with the former CEO’s retirement and share awards. Management reported no material change to previously disclosed risk factors, no material expected litigation impact, and no off-balance-sheet arrangements.
Important facts for investors to verify
- How premium production, payroll exposure, retention, and renewal pricing develop, especially in California and pandemic-affected industries.
- Whether lower claim frequency persists and whether COVID-related or other latent claims, catastrophic losses, or reserve revisions affect future results.
- How investment income and realized or unrealized investment gains evolve with interest rates and equity markets; the filing estimates that a 100-basis-point rise would reduce fixed-maturity and short-term investment fair value by $92.3 million before tax.
- Liquidity available to the holding company given dividend restrictions at certain insurance subsidiaries, the $54.4 million in unfunded private-equity commitments, and continuing dividends and repurchases.
- The July 2021 reinsurance program’s exclusions, recoverability, and adequacy under severe or pandemic-related claim scenarios.