Employers Holdings, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Employers Holdings provides workers’ compensation insurance, primarily to small businesses; nearly half of in-force premiums were in California. The company reports Employers and Cerity segments. All dollar amounts are in millions unless noted.
Financial performance and condition
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net premiums earned | $151.5 | $175.5 | $319.4 | $350.3 |
| Total revenues | $211.4 | $204.3 | $338.4 | $424.6 |
| Net investment income | $19.9 | $21.4 | $39.8 | $43.2 |
| Net realized and unrealized investment gains (losses) | $39.7 | $7.4 | $(21.4) | $30.7 |
| Net income | $59.6 | $40.7 | $24.7 | $92.6 |
| Diluted EPS | $1.97 | $1.25 | $0.80 | $2.84 |
| Operating cash flow | Not presented separately for the quarter | $28.1 | $42.3 |
- Gross premiums written were $140.2 in Q2 and $324.9 for the first half, down from $176.6 and $386.6, respectively, in 2019. The Employers segment’s combined ratio was 88.0% in Q2 and 94.1% for the first half, versus 86.8% and 87.0% in 2019. Its underwriting income was $18.2 in Q2 and $18.9 for the first half.
- At June 30, total assets were $4,004.0, stockholders’ equity was $1,144.0, and cash and cash equivalents were $131.8. Investments totaled $2,750.8. Unpaid losses and LAE were $2,170.7.
- The company received $35.0 of zero-interest FHLB advances; repayment is scheduled for $15.0 in November 2020 and $20.0 in May 2021. Management said the holding company had no outstanding debt and operating subsidiaries had no interest-bearing debt. The advances remain repayable obligations.
- Operating subsidiaries held $2,832.2 in cash and investments. Management said liquidity was adequate and expected subsidiary liquidity needs over the next 24 months to be met from operations, investment income, and maturing investments. First-half financing cash outflow was $55.6, including $72.9 of share repurchases and $15.8 of dividends paid, partly offset by the FHLB advances.
Material changes versus prior periods
- Q2 net income increased to $59.6 from $40.7, principally alongside higher investment gains; premiums earned fell 13.7%. For the first half, net income declined to $24.7 from $92.6, reflecting lower premiums and a swing in investment results from $30.7 of gains to $21.4 of losses.
- Investment results were volatile: Q2 investment gains included $32.5 of net realized and unrealized equity-security gains and $7.5 of net realized fixed-maturity gains. First-half equity-security results were a $21.3 loss. Net investment income also declined, partly due to faster mortgage-backed-security prepayments and related premium amortization.
- Employers’ first-half combined ratio increased to 94.1% from 87.0%. The loss ratio was 57.1% versus 52.4%, and the underwriting expense ratio rose to 24.3% from 21.5%.
- Favorable prior-year loss development was $23.6 in Q2 and $27.1 for the first half, compared with $23.7 and $45.9 in 2019. Management limited recognition of favorable development for more recent accident years given recession-related uncertainty.
- Cash, cash equivalents, and restricted cash declined by $23.1 in the first half, compared with a $3.8 increase in 2019. The company repurchased 1.03 million shares in Q2. The board later expanded the repurchase authorization to $200.0 and declared a $0.25-per-share dividend payable in August.
Outlook, commentary, and risks
- Management gave no specific financial guidance. It expected new-business premium to remain below prior-year levels until insured businesses could reopen, resume operations, and increase staffing and payroll. Submissions, quotes, and binds weakened from late March through May; new submissions and policies bound increased year over year in June, but new-business premium remained pressured. California activity lagged other states.
- COVID-19-related business closures, unemployment, reduced payrolls, and premium-reducing mid-term endorsements pressured written premiums. The company reduced Q2 premiums by approximately $14.7 to reflect estimated exposure adjustments. Management said the ultimate premium decline remained uncertain.
- Management cited possible increases in claim frequency and severity, including from changes to presumed COVID-19 compensability, and possible recession-related cumulative trauma and latent claims. It considered current reserves adequate, but ultimate losses may take years to emerge. Medical and indemnity costs per claim increased, while claim frequency declined.
- The company entered a new reinsurance program effective July 1, 2020 through June 30, 2021, providing $190.0 of coverage above a $10.0 per-occurrence retention, subject to exclusions. Management did not expect the pandemic to trigger recovery under the current excess-of-loss program.
- COVID-19 market volatility affected investment values and credit risk. The company recorded a $1.2 allowance for expected credit losses on available-for-sale debt securities and increased its premiums-receivable allowance to $8.1. A further market-capitalization decline or other developments could trigger goodwill impairment; no impairment was recorded at June 30, when goodwill was $36.2.
- Other risks include competition and renewal price decreases (7.5% in Q2 and 6.9% for the first half), concentration in California and small-business sectors, investment and interest-rate risk, and reinsurer credit risk. The investment portfolio had a 2.7 duration; a hypothetical 100-basis-point rise in rates was estimated to reduce fixed-maturity fair value by $82.0 before tax.
- Insurance-subsidiary dividends to the holding company are subject to regulatory limits. Management said it did not foresee a need to suspend ordinary dividends, seek a capital infusion, or make material non-investment asset sales. Legal proceedings were described as ordinary-course matters not expected to materially affect results, liquidity, or financial position. Disclosure controls were reported effective.
Important facts for investors to verify
- How payroll reductions, business closures, and renewal pricing affect premium volume and retention, especially in California, restaurants, and hospitality.
- Whether favorable reserve development persists and whether COVID-19, recession effects, or medical-cost trends change ultimate claim estimates.
- Whether investment-market volatility, credit losses, mortgage prepayments, or interest-rate changes materially affect earnings, comprehensive income, and capital.
- Regulatory dividend capacity at insurance subsidiaries, liquidity after the scheduled FHLB advance repayments, and the company’s capital needs.
- Execution and costs of the Cerity platform, which reported a $6.7 first-half pretax loss, and the pace and amount of future share repurchases.