Employers Holdings, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; balance-sheet comparisons are with December 31, 2019. Employers Holdings provides workers’ compensation insurance, primarily to small businesses, with substantial exposure to California. Its reportable segments are Employers and Cerity.
Financial performance
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Gross premiums written | $184.7 million | $210.0 million |
| Net premiums earned | $167.9 million | $174.8 million |
| Net investment income | $19.9 million | $21.8 million |
| Investment realized and unrealized losses (gains) | $(61.1) million | $23.3 million |
| Total revenue | $127.0 million | $220.3 million |
| Losses and loss adjustment expenses | $104.3 million | $88.6 million |
| Net income (loss) | $(34.9) million | $51.8 million |
| Basic/diluted EPS | $(1.14) | Basic $1.60; diluted $1.57 |
| Operating cash flow | $15.5 million | $20.1 million |
Employers segment underwriting income was $0.7 million, down from $22.4 million. Its combined ratio rose to 99.5% from 87.2% (loss and LAE ratio 63.5% versus 52.1%; underwriting expense ratio 23.3% versus 22.5%; commission ratio 12.7% versus 12.6%). Current accident-year loss ratio was 65.6%, compared with 64.8%. Prior-year favorable reserve development fell to $3.5 million from $22.2 million.
Financial position and liquidity
- At March 31, total assets were $3,912.2 million, total liabilities $2,854.9 million, and stockholders’ equity $1,057.3 million, compared with $4,004.1 million, $2,838.3 million, and $1,165.8 million, respectively, at year-end 2019.
- Cash and cash equivalents were $174.1 million; total investments were $2,620.5 million. Cash, cash equivalents and restricted cash increased $19.2 million during the quarter. Investing activities provided $56.2 million; financing activities used $52.5 million.
- The company reported no outstanding debt or FHLB advances. Its insurance subsidiaries have access to collateralized FHLB facilities and letters of credit, subject to collateral and use restrictions. Holding-company cash and investments totaled $34.2 million.
- Gross unpaid losses and LAE were $2,191.7 million, with $527.0 million of reinsurance recoverables on unpaid losses, excluding the CECL allowance. Insurance-subsidiary dividends to the parent are subject to state restrictions.
Material changes and unusual items
- Net premiums earned declined 3.9% year over year; gross premiums written declined about 12.0%. Management attributed the reduction to COVID-19-related payroll and business activity declines, lower estimated audit premiums, weaker new-business activity late in March, and competitive rate pressure. Renewal pricing was down 5.9% year over year.
- Investment losses of $61.1 million, versus gains of $23.3 million a year earlier, primarily reflected pandemic-related market volatility, including equity declines and wider credit spreads. The company recorded a $10.7 million allowance for expected credit losses on available-for-sale debt securities under newly adopted CECL accounting.
- Net investment income decreased 8.7%, partly due to increased amortization of mortgage-backed securities premiums. Average pre-tax book yield on invested assets was 3.2%, down from 3.4% a year earlier.
- The company repurchased 1,143,581 shares for $42.5 million during the quarter and paid $8.0 million in dividends. The board expanded the repurchase authorization to $150 million and extended it through June 30, 2021. A $0.25-per-share dividend was declared after quarter-end, payable May 20, 2020.
- California represented approximately 48% of in-force premiums. In-force premiums were $642.6 million at March 31, 2020, down from $674.5 million a year earlier. Cerity generated less than $0.1 million of written premiums in the quarter and recorded a $4.7 million pre-tax loss.
Outlook, commentary and risks
- Management expected new-business writings to continue declining until insured businesses could reopen; the duration and magnitude were uncertain. March endorsements reduced policyholder premiums by $5.3 million, and April endorsements through April 17 reduced them by a further $6.0 million.
- Management said it believed liquidity remained adequate, did not foresee needing to suspend ordinary dividends, obtain a capital infusion, or make material non-investment asset sales, and expected subsidiary liquidity needs over the next 24 months to be met by operating cash, investment income and maturities.
- Management considered its current accident-year loss estimate adequate, but warned that COVID-19 compensability, higher claim frequency or severity, recession effects, cumulative trauma claims and delayed claim reporting could affect losses and reserve development. Ultimate claims costs remain uncertain.
- COVID-19 risks include insured payroll and premium declines, small-business closures, distribution disruption, investment volatility, increased credit risk, potential regulatory changes or mandated premium relief, and possible workers’ compensation claims. The company stated it did not expect its current excess-of-loss reinsurance program to be triggered by the pandemic.
- Other significant risks include California concentration, intense pricing competition, investment and interest-rate risk, reinsurance counterparty risk, regulatory limits on insurer dividends, and uncertainty in claims and investment valuations. Management provided no quantified earnings or premium guidance.
Key facts for investors to verify
- Subsequent premium, policy-count and payroll trends, including the effects of business closures, endorsements and renewal pricing.
- Investment portfolio recovery, credit-loss allowances, equity exposure and any further realized or unrealized losses.
- Claims frequency and severity, COVID-19 compensability developments, and subsequent reserve development.
- Available statutory dividend capacity, holding-company liquidity, repurchase activity and whether the declared dividend was paid.
- Actual performance against management’s stated liquidity expectations and the duration and terms of the reinsurance program.