Employers Holdings, Inc. — Q2 2017 Form 10-Q
Business context and reporting period. The filing covers the quarter and six months ended June 30, 2017. Employers Holdings provides workers’ compensation insurance to small businesses across 36 states and the District of Columbia, with 56% of in-force premiums in California. It reports one operating segment.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net premiums earned | $171.7 million | $176.9 million | $347.1 million | $349.5 million |
| Total revenues | $193.2 million | $201.8 million | $389.5 million | $393.8 million |
| Net income | $24.8 million | $26.8 million | $48.0 million | $48.6 million |
| Diluted EPS | $0.75 | $0.81 | $1.46 | $1.47 |
| Underwriting income | $11.5 million | $9.7 million | $20.5 million | $18.4 million |
| Combined ratio | 93.3% | 94.5% | 94.1% | 94.7% |
For the six months, net cash from operations was $42.6 million, investing cash flow was negative $48.8 million, and financing cash flow was negative $18.4 million; cash and cash equivalents ended at $42.6 million, down from $67.2 million at year-end 2016. Total assets were $3.825 billion and stockholders’ equity was $899.2 million at June 30, 2017. Notes payable were $20.0 million, down from $32.0 million at year-end.
Total investments were $2.624 billion, primarily available-for-sale securities. Fixed maturities had a weighted average credit quality of AA-, a duration of 4.1, and 55.6% rated AA or better. The company reported $43.2 million of cash and investments at the holding company and $2.621 billion at operating subsidiaries. It said subsidiary liquidity needs were expected to be met through operations, investment income, and maturities; insurance-subsidiary dividends are subject to regulatory restrictions.
Material changes and operating trends
- Q2 total revenues fell 4.3% year over year and net income fell 7.5%; six-month revenue and net income declined 1.1% and 1.2%, respectively.
- Underwriting results improved: the combined ratio decreased 1.2 percentage points in Q2 and 0.6 points for the first half. The six-month loss and LAE ratio was 61.9%, versus 62.7% a year earlier.
- Gross premiums written were $184.5 million in Q2, down from $190.6 million; first-half written premiums were $382.1 million, slightly above $381.3 million. Renewal pricing decreased 2.6% in Q2 and 1.8% year to date, while higher payroll exposure supported new business.
- Net investment income was nearly flat in Q2 ($18.2 million versus $18.4 million) and increased to $36.9 million for the first half from $36.2 million. Realized investment gains declined to $1.1 million in Q2 from $6.0 million, and to $3.3 million for the first half from $7.5 million.
- Q2 2016 earnings included $4.9 million of favorable LPT reserve and contingent-commission adjustments. Management’s non-GAAP net income before LPT impact was $21.7 million for Q2 2017 versus $19.2 million, and $42.0 million for the first half versus $37.9 million.
- The company redeemed $12.0 million of surplus notes for $9.9 million in May, recording a $2.1 million gain. The quarterly statements report a $0.4 million interest expense in Q2 and $0.8 million for the first half.
Outlook, risks, and unusual items
No formal earnings or premium guidance is provided. Management said it continued to write attractive business and believed the company was well positioned, citing its balance sheet and underwriting, claims, investment, and capital-management strategies. It noted competitive market conditions and lower renewal pricing. A new reinsurance program began July 1, 2017, providing $190.0 million of coverage in excess of a $10.0 million per-occurrence retention, subject to exclusions.
Loss and LAE reserves are a significant estimate and are inherently uncertain for this long-tail business. Management reported declining claim frequency and a slight downward trend in medical and indemnity costs per claim, and considered its current accident-year loss estimate adequate; ultimate losses may differ materially. At June 30, gross unpaid losses and LAE were $2.285 billion, with $559.8 million of reinsurance recoverables. The LPT Agreement also involves estimates of recoveries, deferred gain amortization, and contingent commissions; its remaining estimated liabilities were $451.5 million and its deferred gain was $168.9 million.
Other exposures include California concentration, investment interest-rate, credit and equity-price risks, and restrictions on subsidiary capital distributions. Unrealized investment losses were primarily attributed to interest rates; one equity security impairment of $0.2 million was recognized in the first half. Management reported no material change in market risk, no material change to previously disclosed risk factors, no off-balance-sheet arrangements, and no litigation expected to materially affect results, liquidity, or financial position. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether current accident-year loss estimates and the $2.285 billion gross loss reserve remain adequate as claims develop.
- How LPT recoverables, deferred gain amortization, and contingent-commission estimates affect reported earnings and capital.
- Whether premium growth and retention can offset continued rate reductions, particularly given California’s share of business and declines in the Los Angeles area.
- Investment portfolio valuation, credit quality, duration, and liquidity, including the effect of interest-rate changes and equity market movements.
- Availability of holding-company liquidity and subsidiary dividends under insurance regulatory constraints, and the practical protection provided by the new reinsurance program.