Employers Holdings, Inc. — 2017 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2017. The company is a workers’ compensation insurer focused on small businesses in low- to medium-hazard industries, operating in 37 states and Washington, D.C. More than half of in-force premiums came from California.
Financial performance and condition
| Metric | 2017 | 2016 |
|---|---|---|
| Net premiums written | $723.7 million | $694.6 million |
| Net premiums earned | $716.5 million | $694.8 million |
| Total revenues | $801.4 million | $779.8 million |
| Net income | $101.2 million | $106.7 million |
| Diluted earnings per share | $3.06 | $3.24 |
| Net cash from operating activities | $142.3 million | $122.8 million |
| Total assets | $3.84 billion | $3.77 billion |
| Stockholders’ equity | $947.7 million | $840.6 million |
- Combined ratio improved to 90.5% from 91.8%; below 100% indicates underwriting profit. Loss and LAE ratio fell to 58.2% from 60.1%, while commission expense ratio increased to 12.8% from 12.0%.
- Underwriting income rose to $68.0 million from $57.3 million. Net income before the impact of the LPT Agreement, a company-defined non-GAAP measure, was $89.6 million versus $90.1 million.
- Net investment income increased to $74.6 million from $73.2 million. Net realized investment gains were $7.4 million, down from $11.2 million.
- Cash and cash equivalents were $73.3 million; total investments were $2.68 billion. The investment portfolio’s fair value exceeded amortized cost. Operating subsidiaries reported $2.68 billion of cash and investments.
- Notes payable fell to $20.0 million from $32.0 million after the company bought and redeemed a $12.0 million surplus note for $9.9 million, recording a $2.1 million gain. Remaining surplus notes mature in 2034; interest and principal payments require Florida regulatory approval.
- Gross unpaid losses and LAE were $2.27 billion, with $537.0 million of reinsurance recoverables on unpaid losses and $1.73 billion of net reserves. The company reported $544.2 million in total paid and unpaid reinsurance recoverables.
Changes versus prior year
- Net premiums written rose about 4%, and total revenues rose about 3%; net income declined about 5% and diluted EPS declined from $3.24 to $3.06.
- Underwriting results improved, with the combined ratio down 1.3 percentage points. Favorable prior-year accident-year loss development was $18.5 million, approximately unchanged from $18.4 million in 2016.
- Cash from operations increased to $142.3 million. Cash and cash equivalents increased by $6.1 million during 2017, compared with a $10.6 million increase in 2016.
- Stockholders’ equity increased to $947.7 million. Dividends paid rose to $19.7 million from $11.5 million; no shares were repurchased during 2017.
- Renewal pricing decreased 3.3% year over year. In-force premiums grew 1.3% overall, with California up 0.3% and other states up 2.7%.
Outlook, significant items and risks
- Management said it was positioned for the current market cycle but described continued price competition and excess underwriting capacity in workers’ compensation. No formal financial guidance was provided.
- The company plans to accelerate investment in digital technology, using expected benefits from federal tax reform. It expects higher underwriting and operating expenses in 2018 and 2019, with those costs expected to be more than offset by later efficiency gains.
- A $7.5 million write-off of previously capitalized technology costs reduced 2017 results. The 2017 effective tax rate was 29.7%, including a $7.0 million charge from revaluing deferred taxes after the Tax Cuts and Jobs Act reduced the federal corporate rate from 35% to 21% beginning in 2018. The company said further tax adjustments could be needed, but did not expect them to be material.
- Management cited declining claims frequency and slight downward movement in medical and indemnity costs per claim in 2017, alongside continued long-term medical and indemnity cost trend risk. A 1% increase in medical-cost inflation above the reserve assumption was estimated to increase future medical costs on current claims by about $90 million net of reinsurance.
- Key exposures include reserve-estimation uncertainty, California concentration (56% of in-force premiums), regulatory and rate constraints, competition, catastrophe and terrorism losses, investment-market risk, and the collectability and renewal terms of reinsurance. The A.M. Best rating for insurance subsidiaries was A- with a positive outlook.
- The 1999 LPT Agreement covers substantially all specified pre-July 1, 1995 Nevada claims, subject to a $2.0 billion coverage limit. Remaining liabilities under the agreement were estimated at $438.9 million, supported by $380.8 million in trust assets. The company remains liable to policyholders if reinsurers fail to pay.
- The company had agreed to acquire PartnerRe Insurance Company of New York for its closing statutory capital and surplus, estimated at approximately $40 million, plus $5.8 million. The acquisition was subject to closing conditions, including New York regulatory approval; no employees or ongoing operations were to be acquired.
- Management and the independent auditor reported effective internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether the $18.5 million of favorable prior-year loss development is sustainable and how reserves compare with subsequent claims experience.
- California workers’ compensation trends, renewal pricing, and the company’s progress diversifying geographically.
- Actual technology spending in 2018–2019 and whether projected efficiency gains offset expense increases.
- Closing status and final economics of the proposed PartnerRe New York insurer acquisition.
- Reinsurance counterparties’ financial strength, LPT trust collateral adequacy, and remaining coverage capacity for large losses.
- Holding-company cash availability and regulatory limits on subsidiary dividends; the company declared a $0.20-per-share dividend for March 2018 and authorized a new share repurchase program of up to $50 million.