Employers Holdings, Inc. — Q1 2014 Form 10-Q
Business and period. The filing covers the three months ended March 31, 2014. Employers Holdings provides workers’ compensation insurance, primarily to small businesses, through subsidiaries operating in 31 states and the District of Columbia. California accounted for about 60% of in-force premiums.
Financial performance and condition
| Metric | Q1 2014 | Q1 2013 / comparison |
|---|---|---|
| Net premiums earned | $167.2 million | $148.0 million; up 13.0% |
| Total revenue | $188.5 million | $166.3 million |
| Net investment income | $18.0 million | $17.4 million; up 3.5% |
| Net realized investment gains | $3.3 million | $0.8 million |
| Net income | $10.8 million; diluted EPS $0.34 | $7.5 million; diluted EPS $0.24 |
| Underwriting result | Loss of $8.5 million | Loss of $10.2 million |
| Combined ratio | 105.1% | 106.9% |
| Operating cash flow | $38.6 million | $41.6 million |
Loss and LAE ratio was 73.1% versus 73.2%; underwriting and other operating expense ratio was 20.0% versus 21.3%; commission expense ratio was 12.0% versus 12.4%. The combined ratio remained above 100%, indicating underwriting losses before investment income.
At March 31, 2014, total assets were $3.70 billion, investments were $2.38 billion, cash and cash equivalents were $51.1 million, total liabilities were $3.11 billion, and GAAP stockholders’ equity was $587.9 million. Notes payable totaled $102.0 million: $70.0 million under the credit facility and $32.0 million in surplus notes. The company reported $833.1 million of equity including the deferred LPT gain, a non-GAAP measure. Cash increased $16.6 million during the quarter; investing activities used $20.8 million and financing activities used $1.2 million. Dividends declared were $0.06 per share.
Changes and management commentary
- Gross premiums written rose 6.3%; net premiums earned increased 13.0%. Management attributed premium growth to higher policy count, average policy size, and net rates. Year-over-year in-force premiums were up 12.5% overall and 14.0% in California.
- Losses and LAE increased 12.9%, broadly in line with premium growth. Prior-period development was unfavorable by $1.8 million, primarily related to assigned-risk business, versus $1.1 million unfavorable in Q1 2013.
- Management reported declining indemnity claim frequency but rising medical and indemnity costs per claim. Litigation-related costs increased; in Southern California, the share of claims in litigation was nearly 15 percentage points higher year over year for the quarter. Management considered the current accident-year loss estimate adequate, while noting ultimate claims costs remain uncertain.
- Management expected 2014 premiums to reflect overall net rate increases, higher average policy size, and stable policy-count growth compared with 2013. No quantitative earnings or revenue guidance was provided. The company did not anticipate cost savings from California’s SB 863 reforms at this time; savings depend on implementation.
- Net income included LPT Agreement accounting effects. The company reported net income before LPT Agreement impacts of $6.5 million, versus $3.5 million, a non-GAAP measure. Q1 also benefited from higher realized investment gains. Investment portfolio book yield fell to 3.3% from 3.5% a year earlier; tax-equivalent yield fell to 4.0% from 4.3%.
Liquidity, risks, and contingencies
Management said holding-company liquidity needs for the next 24 months should be met by cash, investments, and subsidiary dividends; subsidiary liquidity needs should be met by operations, investment income, and maturing investments. Subsidiary dividends are subject to insurance regulation. The holding company had $51.9 million of cash and cash equivalents plus fixed maturities due within 24 months; subsidiaries had $351.8 million on the same stated basis. The company reported compliance with credit-facility covenants. The $70 million facility principal was scheduled for repayment in installments of $10 million in 2014 and $60 million in 2015.
The company’s reinsurance program provided $195 million of per-occurrence coverage above a $5 million retention, subject to a $2 million annual aggregate deductible and exclusions, through June 30, 2014. Investments are exposed principally to interest-rate, credit, and equity-price risks; fixed maturities had a duration of 4.2 years. The company reported no material change in market risk since year-end. It identified loss reserves, reinsurance recoverables, premium recognition, taxes, investments, and goodwill/intangibles as significant estimation areas. Management said pending or threatened ordinary-course litigation was not expected to materially affect results, liquidity, or financial position; it reported no material changes to previously disclosed risk factors and no off-balance-sheet arrangements.
Investor verification points
- Track whether premium growth and rate increases keep pace with rising claim severity, litigation costs, and reserve development; scrutinize California exposure and assigned-risk claims.
- Review reserve adequacy and reinsurance recoverability, including remaining LPT Agreement liabilities, deferred gain, and contingent commission estimates.
- Assess whether the combined ratio can improve below 100% and distinguish recurring underwriting results from investment gains and LPT-related effects.
- Monitor investment yields, interest-rate sensitivity, unrealized losses, and the quality and liquidity of assets, including securities pledged or held on deposit.
- Confirm the timing and funding of credit-facility repayments, subsidiary dividend capacity, and renewal or replacement of the reinsurance program after June 30, 2014.