Employers Holdings, Inc. — Q2 2015 Form 10-Q
Business and period: Workers’ compensation insurer focused on small businesses, operating in 32 states and the District of Columbia, with more than half of business concentrated in California. This report covers the quarter and six months ended June 30, 2015; financial amounts are in millions unless noted.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net premiums earned | $170.6 | $172.6 | $329.6 | $339.9 |
| Total revenues | $190.9 | $200.3 | $368.1 | $388.8 |
| Net income | $29.2 | $45.6 | $43.2 | $56.4 |
| Diluted EPS | $0.90 | $1.42 | $1.33 | $1.76 |
| Underwriting income | $13.7 | $20.6 | $14.3 | $12.3 |
| Combined ratio | 92.0% | 88.0% | 95.7% | 96.4% |
- Net investment income was $18.4 million in Q2 and $35.3 million for six months, compared with $18.3 million and $36.3 million, respectively, in 2014. Net realized investment gains were lower: $1.9 million and $3.1 million, versus $9.2 million and $12.4 million.
- For six months, operating cash flow was $62.4 million, down from $78.1 million; investing activities used $100.4 million, and cash and cash equivalents declined $38.7 million to $64.9 million. Dividends paid were $3.8 million.
- At June 30, total investments were $2.518 billion; total assets were $3.811 billion, total liabilities $3.097 billion, and GAAP stockholders’ equity $714.5 million. Adjusted stockholders’ equity, a company-defined non-GAAP measure, was $820.1 million.
- Notes payable were $92.0 million: $60 million under the credit facility and $32 million of surplus notes. The facility’s $60 million principal was due December 31, 2015. The company reported covenant compliance.
Changes and operating trends
- Compared with 2014, Q2 net income and diluted EPS fell substantially, while six-month underwriting income improved. The company attributed the lower reported earnings mainly to smaller favorable Loss Portfolio Transfer (LPT) adjustments and lower realized investment gains than in 2014.
- Gross premiums written declined 1.6% in Q2 and 4.0% for six months year over year. Net premiums earned declined 1.2% and 3.0%, respectively, reflecting lower policy counts and payroll exposure, partly offset by higher net rates.
- California represented 58% of in-force premiums. At June 30, total in-force premiums were $627.6 million versus $633.7 million a year earlier; California premiums were $363.1 million versus $381.9 million. California net rate rose 10.1% year over year, while payroll exposure fell 13.7%.
- The six-month loss and LAE ratio improved to 63.0% from 65.0%; Q2 increased to 59.5% from 57.1%. The six-month current accident-year loss estimate fell to 67.1% from 74.4%, which management associated with rate increases exceeding anticipated loss-cost increases and a changed business mix. Commission ratios increased, including because of partner business, preferred-class commission changes, and an assigned-risk accrual.
Outlook, risks and unusual items
- No specific earnings or revenue guidance was provided. Management said it expected holding-company liquidity needs over the next 24 months to be met by available cash and investments and subsidiary dividends; it expected subsidiaries’ needs to be met by operations, investment income and maturities. These are forward-looking assessments, not guarantees.
- Q2 2015 included $11.3 million of net-income benefit from estimate changes: $6.4 million from favorable LPT reserve adjustment, $2.4 million from an increased LPT contingent commission estimate, and $2.5 million from reallocating reserves to taxable years, reducing tax expense. The comparable Q2 2014 benefit was $29.6 million. Company-defined net income before LPT impact was $17.6 million in Q2 2015 versus $14.6 million in Q2 2014, and $28.4 million versus $21.1 million for six months.
- Management noted slightly higher medical and indemnity costs per claim, while indemnity claim frequency declined. Loss reserves are inherently uncertain given the long-tail nature of claims. Reinsurance recoverables and LPT estimates are also important judgments.
- A new reinsurance program took effect July 1, 2015 through June 30, 2016, providing $193 million excess of a $7 million per-occurrence retention, subject to exclusions. The company said it believed its capitalization and reinsurance program were adequate.
- Investment fair value exceeded cost, but accumulated other comprehensive income fell to $89.5 million from $106.9 million at year-end, reflecting investment valuation changes. Management attributed fixed-income unrealized losses primarily to interest rates; it recognized $0.1 million of equity-security impairment. The portfolio’s fixed-maturity duration was 4.2 years and weighted average quality was AA-. Interest-rate, credit, equity-market, reserve and California concentration risks remain relevant.
- Management reported no material change in market risk or previously disclosed risk factors. Routine litigation was not expected to materially affect results, liquidity or financial position. No off-balance-sheet arrangements were reported.
Key facts for investors to verify
- How much of reported earnings depends on LPT estimates and other reserve or tax reallocations, and how those estimates develop in later periods.
- Whether premium and policy-count trends, especially in California, stabilize as pricing and underwriting actions continue.
- Whether current loss reserves remain adequate as medical and indemnity costs per claim evolve.
- How the December 2015 $60 million credit-facility maturity is funded and whether subsidiary dividend restrictions affect parent liquidity.
- How investment income, interest-rate movements and unrealized portfolio losses affect earnings, equity and insurer capital.