Employers Holdings, Inc. (EIG) - 2009 Annual Report Summary
Business Context and Reporting Period
This Form 10-K covers the fiscal year ended December 31, 2009. Employers Holdings, Inc. is a Nevada holding company and a specialty provider of workers' compensation insurance, focusing on select small businesses in low to medium hazard industries. The company operates in 30 states, with approximately 46.9% of in-force premiums generated in California. In 2009, the company completed a strategic restructuring plan initiated in January, which included a 14% reduction in workforce (approximately 150 employees) and the consolidation of corporate functions. The company also completed the integration of its 2008 acquisition, AmCOMP Incorporated, into its policy administration and claims systems.
Key Financial Metrics
| Metric | 2009 | 2008 |
|---|---|---|
| Net Premiums Written | $368.3 million | $308.3 million |
| Total Revenues | $495.9 million | $396.8 million |
| Net Income | $83.0 million | $101.8 million |
| Earnings Per Share (Diluted) | $1.80 | $2.07 |
| Combined Ratio (GAAP) | 98.0% | 85.9% |
| Combined Ratio (Statutory) | 99.0% | 84.9% (5-year avg) |
| Total Assets | $3.68 billion | $3.83 billion |
| Total Liabilities | $3.18 billion | $3.38 billion |
| Stockholders' Equity | $498.4 million | $444.7 million |
| Unpaid Losses & LAE (Net) | $1.37 billion | $1.43 billion |
| Cash and Cash Equivalents | $191.6 million | $202.9 million |
Material Changes vs. Prior Period
- Profitability Decline: Net income decreased 18.4% to $83.0 million, primarily driven by a $77.9 million increase in losses and loss adjustment expenses (LAE) and a $37.5 million increase in underwriting and operating expenses. These increases were partially offset by a 22.9% rise in net premiums earned.
- Combined Ratio Deterioration: The GAAP combined ratio increased 12.1 percentage points to 98.0%. This was largely due to a decrease in favorable prior accident year loss development (from $71.7 million in 2008 to $51.4 million in 2009) and lower premiums earned in key markets like California and Nevada due to economic conditions and rate reductions.
- Expense Increases: Underwriting and other operating expenses rose 37.1%, attributed to the inclusion of AmCOMP operations, increased compensation costs, and $5.7 million in one-time restructuring and integration charges. Interest expense increased 247.0% due to debt incurred to finance the AmCOMP acquisition.
- Investment Performance: Net investment income increased 15.9% to $90.5 million. Realized gains on investments were $0.8 million in 2009, compared to realized losses of $11.5 million in 2008.
- Policy Count: Total in-force policies decreased 3.2% year-over-year, with significant declines in Nevada (21.1%) and Florida (15.6%) due to adverse economic conditions, partially offset by growth in the Midwest and Southeast.
Guidance, Outlook, and Risks
- Outlook: Management expects continued downward pressure on premiums in 2010 due to economic conditions, though this may be partially offset by policy count growth and rate increases in California. The company anticipates achieving annual pre-tax cost savings of $20.0 million to $22.0 million beginning in 2010 from its restructuring plan.
- Rate Environment: The company filed for a 3.0% rate increase in California effective March 15, 2010. In Florida, a 6.8% rate decrease was approved for 2010. In Nevada, a 7.6% rate decrease is scheduled for March 1, 2010.
- Capital Management: The Board authorized a new $50 million share repurchase program for 2010. The company maintains an A.M. Best rating of "A-" (Excellent) with a stable outlook.
- Key Risks:
- Economic Conditions: High unemployment and business failures in key markets (California, Nevada, Florida) reduce payrolls and premium volume.
- Reserve Uncertainty: Workers' compensation is a "long-tail" line; ultimate losses may differ significantly from estimates. While the company has experienced favorable reserve development, future unfavorable development is possible.
- Reinsurance: The company relies on reinsurance to manage catastrophic risk. Failure of reinsurers to pay or inability to renew coverage on favorable terms could materially impact results.
- Regulatory Changes: Legislative or judicial changes in workers' compensation laws, particularly in California and Florida, could increase claim costs.
Investor Verification Checklist
- Reserve Adequacy: Verify the assumptions used for the $1.37 billion in net unpaid loss reserves, specifically regarding medical cost inflation and the impact of California/Florida legislative reforms.
- Reinsurance Exposure: Review the concentration of reinsurance recoverables ($1.05 billion) and the financial strength of key reinsurers, particularly regarding the LPT Agreement covering pre-1995 Nevada risks.
- California Market Concentration: Assess the impact of the 46.9% premium concentration in California, given the state's economic volatility and regulatory rate-setting environment.
- Restructuring Savings: Monitor the realization of the projected $20-$22 million in annual cost savings from the 2009 restructuring plan.
- Debt Obligations: Confirm compliance with covenants on the $100 million outstanding credit facility and surplus notes, and the impact of interest rate fluctuations on expenses.