Employers Holdings, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. The company provides workers’ compensation insurance, primarily to small businesses, through its Employers and Cerity distribution segments. California represented 45% of in-force premiums.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net premiums earned | $165.2m | $137.0m | $315.4m | $270.9m |
| Total revenue | $135.3m | $171.4m | $287.3m | $335.0m |
| Net investment income | $20.0m | $18.2m | $39.1m | $36.6m |
| Net realized and unrealized investment gains (losses) | $(50.1)m | $16.0m | $(67.4)m | $26.9m |
| Net income (loss) | $(15.6)m | $26.4m | $(17.8)m | $49.5m |
| Diluted earnings (loss) per share | $(0.56) | $0.92 | $(0.65) | $1.71 |
Premium growth was supported by new and renewal business and higher final audit premiums. The investment losses, attributed mainly to rising interest rates, inflation and market volatility, more than offset higher premiums and investment income. Q2 and first-half 2022 consolidated underwriting income was $8.8m and $4.7m, respectively, versus underwriting losses of $1.7m and $0.8m in the comparable 2021 periods. The Employers segment reported underwriting income of $12.5m in each 2022 period; Cerity remained loss-making.
- Underwriting: Employers’ combined ratio was 92.4% for Q2 and 96.0% for the first half, compared with 98.8% and 96.4% a year earlier. Lower expense ratios helped; commission ratios rose. Current-accident-year loss ratios were 63.9% and 64.0%, slightly above the comparable 2021 periods.
- Prior-year reserves: Favorable development was $10.0m in both Q2 and the first half of 2022, primarily related to accident years 2017 and earlier.
- Cash flow: Operating activities generated $37.9m in the first half, compared with $24.7m used in the prior-year period. Investing activities used $44.3m; financing activities provided $61.4m, including FHLB advances.
- Balance sheet and liquidity: At June 30, total assets were $3,685.5m, total liabilities $2,708.0m, and stockholders’ equity $977.5m, down from $1,213.1m at year-end 2021. Cash and restricted cash were $130.3m. Investments totaled $2,512.4m; fixed-maturity and equity investment fair values fell materially during the period. Accumulated other comprehensive loss was $94.7m, versus income of $60.6m at year-end.
- Debt and commitments: The company had $126.0m of FHLB advances, used to purchase collateralized loan obligation securities; the reported weighted-average rate was 0.90%. No revolving credit-facility balance was outstanding, and the company reported compliance with debt covenants. Private-equity investment commitments were $68.6m.
Changes, outlook and risks
- Gross premiums written rose 22.0% in Q2 and 19.1% in the first half year over year. Total in-force premiums, including estimated audit premiums, were $612.1m at June 30, 2022, versus $581.5m a year earlier.
- Management said strengthening payroll exposure and higher new and renewal business were supporting premium growth, and expected further top-line improvement if labor markets and payrolls continued to strengthen. No numerical earnings or premium guidance was provided.
- Management cited COVID-19-related uncertainty, inflation, labor-market and supply-chain disruption, geopolitical events, and market volatility. Higher inflation could raise claim, medical, litigation and operating costs; reserve estimates remain uncertain. Interest-rate increases reduce fixed-income market values, though they may improve yields on new investments.
- The fixed-maturity portfolio had a 4.1 duration and A+ weighted-average quality. A hypothetical 100-basis-point rate increase was estimated to reduce fair value by $81.4m before tax. The AFS securities credit-loss allowance was $10.0m, up from $0.2m at year-end.
- The company paid $42.1m in dividends in the first half, including a $1.00-per-share special dividend, and repurchased $14.6m of stock in Q2. A $0.26-per-share quarterly dividend was declared after quarter-end. Management stated liquidity was adequate and it did not foresee a need to suspend ordinary dividends or repurchases, seek capital, or make material non-investment asset sales.
- A new reinsurance program began July 1, 2022, providing $190.0m of per-occurrence excess coverage above a $10.0m retention, subject to exclusions. Management said it believed coverage and capitalization were adequate.
- Management reported no material change in previously disclosed risk factors. Routine pending or threatened litigation was not expected to materially affect results, liquidity or financial position. Disclosure controls were assessed as effective.
Key facts for investors to verify
- How much of investment losses reflects unrealized market-value declines versus realized losses or credit deterioration, and how portfolio values respond to market conditions.
- Whether premium growth and payroll recovery persist, and how audit-premium estimates and retention develop.
- Whether claims trends, inflation and reserve development support current loss estimates and combined ratios.
- The liquidity and capital implications of the $126.0m FHLB advances, restricted assets, subsidiary dividend limits and $68.6m of unfunded investment commitments.
- The sustainability of dividends and repurchases given the first-half net loss, lower equity and investment-market volatility.