Employers Holdings, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; balance-sheet comparisons are to December 31, 2017. Employers Holdings provides workers’ compensation insurance, primarily to small businesses, in 40 states and the District of Columbia. California generated 55% of in-force premiums.
Financial results and position
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Gross premiums written | $211.6 million | $197.6 million |
| Net premiums earned | $176.6 million | $175.3 million |
| Total revenue | $188.0 million | $196.3 million |
| Net investment income | $19.4 million | $18.8 million |
| Net realized and unrealized investment losses (gains) | $(8.0) million | $2.2 million gain |
| Net income / diluted EPS | $25.6 million / $0.77 | $23.2 million / $0.70 |
| Combined ratio | 89.6% | 94.9% |
| Operating cash flow | $46.2 million | $30.7 million |
Underwriting income increased to $18.3 million from $8.9 million. The loss and LAE ratio improved to 54.0% from 62.2%; expense and commission ratios rose to 22.2% and 13.4%, respectively, from 20.4% and 12.3%. Renewal pricing was down 9.5% year over year. Gross premiums written grew mainly on higher new-business policy counts, partly offset by lower renewal premiums and average rates.
Total assets were $3,847.9 million and stockholders’ equity was $930.3 million at March 31. Claims and policy liabilities totaled $2,610.0 million, including $2,258.1 million of unpaid losses and LAE. Notes payable were $20.0 million. Cash, cash equivalents and restricted cash were $57.2 million, down from $74.3 million at year-end. Cash used in investing activities was $53.7 million and cash used in financing was $9.6 million, including $6.6 million in dividends paid.
Management reported $78.1 million of cash and investments at the holding company and $2,647.4 million at operating subsidiaries. It stated that subsidiary liquidity needs over the next 24 months are expected to be met by operating cash flow, investment income and maturities. The company had no advances outstanding under its FHLB facility; $140.0 million of standby letters of credit replaced securities required on deposit in California. Fixed maturities were 91% of the investment portfolio; their duration was 4.4 and weighted average quality was AA-.
Material changes and unusual items
- Net income rose despite lower total revenue, primarily reflecting improved underwriting results and a lower tax expense, partly offset by investment losses. Q1 2018 investment results included $12.9 million of unrealized equity losses, attributed mainly to equity-market volatility, particularly in the energy sector, and $2.0 million of impairment losses on fixed maturities the company intended to sell.
- Favorable prior-year loss development was $12.4 million ($12.0 million voluntary and $0.4 million assigned-risk), versus none in Q1 2017. Management attributed the voluntary development to observed favorable paid-loss trends and accelerated claims settlement activity. Current accident-year loss ratio was 62.5%, versus 63.8%.
- The effective tax rate fell to 12.9% from 21.4%; management cited tax-advantaged investment income, deferred-gain amortization and other items, and a $2.5 million reduction in tax expense resulting from the Tax Cuts and Jobs Act.
- Adoption of ASU 2016-01 moved $74.0 million, net of tax, from accumulated other comprehensive income to retained earnings and changed the treatment of equity-security fair-value movements: they are now reflected in earnings. The company also reported a $35.4 million after-tax other comprehensive loss for the quarter, largely reflecting investment valuation changes.
- The company has a pending agreement to acquire all shares of PartnerRe Insurance Company of New York. The purchase price is estimated at approximately $40.0 million of statutory capital and surplus plus $5.8 million; the company expects to use cash on hand. Closing remains subject to conditions, including New York regulatory approval. Existing PRNY liabilities are to be assumed by the seller, PRUS.
Outlook, risks and contingencies
No quantitative earnings or premium guidance was provided. Management cited a competitive workers’ compensation market and falling renewal prices, but said it expects to pursue profitable growth through disciplined underwriting, claims management and distribution initiatives. It noted slight upward movement in medical and indemnity costs per claim while stating its current accident-year loss estimate is adequate; ultimate claim costs remain uncertain. Investment risks include interest rates, issuer credit and equity-price volatility. Loss reserves, reinsurance recoverables, premium recognition, deferred taxes and investment valuations depend on estimates. The existing reinsurance program provides $190.0 million of coverage above a $10.0 million per-occurrence retention, subject to exclusions, through June 30, 2018. Management said pending or threatened litigation was not expected to have a material effect and reported no material changes to previously disclosed risk factors.
The board authorized a new $50.0 million share-repurchase program, effective February 26, 2018 through February 26, 2020; no shares were repurchased in Q1. A $0.20-per-share dividend was declared after quarter-end, payable May 23, 2018.
Investor verification points
- Assess the sustainability of favorable prior-year reserve development and the assumptions behind current accident-year loss estimates.
- Track renewal pricing, new-business growth, policy counts and payroll exposure against the stated competitive-market pressures.
- Separate recurring investment income and underwriting performance from equity-market valuation changes and impairment charges under the new accounting treatment.
- Review liquidity and capital available at the holding company versus regulated insurance subsidiaries, including dividend restrictions and collateral pledged for FHLB arrangements.
- Confirm the acquisition’s regulatory approval, final price and closing terms, and monitor the reinsurance program after its stated expiration.