Employers Holdings, Inc. — Q1 2015 Form 10-Q
Business context and reporting period. The company provides workers’ compensation insurance to small businesses through its insurance subsidiaries, operating in 31 states and the District of Columbia. The unaudited quarter ended March 31, 2015; comparisons are with the three months ended March 31, 2014, unless stated otherwise. California accounted for 58% of in-force premiums.
Financial performance and position
| Metric | Q1 2015 | Q1 2014 / comparison |
|---|---|---|
| Net premiums earned | $159.0 million | $167.2 million; down 4.9% |
| Total revenues | $177.2 million | $188.5 million |
| Net income | $14.0 million | $10.8 million |
| Diluted EPS | $0.43 | $0.34 |
| Underwriting income | $0.6 million | Underwriting loss of $8.4 million |
| Combined ratio | 99.6% | 105.1% |
| Net cash from operating activities | $24.8 million | $38.6 million |
Losses and loss adjustment expenses were $106.2 million, versus $122.3 million. The loss and LAE ratio improved to 66.8% from 73.1%; the expense ratio was 21.1% versus 20.0%, and the commission ratio was 11.7% versus 12.0%. Net investment income fell to $16.9 million from $18.0 million, while realized investment gains declined to $1.2 million from $3.3 million. The effective tax rate rose to 22.5% from 10.9%.
Cash and cash equivalents were $45.6 million at quarter-end, down from $103.6 million at December 31, 2014. Investing activities used $81.2 million, chiefly reflecting purchases of fixed-maturity securities. Total investments were $2.542 billion at fair value. Total assets were $3.801 billion; stockholders’ equity was $709.5 million, compared with $686.8 million at year-end. The company’s supplemental stockholders’ equity measure including the $204.1 million deferred LPT gain was $913.6 million.
Notes payable were $92.0 million: $60.0 million outstanding under the credit facility and $32.0 million in surplus notes. The $60.0 million credit-facility principal is due December 31, 2015. The company reported $54.7 million of holding-company cash, short-term investments, and fixed maturities due within 24 months, and said it expects holding-company liquidity needs over the next 24 months to be met by those resources and subsidiary dividends, subject to regulatory restrictions. Insurance subsidiaries had $331.4 million of cash and fixed maturities due within 24 months. The quarterly dividend declared was $0.06 per share.
Material changes and management commentary
- Gross premiums written declined 6.5% to $174.0 million. Management attributed lower premium volume to deliberate actions including moderating California policy growth, diversifying geographically, improving the link between pricing and class performance, and non-renewing under-performing business.
- Net premiums earned fell primarily because of lower policy count and payroll exposure, especially in Southern California, partly offset by higher net rates. Year-over-year California in-force policy count declined 5.8% and payroll exposure declined 13.9%; California net rate increased 12.4%.
- The lower loss ratio reflected a reduced current-accident-year loss estimate: 67.7% versus 74.6%. Management cited rate increases exceeding anticipated loss-cost increases and a change in business mix. Prior-year unfavorable loss development was $1.7 million, related to assigned-risk business, versus $1.8 million.
- Underwriting and operating expenses rose 0.6% in dollars, increasing their ratio as earned premiums declined. Management cited higher bad-debt allowance and professional-services costs, partly offset by lower IT expenses.
- Net income before the impact of the LPT Agreement, a company-defined non-GAAP measure, was $10.9 million versus $6.5 million. The LPT contributed a net $3.1 million impact in Q1 2015, compared with $4.3 million in Q1 2014; the filing cautions that this measure is not a substitute for GAAP results.
Outlook, risks, and contingencies
- No numerical earnings or premium guidance was provided. Management said it believes current accident-year reserves are adequate, while noting ultimate claim costs remain uncertain for many years. Medical and indemnity costs per claim showed slight upward movement despite lower claim frequency.
- Loss reserves and reinsurance recoverables depend on significant estimates. The company reported $2.370 billion of gross unpaid losses and LAE, with $663.0 million of reinsurance recoverables for unpaid losses.
- Investment exposure includes interest-rate, credit, and equity-price risks. Fixed-maturity securities had a 4.1 duration; the portfolio’s weighted-average credit quality was AA. Management said unrealized fixed-income losses were primarily interest-rate-related and did not identify other-than-temporary impairments.
- State rules restrict insurance-subsidiary dividends. Securities on deposit with states had a fair value of $917.3 million at quarter-end. Reinsurance coverage was $195.0 million excess of a $5.0 million per-occurrence retention, subject to a $2.0 million annual aggregate deductible and exclusions; the program was effective through June 30, 2015.
- Management reported no material change in risk factors or market risk since year-end, no off-balance-sheet arrangements, and no expected material effect from pending or threatened litigation. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether premium and payroll contraction, especially in California, continues and whether rate increases adequately offset loss-cost inflation.
- Subsequent reserve development, particularly assigned-risk business, and the adequacy and collectability of reinsurance recoverables.
- Repayment or refinancing of the $60.0 million credit-facility balance due December 31, 2015, and the availability of subsidiary dividends to the holding company.
- Investment income and portfolio fair values under changing interest rates, including any later impairment assessments.
- The renewal and terms of reinsurance coverage after June 30, 2015, and changes in the LPT Agreement estimates or deferred gain.