Employers Holdings, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Employers Holdings provides workers’ compensation insurance, primarily to small businesses; California represented 45% of in-force premiums.
Financial performance and key metrics
- Premiums: Net premiums earned increased 12.2% to $150.2 million from $133.9 million. Gross premiums written rose to $172.4 million from $148.3 million.
- Earnings: Net loss was $2.3 million, or $0.08 per diluted share, versus net income of $23.1 million, or $0.80 per diluted share. Total revenue fell to $152.0 million from $163.6 million, mainly reflecting a change from investment gains to losses.
- Investment results: Net investment income increased 3.8% to $19.1 million. Net realized and unrealized investment losses were $17.3 million, compared with gains of $10.9 million a year earlier. Other comprehensive loss was $88.2 million, largely reflecting unrealized losses on available-for-sale investments.
- Underwriting: Employers segment combined ratio rose to 100.0% from 93.9%; underwriting income was zero versus $8.1 million. Its loss and LAE ratio increased to 64.1% from 53.5%, while the expense ratio improved to 21.9% from 27.9%. Cerity reported a $3.0 million underwriting loss.
- Cash flow: Operating cash flow was $16.8 million, compared with cash used of $10.8 million. Investing activities used $6.1 million; financing activities provided $44.7 million. Cash, cash equivalents and restricted cash increased $55.4 million to $130.7 million.
- Balance sheet and liquidity: Total assets were $3.75 billion and stockholders’ equity was $1.11 billion at quarter-end, down from $3.78 billion and $1.21 billion at December 31, 2021. Total investments were $2.62 billion. The company reported $60.0 million of FHLB advances; it had no outstanding revolver borrowings and was in compliance with debt covenants.
- Capital returns: The company paid $7.4 million in dividends and repurchased $6.7 million of shares during the quarter. Book equity declined in part as accumulated other comprehensive income moved from $60.6 million to a loss of $27.6 million.
Material changes versus Q1 2021
- Premium growth was accompanied by higher losses and commissions: losses and LAE rose 35.3% to $94.2 million, and commission expense increased to $20.9 million from $16.8 million.
- Prior-year reserve development was neutral in Q1 2022; Q1 2021 included $13.9 million of favorable development. The current accident-year loss ratio was nearly unchanged at 64.1% versus 63.9%.
- Underwriting and general and administrative expenses fell to $39.3 million from $46.6 million. Q1 2021 included $2.9 million of severance expense.
- In-force policies reached 114,461, up 9.2% year over year; total in-force premiums including final audit premium were $594.2 million versus $559.8 million.
Outlook, commentary, and risks
- Management reported record in-force policies, stronger new and renewal premiums, and improved payroll exposure as labor conditions strengthened. It said further payroll growth could support premiums, but provided no specific earnings or premium guidance.
- Management cited continued COVID-19-related uncertainty, supply-chain and labor disruptions, inflation, and economic instability. It noted that some insured sectors, including restaurants and hospitality, remained affected.
- Claims estimates are uncertain. Management said lower indemnity claim frequency and continued claim settlements benefited estimates, but ultimate current accident-year losses will not be known with certainty for years. Inflation in medical, litigation, wage, and operating costs could increase reserves and expenses.
- Investment values were pressured by rising rates, inflation concerns, and world events. A 100-basis-point rate increase was estimated to reduce fixed-maturity and short-term investment fair value by $80.4 million before tax. Equity securities had a fair value of $296.8 million.
- Liquidity sources include cash, liquid securities, operating cash flows, and FHLB access. Management said it expected subsidiary liquidity needs over the next 24 months to be met from operations, investment income, and maturing investments. Some cash and securities are restricted by regulatory deposits, collateral, or trust requirements.
- After quarter-end, the board declared a regular $0.26-per-share dividend and a special $1.00-per-share dividend, and expanded the share repurchase authorization by $50 million to $100 million. These actions are subject to board discretion and applicable constraints.
- The company reported no material change to its previously disclosed risk factors and no off-balance-sheet arrangements. Management said ordinary-course litigation was not expected to materially affect results, liquidity, or financial position.
Important facts for investors to verify
- Whether premium growth and policy-count gains translate into profitable underwriting, particularly given the 100.0% Employers combined ratio and higher commission ratio.
- How claims frequency, severity, inflation, and reserve estimates develop, including the absence of favorable prior-year development in Q1 2022.
- Whether investment marks and interest-rate changes continue to affect reported earnings, accumulated other comprehensive income, and capital.
- Liquidity and capital flexibility after the $60.0 million FHLB advance, regulatory limits on subsidiary dividends, and the announced special dividend and expanded repurchase program.
- Potential funding needs for $44.7 million of private-equity commitments at quarter-end, plus the additional $15.0 million commitment entered into in April 2022.