Employers Holdings, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Employers Holdings provides workers’ compensation insurance, primarily to small businesses; California generated 45% of in-force premiums. Its reportable segments are Employers and Cerity. Unless otherwise noted, amounts are in millions.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net premiums earned | $147.1 | $144.4 | $418.0 | $463.8 |
| Total revenue | $168.3 | $181.9 | $503.3 | $520.3 |
| Net investment income | $18.4 | $18.5 | $54.9 | $58.3 |
| Net realized and unrealized investment gains (losses) | $2.7 | $19.1 | $29.6 | ($2.3) |
| Net income | $15.0 | $31.1 | $64.5 | $55.8 |
| Diluted EPS | $0.53 | $1.05 | $2.24 | $1.83 |
| Operating cash flow | Not presented by quarter | ($9.3) | $47.6 |
- Employers segment combined ratio was 98.1% for Q3 and 96.9% for the nine months, versus 95.2% and 94.5% in the comparable 2020 periods. Underwriting income was $2.8 million for Q3 and $12.7 million year to date, down from $6.9 million and $25.8 million.
- At September 30, total assets were $3,801.5, total liabilities $2,611.6, and stockholders’ equity $1,189.9. Cash and cash equivalents were $95.6; total investments were $2,712.0.
- Unpaid losses and loss adjustment expenses were $2,002.1, including $478.4 of reinsurance recoverables on unpaid losses. The company reported no outstanding FHLB advances or credit-facility borrowings; it had a $75 million revolving credit facility and was in covenant compliance.
Changes versus comparable periods
- Q3 net income fell to $15.0 million from $31.1 million, principally reflecting lower investment gains and higher losses and LAE. Net premiums earned increased 1.9%, while losses and LAE rose 18.3%.
- For the first nine months, net income increased despite 9.9% lower net premiums earned. Investment results improved to $29.6 million of gains from a $2.3 million loss, while underwriting and general and administrative expenses declined 12.3%.
- Prior-year reserve development was less favorable: $0.1 million for Q3 and $15.6 million for nine months, compared with $14.8 million and $41.9 million in 2020. The 2021 nine-month favorable development included $8.0 million of unfavorable development from two catastrophic, non-COVID claims in accident year 2020.
- Net cash declined $64.8 million in the first nine months, compared with an $82.4 million increase in 2020. The company spent $33.7 million on share repurchases and paid $21.5 million in dividends during the period.
Outlook, management commentary, risks and unusual items
- Management reported a recovery in new business since May 2021, year-over-year increases in new business premiums, and a record number of policies in force. It cited strengthening payroll exposure and increased final-audit premium accruals of $4.7 million in Q3. In-force premiums nevertheless remained down year over year.
- Management said liquidity was adequate and expected subsidiary liquidity needs over the next 24 months to be met through operating cash, investment income and maturing investments. It did not provide numerical earnings guidance.
- COVID-19, renewed restrictions, infection trends, labor-market conditions and possible latent claims remain uncertain. Management noted declining compensable indemnity claim frequency but said future pandemic effects could not be estimated.
- Key exposures include workers’ compensation reserve-estimation uncertainty, reinsurance collectability, investment credit and equity-market risk, interest-rate sensitivity, inflation in claim costs and California concentration. A 100-basis-point rise in interest rates was estimated to reduce fixed-maturity and short-term investment fair value by $66.4 million before tax; a 20% equity-price decline would reduce equity-security value by $58.3 million before tax.
- Q3 included a $1.0 million write-off of capitalized technology costs identified as no longer used. The company also recorded $3.1 million in employee severance costs year to date. It had $49.9 million of unfunded private-equity commitments. Routine pending litigation was not expected by management to materially affect results, liquidity or financial position; no material risk-factor changes were reported.
- The board declared a $0.25-per-share dividend on October 27, 2021, payable November 24. A new share-repurchase authorization permits up to $50 million through December 31, 2022.
Most important facts for investors to verify
- Whether premium growth and payroll recovery persist, particularly in California, and whether policy count growth translates into higher in-force premiums.
- Whether claims frequency, severity and reserve development support management’s loss estimates; track the impact of the two catastrophic 2020 claims and potential latent COVID-19 claims.
- How investment returns, interest rates and equity-market movements affect earnings, accumulated other comprehensive income and capital.
- Whether negative year-to-date operating cash flow is temporary and whether liquidity remains adequate after dividends, repurchases and the $49.9 million of unfunded investment commitments.
- Whether expense reductions and Cerity’s progress improve underwriting results without undermining customer service or future growth.