Employers Holdings, Inc. — 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. This is an annual report, not a standalone fourth-quarter filing. Employers Holdings provides workers’ compensation insurance mainly to small businesses in low-to-medium hazard industries across most of the United States; California represented 45% of in-force premiums.
Key financial results
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Net premiums written | $583.1 million | $574.9 million | Up 1.4% |
| Net premiums earned | $574.4 million | $615.3 million | Down 6.6% |
| Total revenues | $703.1 million | $711.4 million | Down 1.2% |
| Net income | $119.3 million | $119.8 million | Down 0.4% |
| Diluted earnings per share | $4.17 | $3.97 | Up 5.0% |
| Operating cash flow | $10.8 million | $33.0 million | Down $22.2 million |
Employers segment underwriting income was $40.2 million, down from $71.0 million. Its combined ratio rose to 93.1% from 88.5% (below 100% indicates an underwriting profit); the loss and LAE ratio increased to 56.9% from 51.1%, while the underwriting expense ratio improved to 22.9% from 24.6%. The segment recorded $39.8 million of favorable prior-year reserve development, versus $81.6 million in 2020. Cerity remained in an early growth phase, writing $1.5 million of gross premiums and posting a $9.6 million pretax loss.
Net investment income declined to $72.7 million from $76.3 million, primarily due to lower bond yields. Net realized and unrealized investment gains reported in earnings were $54.6 million, versus $19.0 million. Separately, rising interest rates contributed to $69.0 million of pretax unrealized losses on fixed-maturity investments recorded in other comprehensive income; after tax, other comprehensive loss was $54.5 million. Total comprehensive income fell to $64.8 million from $169.6 million.
Financial position, liquidity and capital
- Total assets were $3.78 billion at year-end, versus $3.92 billion a year earlier; stockholders’ equity was broadly unchanged at $1.21 billion.
- Cash, cash equivalents and restricted cash were $75.3 million, down from $160.6 million. The company reported $10.8 million of operating cash flow and $94.4 million of cash used in financing activities, including dividends, share repurchases and repayment of FHLB advances.
- The holding company had $39.9 million of cash and investments. Operating subsidiaries held $2.77 billion of cash and investments, including substantial publicly traded securities described as available for prompt liquidity.
- The company had no outstanding interest-bearing debt at year-end. It had a $75 million revolving credit facility and borrowed and repaid $27 million during 2021. FHLB advances were also fully repaid by year-end.
- Gross unpaid losses and LAE reserves were $1.98 billion, with $476.9 million of reinsurance recoverables on unpaid losses; net unpaid reserves were $1.50 billion. Management’s reserve estimate is judgmental and sensitive to claim development and medical-cost trends.
- The investment portfolio was $2.74 billion on the balance sheet; fixed maturities were 86% of the portfolio and had a 3.4-year duration. The fixed-maturity portfolio’s weighted-average quality was A+, though 11.3% of fixed maturities were rated below investment grade.
- Statutory surplus of the insurance subsidiaries was $1.09 billion, and each subsidiary exceeded applicable risk-based capital requirements.
Changes, outlook and material risks
- New business premiums written increased to $145.2 million from $133.3 million in 2020, while the company ended the year with a record 111,350 policies in-force. Total in-force premiums nevertheless declined 1.1% to $571.4 million, reflecting smaller average policy size and lingering pandemic effects.
- Management cited a rebound in new business after a weaker first half, stronger renewal business, and improved payroll exposure. It expressed optimism that recovery in payrolls could support premium growth, but gave no specific numerical earnings or revenue guidance.
- Underwriting and general and administrative expenses fell 11.6% to $160.2 million. Expense actions included a workforce reduction; the company recorded $3.1 million of severance costs and wrote off $1.0 million of previously capitalized technology costs. A new claims system was implemented in 2021.
- COVID-19 continued to affect restaurant and hospitality insureds and created uncertainty around payrolls, claims frequency and severity, and possible legislative changes. Inflation may raise medical, indemnity, and operating costs; management estimated that a 1 percentage-point increase in medical-cost inflation above the assumption embedded in reserves could add about $67.5 million to lifetime net claim costs.
- California concentration, intense pricing competition, reserve-estimation uncertainty, interest-rate and equity-market exposure, and dependence on reinsurers and distribution partners are significant risks. ADP generated 13.1% of in-force premiums. The company’s excess-of-loss reinsurance provided $190 million above a $10 million retention per occurrence, subject to exclusions.
- The legacy loss portfolio transfer (LPT) covered pre-July 1995 claims; estimated remaining LPT liabilities were $328.7 million and trust collateral was $432.5 million. The estimated ultimate contingent profit commission was $69.3 million, of which $55.4 million had been settled.
- The company paid $29.0 million in dividends and repurchased $42.2 million of stock in 2021. A new $50 million repurchase authorization ran through December 2022; $27.9 million remained at year-end. A $0.25-per-share dividend was declared in February 2022.
- Management and the independent auditor reported effective internal control over financial reporting; the auditor issued an unqualified opinion and identified reserve valuation as a critical audit matter. Management said pending litigation was not expected to materially affect results or financial position.
Important facts for investors to verify
- Whether premium growth and improving payroll exposure continue, particularly in California and pandemic-affected customer classes.
- Whether the lower favorable reserve development and higher 2021 loss ratio persist; review accident-year development and the assumptions behind the $1.50 billion net reserve.
- How inflation and rising rates affect claims costs, reinvestment yields, and fixed-maturity fair values; distinguish earnings gains from unrealized losses in other comprehensive income.
- The collectability and collateral adequacy of reinsurance recoverables, especially under the LPT Agreement, and the timing and final amount of its contingent commission.
- Whether Cerity’s premium growth eventually offsets its continuing underwriting losses and expense base.
- Regulatory limits on subsidiary dividends and the resulting capacity to fund parent-company dividends and repurchases; note the $120 million extraordinary subsidiary distribution paid in February 2022.