Employers Holdings, Inc. — Q2 2023 Form 10-Q
Reporting period: Unaudited quarter and six months ended June 30, 2023; comparisons are with the corresponding 2022 periods. Employers Holdings provides workers’ compensation insurance, principally to small businesses, through its Employers and Cerity underwriting platforms. California represented 45% of in-force premiums.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net premiums earned | $177.1 million | $165.2 million | $349.8 million | $315.4 million |
| Net investment income | $26.8 million | $20.0 million | $54.4 million | $39.1 million |
| Net realized and unrealized investment gains (losses) | $11.3 million | $(50.1) million | $17.7 million | $(67.4) million |
| Total revenue | $215.2 million | $135.3 million | $421.7 million | $287.3 million |
| Net income (loss) | $34.9 million | $(15.6) million | $58.5 million | $(17.8) million |
| Diluted earnings (loss) per share | $1.30 | $(0.56) | $2.16 | $(0.65) |
- Underwriting: Employers segment underwriting income was $22.4 million in Q2 and $24.5 million for the first half, versus $12.5 million in each comparable 2022 period. Its combined ratio improved to 87.2% for Q2 and 93.0% for the first half, from 92.4% and 96.0%, respectively. Cerity continued to report underwriting losses.
- Premium growth: Gross premiums written rose to $198.4 million in Q2 and $393.3 million for the first half, from $179.4 million and $351.8 million. Total in-force premiums including estimated audit premium were $698.0 million, up from $635.7 million at June 30, 2022; policies in force were 124,848, compared with 117,256.
- Cash flow and liquidity: First-half operating cash flow was $(3.5) million, versus $37.9 million provided in 2022. Investing activities provided $119.4 million and financing activities used $138.9 million; cash, cash equivalents and restricted cash ended at $66.4 million, down from $89.4 million at year-end 2022. Management said available liquidity was adequate; operating subsidiaries had $2,486.4 million in cash and investments.
- Balance sheet and financing: Total assets were $3,615.6 million and stockholders’ equity was $951.7 million at June 30, 2023. Unpaid losses and LAE were $1,927.2 million. FHLB advances were $105.7 million, down from $182.5 million at year-end; the company had no borrowings under its $75 million revolving credit facility during the first half and reported compliance with its covenants.
- Investments: Total investments were $2,471.8 million. Fixed-maturity securities had $168.6 million of gross unrealized losses; accumulated other comprehensive loss was $130.5 million. The portfolio’s weighted-average fixed-income quality was “A,” and fixed-maturity duration was 3.9 years.
Changes, outlook and risks
- Profitability reversed the prior-year losses, reflecting higher premiums and investment income and a substantial year-over-year swing in investment results. Management attributed higher investment income chiefly to bond yields and invested balances.
- Q2 and first-half calendar-year loss results benefited from favorable prior-year reserve development of $19.7 million and $19.9 million, respectively, versus $10.0 million in each 2022 period. Current accident-year loss ratios were 63.4% in both 2023 periods; management said ultimate losses remain uncertain.
- The company recorded $9.4 million of net non-recurring expense for early termination of its former Reno headquarters lease, including a $7.6 million termination payment and $2.6 million write-off, partly offset by a $1.0 million lease termination gain.
- Management cited record policies in force, stronger new and renewal premiums, retention, and audit premium increases; it expects improving labor availability and rising payrolls to support premium growth. The filing provides no formal earnings or revenue guidance. The July 1, 2023–June 30, 2024 reinsurance program provides $190 million of coverage excess of a $10 million per-occurrence retention, subject to exclusions.
- Key risks include claims-reserve estimation and medical-cost inflation, wage and payroll changes, investment interest-rate, equity-price and credit volatility, reinsurance recoverability, and competitive and economic conditions. The filing reported no material change to previously disclosed risk factors; pending ordinary-course litigation was not expected by management to materially affect results, liquidity or financial position.
- After quarter-end, the board declared a $0.28 quarterly dividend and authorized a new $50 million share repurchase program. Management stated it did not foresee a need to suspend dividends, forego repurchases, seek additional capital or make material non-investment asset sales.
Most important facts for investors to verify
- How much of reported earnings and the improved combined ratio depends on favorable prior-year reserve development, and how current accident-year claims develop.
- Whether premium and in-force policy growth persist, including the contribution of payroll exposure, audit premiums and California concentration.
- Investment portfolio exposure to interest-rate, credit and equity-market movements, including unrealized fixed-income losses and less-liquid private-equity commitments of $35.1 million.
- Cash generation, FHLB repayment needs and the availability of subsidiary dividends subject to regulatory limits; several subsidiaries cannot pay further 2023 dividends without prior approval.
- The effect of the one-time lease charge, continued Cerity underwriting losses, and capital allocation through dividends and repurchases.