Employers Holdings, Inc. — FY2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. The filing is an annual report; the provided text does not give separate fourth-quarter results. Employers Holdings is a specialty workers’ compensation insurer focused on small businesses, with 45% of in-force premiums generated in California.
Financial performance and position
| Metric | 2022 | 2021 |
|---|---|---|
| Total revenue | $713.5 million | $703.1 million |
| Net premiums earned | $675.2 million | $574.4 million |
| Net investment income | $89.8 million | $72.7 million |
| Net realized and unrealized investment gains (losses) | $(51.8) million | $54.6 million |
| Net income | $48.4 million | $119.3 million |
| Diluted EPS | $1.75 | $4.17 |
| Operating cash flow | $99.8 million | $10.8 million |
- Net premiums written increased 21.3% to $707.2 million. Total in-force premiums, including estimated final audit premium, rose to $665.0 million from $612.9 million; policies in-force reached a record 121,356.
- Employers segment underwriting income was $39.9 million, with a 94.1% combined ratio, compared with $40.2 million and 93.1% in 2021. The ratio remained below 100%, indicating underwriting profit for that segment.
- Losses and LAE increased to $391.0 million from $315.2 million. Favorable prior-year reserve development declined to $33.4 million from $39.8 million.
- At year-end, total assets were $3.72 billion, stockholders’ equity was $944.2 million, and gross unpaid losses and LAE reserves were $1.96 billion. Total investments were $2.57 billion.
- Cash and investments at the holding company totaled $98.9 million. Operating subsidiaries held $2.56 billion in cash and investments, including $930.4 million identified as immediate, unencumbered liquidity.
- Insurance subsidiaries had $182.5 million of FHLB advances outstanding, collateralized by eligible securities; the weighted average rate was 2.65%. No revolving-credit-facility borrowings were outstanding at year-end. The company reported compliance with credit covenants and statutory RBC requirements.
- Cash dividends paid to stockholders and eligible plan award holders were $90.3 million, including $61.5 million of special dividends. The company repurchased $30.4 million of stock. A $0.26-per-share quarterly dividend was declared for payment in March 2023.
Material changes and management commentary
- Net income fell 59% year over year, while revenue rose modestly. The change reflected the reversal from investment gains to losses, higher losses and LAE, and higher commissions; increased investment income partly offset these effects.
- Rising interest rates contributed to $252.5 million of pretax unrealized losses on fixed-maturity investments and a $199.5 million after-tax decline in accumulated other comprehensive income. Management said higher rates also lifted investment income, which increased 23.5%.
- Premium growth reflected new and renewal business, broader class appetite, strategic distribution partnerships, higher payroll exposure and $34.8 million of audit-premium pickup. Management increased final-audit premium accruals by $24.6 million.
- Management expects improving labor availability and continued wage increases to support payrolls and premium growth. No quantified earnings, premium, or combined-ratio guidance is provided.
- Cerity, the direct-to-customer channel, grew gross written premiums to $6.7 million from $1.5 million but reported a $9.9 million pretax loss and a $12.7 million underwriting loss.
- Management stated that capital and liquidity remained strong and adequate, and that it did not foresee a need to suspend dividends, forgo repurchases, raise capital, or make material non-investment asset sales.
Risks, contingencies, and unusual items
- Reserve uncertainty: Claims reserves require judgment and may be affected by medical-cost inflation, indemnity severity, claim trends, legislation, litigation, and settlement patterns. A 1% increase in medical-cost inflation above the assumption embedded in reserves was estimated to raise lifetime net claim costs by approximately $63.9 million. The carried net reserve was $1.515 billion, within the actuarial range of $1.366 billion to $1.687 billion.
- Investment and market risk: Fixed-income values are exposed to interest-rate changes; equity securities are exposed to market declines. The portfolio included 11.1% below-investment-grade fixed maturities. Management recorded a $4.5 million CECL allowance on AFS debt securities during 2022.
- Concentration and distribution: California represented 45% of in-force premiums, while ADP generated 15.0%. The ADP relationship is non-exclusive; loss of the partner or adverse conditions in California could affect results.
- Reinsurance: The company remains liable to policyholders if reinsurers fail to pay. Its catastrophe program provides $190 million excess of a $10 million retention, subject to exclusions, and excludes nuclear, biological, chemical, and radiological events. The LPT Agreement covered legacy claims, with $308.6 million of estimated remaining liabilities and $312.5 million of collateral in trust at year-end.
- Economic and operational risks: Management cited inflation, labor shortages, supply-chain disruption, recession concerns, geopolitical conditions, and COVID-19-related disruption. Cybersecurity, third-party systems, regulatory changes, and competitive pricing are additional identified risks.
- The company reported no off-balance-sheet arrangements. Management said pending or threatened litigation was not expected to have a material effect on results, liquidity, or financial position. The independent auditor issued an unqualified opinion, and management and the auditor concluded internal control over financial reporting was effective.
Key facts for investors to verify
- Whether premium and policy growth can continue without weakening pricing discipline or the combined ratio.
- How claims inflation and future reserve development compare with assumptions, particularly given the actuarial range and California/Nevada reserve concentration.
- Whether higher reinvestment yields offset any further market-value declines, and the effect of investment movements on earnings, equity, and statutory capital.
- Liquidity and capital implications of FHLB advances, collateral requirements, restricted subsidiary dividends, and planned shareholder distributions.
- Dependence on California, ADP, and other distribution partners, and the pace and economics of Cerity’s growth.
- Progress on collecting reinsurance recoverables and maintaining required LPT collateral and counterparty strength.