Employers Holdings, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. Employers Holdings provides workers’ compensation insurance, primarily to small businesses; California represented 45% of in-force premiums. Its reportable segments are Employers and Cerity.
Financial results and key metrics
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Gross premiums written | $148.3 million | $184.7 million |
| Net premiums earned | $133.9 million | $167.9 million |
| Net investment income | $18.4 million | $19.9 million |
| Net realized and unrealized investment gains (losses) | $10.9 million | $(61.1) million |
| Net income (loss) | $23.1 million | $(34.9) million |
| Basic / diluted EPS | $0.81 / $0.80 | $(1.14) / $(1.14) |
| Operating cash flow | $(11.4) million | $15.5 million |
| Cash, cash equivalents and restricted cash, quarter-end | $85.6 million | $174.4 million |
| Total assets / stockholders’ equity, March 31 | $3,864.0 million / $1,186.6 million | — |
The Employers segment reported an underwriting combined ratio of 93.9%, versus 99.5% a year earlier, and underwriting income of $8.1 million versus $0.7 million. Its loss and LAE ratio improved to 53.5% from 63.5%; its underwriting expense ratio increased to 27.9% from 23.3%. Net income included favorable prior-year loss development of $13.9 million. Comprehensive loss was $13.0 million, primarily reflecting a $36.1 million after-tax other comprehensive loss on investments.
Material changes versus the prior comparable period
- Net premiums earned declined 20.3%, while gross written premiums fell about 19.7%, reflecting lower payroll exposure, smaller average policies, non-renewals of certain unprofitable accounts, and lower rates.
- Net income improved from a loss to a profit, helped substantially by the swing in investment gains and losses. Losses and LAE declined 33.3%, including greater favorable prior-year development; current accident-year loss ratio was 63.9%, down from 65.6%.
- Net investment income decreased 7.5%; management attributed this mainly to lower interest rates and a lower average invested-asset balance. Average pre-tax book yield declined to 3.0% from 3.2%.
- Cash decreased by $75.0 million during the quarter, versus a $19.2 million increase in Q1 2020. The company repurchased 298,546 shares for $9.6 million and paid $7.1 million in dividends.
- Shareholders’ equity declined from $1,212.8 million at year-end, with net income more than offset by investment-related other comprehensive losses, dividends, and repurchases.
Liquidity, debt and capital
- At March 31, the company reported $2,832.2 million of cash and investments at operating subsidiaries and $18.6 million of cash and investments at the holding company. It stated that liquidity was adequate and expected subsidiary needs over the next 24 months to be met by operations, investment income, and maturing investments.
- The holding company had no outstanding borrowings under its $75 million revolving credit facility at quarter-end; it borrowed and repaid $12 million during the quarter and was in compliance with covenants. Management said the holding company had no outstanding debt obligations.
- Insurance subsidiaries had $15 million of FHLB advances remaining, due May 11, 2021. These are shown separately from the holding-company credit facility.
- Fixed maturities were 90% of the investment portfolio; the portfolio’s weighted average quality was A+, and duration was 3.8. The company had $57.9 million in unfunded private-equity commitments.
Outlook, commentary and risks
- No quantitative earnings or premium guidance was provided. Management reported strong retention, year-over-year increases in new submissions and policies in most states, a rebound in new business activity in March and into April, and a record number of policies in force. It was optimistic that improving employment and payrolls could support premium growth.
- COVID-19-related business disruption, particularly in restaurant and hospitality classes, continued to weigh on payrolls and premiums. The company reduced final audit premium accruals by approximately $2.7 million for expected policyholder exposure adjustments. Management reported lower indemnity claim frequency and severity but cautioned that ultimate loss estimates remain uncertain.
- Renewal pricing showed an overall rate decrease of 6.1% versus the prior-year rate level. California in-force premiums were down 18.8% year over year; total in-force premiums were down 14.0%.
- Other unusual costs included $2.9 million of employee severance related to a Q1 reduction in force and a $2.3 million increase in Corporate and Other compensation-related expenses connected with the CEO’s retirement and equity awards.
- Key exposures include uncertainty in claims reserves and reinsurance recoverables, COVID-19 effects on policyholder payrolls and premium collections, investment credit and equity-market risk, interest-rate sensitivity, and potential inflation in medical and claims costs. A 100-basis-point increase in rates was estimated to reduce fixed-maturity and short-term investment fair value by $95.1 million pretax.
- Management said pending or threatened litigation was not expected to materially affect results, liquidity, or financial position; it reported no material change to previously disclosed risk factors and no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether premium and policy growth recover as payrolls normalize, and whether California’s decline moderates.
- Whether favorable reserve development persists and current accident-year loss estimates prove adequate.
- Cash-flow and liquidity trends, including repayment of the $15 million FHLB advance due May 11, 2021 and availability of subsidiary dividends to the holding company.
- The persistence and composition of investment gains, investment income, and accumulated unrealized gains; Q1 earnings benefited from a favorable year-over-year investment comparison while OCI declined.
- Effects of lower renewal pricing, higher underwriting expense ratio, severance and executive retirement-related costs on future underwriting profitability.