Employers Holdings, Inc. — Q3 2017 Form 10-Q
Business and period: Unaudited results for the three and nine months ended September 30, 2017, compared with the same periods in 2016. The company provides workers’ compensation insurance, primarily to small businesses; over half of its business is generated in California.
Key financial results
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net premiums earned | $187.9 million | $173.3 million | $535.0 million | $522.8 million |
| Total revenue | $210.9 million | $192.8 million | $600.4 million | $586.6 million |
| Income before tax | $28.9 million | $30.4 million | $91.0 million | $92.3 million |
| Net income | $21.9 million | $22.6 million | $69.9 million | $71.2 million |
| Diluted EPS | $0.66 | $0.69 | $2.12 | $2.16 |
| Combined ratio | 92.7% | 93.5% | 93.6% | 94.3% |
- Underwriting: Underwriting income was $13.7 million in Q3 and $34.2 million for the nine months, versus $11.3 million and $29.7 million, respectively, in 2016. Combined ratios below 100% indicate underwriting profit.
- Cash flow: Nine-month operating cash flow was $103.8 million, compared with $97.0 million. Investing activities used $78.0 million and financing activities used $23.6 million; cash and cash equivalents ended at $69.4 million, up $2.2 million from year-end 2016.
- Balance sheet and liquidity: Total assets were $3.84 billion, liabilities $2.92 billion and stockholders’ equity $917.1 million at September 30. Investments totaled $2.62 billion. Holding-company cash and investments were $76.6 million; operating subsidiaries held $2.61 billion of cash and investments. Management said expected liquidity needs could be met by available resources and operating cash flows.
- Debt and capital: Notes payable were $20.0 million, down from $32.0 million at year-end, after a $12.0 million note was redeemed for $9.9 million, generating a $2.1 million gain. Adjusted stockholders’ equity, a non-GAAP measure, was $992.9 million versus $941.0 million at year-end.
Changes and management commentary
- Premium growth reflected higher final-audit premiums and new business, partly offset by lower renewal premiums. Renewal pricing was down 4.4% year over year in Q3 and 2.8% for the nine-month period. California represented 56% of premiums; California in-force policy count declined year over year while payroll exposure increased.
- The loss and LAE ratio improved to 62.2% for Q3 and 62.1% year to date. Management reported declining claim frequency and lower current accident-year loss estimates, but emphasized that long-tail claim costs remain uncertain. Prior-period reserve development was modestly favorable in 2017.
- Q3 results included a $7.5 million write-off of capitalized technology-development costs, reducing net income by $4.9 million. Management said the charge followed its ongoing evaluation of technology initiatives.
- Investment income increased to $18.5 million in Q3 and $55.4 million year to date. Nine-month realized investment gains were $7.4 million, below $9.1 million in 2016; 2016 included $5.3 million of other-than-temporary impairments versus $0.2 million in 2017. A $2.1 million debt-redemption gain contributed to 2017 nine-month revenue.
- Cash dividends declared were $0.15 per share for Q3, compared with $0.09 in Q3 2016. The board declared another $0.15 dividend after quarter-end, payable November 22, 2017. No shares were repurchased in the first nine months of 2017.
Outlook, transactions and risks
- Acquisition: The company agreed to acquire all shares of PartnerRe Insurance Company of New York. The purchase price was expected to be approximately $40.0 million of statutory capital and surplus at closing plus $5.8 million, funded with cash on hand. Closing was subject to conditions, including New York regulatory approval. PartnerRe’s parent guaranteed PartnerRe’s obligations; existing PRNY liabilities were to remain with PartnerRe.
- Reinsurance: A program effective July 1, 2017 through June 30, 2018 provides $190.0 million of coverage above a $10.0 million per-occurrence retention, subject to exclusions.
- Key uncertainties: Results depend on estimates of unpaid losses and LAE, reinsurance recoverables, premium recognition, deferred taxes and investment valuations. The company identified interest-rate, credit and equity-price risks; it reported no material change in market risk since December 31, 2016. Fixed-maturity portfolio duration was 4.1 years and weighted-average quality was AA-.
- Management reported no material changes to previously disclosed risk factors, no off-balance-sheet arrangements, and no litigation expected to materially affect financial condition, liquidity or results. Disclosure controls were assessed as effective.
- The filing gives no specific earnings or premium guidance. Management cited disciplined underwriting, claims management, geographic diversification and active capital management, while noting competitive pricing conditions.
Investor verification priorities
- Track loss-reserve adequacy and development, including the long-tail workers’ compensation claims and assumptions about current accident-year losses.
- Assess whether premium growth and renewal pricing can sustain underwriting profitability, particularly in California and amid competitive rate decreases.
- Review the $7.5 million technology write-off and whether further technology-related charges or planned benefits emerge.
- Confirm acquisition closing, final purchase price, regulatory approval and actual cash required.
- Monitor investment valuation and liquidity, including the concentration in fixed maturities, interest-rate exposure and securities held on deposit or in trust.
- Consider limits on insurance-subsidiary dividends: after a $38.0 million dividend to its parent, ECIC’s remaining 2017 dividend capacity without regulatory approval was $0.1 million.