Employers Holdings, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; figures are unaudited and in U.S. dollars. Employers Holdings provides workers’ compensation insurance, primarily to small businesses, across 45 states and the District of Columbia. California generated 52% of premiums.
Financial results and position
| Metric | Q1 2019 | Q1 2018 / comparison |
|---|---|---|
| Total revenue | $220.3 million | $188.0 million |
| Net premiums earned | $174.8 million | $176.6 million |
| Net investment income | $21.8 million | $19.4 million |
| Net realized and unrealized investment gains (losses) | $23.3 million | $(8.0) million |
| Net income | $51.8 million; $1.60 basic EPS and $1.57 diluted EPS | $25.6 million; $0.78 basic and $0.77 diluted EPS |
| Underwriting income | $16.7 million | $18.3 million |
| Combined ratio | 90.4% | 89.6% |
| Operating cash flow | $20.1 million | $46.2 million |
Q1 2019 net income included $22.2 million of favorable prior-year loss development and $21.2 million of unrealized equity-security gains. Management said these items increased pretax income by $43.4 million. The company’s non-GAAP net income before the impact of the LPT Agreement was $49.3 million, versus $23.0 million in Q1 2018.
At March 31, 2019, total assets were $3.97 billion, total liabilities $2.90 billion, and stockholders’ equity $1.07 billion. Investments totaled $2.76 billion, and cash and cash equivalents were $92.3 million, plus $2.5 million of restricted cash. Unpaid losses and loss adjustment expenses were $2.19 billion, including $498.7 million of reinsurance recoverables. Debt consisted of $20.0 million in surplus notes; no FHLB advances were outstanding.
Cash and investments at the holding company were $124.1 million; operating subsidiaries held $2.73 billion. Management said subsidiary liquidity needs over the next 24 months were expected to be met by operating cash, investment income, and maturities. Operating, investing, and financing cash flows were $20.1 million, $9.9 million, and $(37.2) million, respectively; the financing outflow principally reflected share repurchases and dividends.
Material changes versus Q1 2018
- Net income rose to $51.8 million from $25.6 million, while total revenue increased mainly because investment results shifted from an $8.0 million loss to a $23.3 million gain. Premiums earned declined modestly.
- Favorable prior-year reserve development increased to $22.2 million from $12.4 million. The current accident-year loss and LAE ratio increased to 64.8% from 62.5%; the overall loss and LAE ratio fell to 50.7% from 54.0%.
- The combined ratio edged up to 90.4% from 89.6%, as the underwriting and other operating expense ratio rose to 27.1% from 22.2%. Management attributed higher costs in part to digital technology development and implementation.
- Net investment income rose 12.4%; average pretax book yield increased to 3.4% from 3.1%. Net cash from operations decreased to $20.1 million from $46.2 million.
- Share repurchases totaled $26.6 million in cash during the quarter; dividends paid were $7.3 million. The quarterly dividend declared was $0.22 per share, versus $0.20 in Q1 2018.
Outlook, commentary, risks and unusual items
- Management reported an 11.6% overall price decrease on renewals compared with the rate level on that business a year earlier. It cited competitive pressure and said the current accident-year loss ratio on voluntary business increased, while pointing to favorable loss-cost trends and claims-settlement initiatives.
- Management considers current accident-year reserves adequate, but noted ultimate claim costs remain uncertain and may take years to emerge. Reserve estimates, reinsurance recoverables, premium recognition, deferred taxes, and investment valuations require significant judgment.
- The investment portfolio was 92% fixed maturities, with a 3.9-year duration and AA- weighted average quality. Equity securities were 8% of the portfolio. The company identified interest-rate, credit, and equity-price exposure; it reported no material change in market risk since year-end.
- The company has a workers’ compensation reinsurance program providing $190 million excess of a $10 million per-occurrence retention, subject to exclusions, effective through June 30, 2019. Insurance deposits and collateral restrict some assets; $925.5 million of securities were on deposit and $260 million of letters of credit were issued in lieu of deposits.
- The planned acquisition of PartnerRe Insurance Company of New York remained subject to closing conditions, including New York regulatory approval. The estimated purchase price was approximately $40.0 million of statutory capital and surplus plus $5.8 million; the company expected to use cash on hand.
- After quarter-end, EPIC received approval to call its $10 million Dekania surplus note and notified the trustee it intended to repay $10.2 million, including accrued interest, effective May 15, 2019. On April 24, the board expanded the share repurchase authorization from $50 million to $100 million and extended it through June 30, 2020.
- Management reported no material change in risk factors, no material expected effect from pending litigation, and no off-balance-sheet arrangements. Disclosure controls were assessed as effective.
Important facts for investors to verify
- How much of earnings growth persists absent the quarter’s $21.2 million equity-security gains and $22.2 million favorable prior-year reserve development.
- Whether current-year claims costs, competitive pricing decreases, and California concentration affect future underwriting profitability.
- Reserve adequacy and the assumptions behind unpaid loss estimates and reinsurance recoverables, including the LPT Agreement.
- Acquisition closing status, regulatory conditions, cash funding needs, and the planned repayment of the Dekania note.
- How share repurchases, dividends, regulatory limits on subsidiary dividends, and collateral requirements affect holding-company liquidity.