Employers Holdings, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020; balance-sheet comparisons are with December 31, 2019. Amounts are in millions except per-share data. The company provides workers’ compensation insurance, primarily to small businesses, through its Employers and Cerity platforms. California represented 46% of in-force premiums.
Financial results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net premiums earned | $144.4 | $175.8 | $463.8 | $526.1 |
| Total revenue | $181.9 | $201.0 | $520.3 | $625.5 |
| Net investment income | $18.5 | $22.3 | $58.3 | $65.5 |
| Investment gains (losses) | $19.1 | $2.6 | $(2.3) | $33.3 |
| Net income | $31.1 | $32.8 | $55.8 | $125.4 |
| Diluted EPS | $1.05 | $1.01 | $1.83 | $3.85 |
| Operating cash flow | — | $47.6 | $112.6 |
- Underwriting: Employers segment combined ratio was 95.2% for Q3 and 94.5% year to date, compared with 87.3% and 87.1%. Its underwriting income fell to $6.9 million for Q3 and $25.8 million for nine months, from $22.5 million and $68.3 million.
- Cash and capital: Cash and cash equivalents were $237.3 million at September 30, up from $154.9 million at year-end. Total assets were $3,985.1 million, liabilities $2,817.7 million, and shareholders’ equity $1,167.4 million.
- Debt and liquidity: The company reported no holding-company debt and no interest-bearing debt at its operating subsidiaries, but had $35.0 million of FHLB advances. These zero-interest advances are due in installments of $15.0 million in November 2020 and $20.0 million in May 2021. Management said available liquidity was adequate and it did not foresee a need to suspend ordinary dividends, seek capital, or sell material non-investment assets.
- Other capital returns: Nine-month dividends paid were $23.3 million; the board declared a further $0.25-per-share dividend in October. The company repurchased 2.49 million shares for $82.6 million during the first nine months.
Changes versus prior comparable periods
- Net premiums earned declined 17.9% in Q3 and 11.8% year to date. Gross premiums written fell to $131.3 million from $166.5 million in Q3 and to $456.2 million from $553.1 million year to date.
- Management attributed weaker premium volume mainly to COVID-19-related business closures, unemployment and payroll declines, particularly in restaurant and hospitality businesses. Final audit premium accruals were reduced by approximately $15.7 million in Q3 and $35.0 million year to date for expected exposure reductions.
- Net income declined modestly in Q3 despite higher investment gains, but fell substantially year to date. The prior-year nine-month period included $33.3 million of investment gains versus a $2.3 million loss in 2020; 2020 also had lower premiums and investment income.
- Net investment income decreased 17.0% in Q3 and 11.0% year to date, reflecting lower bond yields, faster mortgage prepayments and lower average invested assets. The average pre-tax book yield was 3.0%, versus 3.4% a year earlier.
- Prior-year reserve development remained favorable but was lower: $14.8 million in Q3 and $41.9 million year to date, compared with $20.2 million and $66.1 million. The company recorded a $1.2 million expected-credit-loss allowance on available-for-sale debt securities and increased the premiums-receivable allowance to $10.4 million.
Outlook, commentary and risks
- Management expected in-force premiums to remain below prior-year levels until insured businesses could operate more normally and rebuild payrolls; the ultimate premium decline was uncertain. New business submissions and policy counts had improved in many states, but California remained weaker and new-business premium was pressured by fewer larger policies.
- Management cited declining claim frequency but rising medical and indemnity costs per claim. It considered current accident-year loss estimates adequate, while cautioning that COVID-19, a prolonged recession, cumulative-trauma claims and delayed claim reporting could affect reserve development. Ultimate losses remain uncertain.
- The company’s July 2020 reinsurance program provides $190.0 million of coverage above a $10.0 million per-occurrence retention, subject to exclusions. Management did not expect COVID-19 to trigger recovery under the current excess-of-loss program.
- Key exposures include COVID-19 impacts on small-business payrolls and claims, regulatory changes to premium and claim rules, competition and rate pressure, California concentration, reinsurer credit and availability, and investment-market, interest-rate and equity-price volatility. Management reported no goodwill impairment at September 30, but warned further declines in market capitalization or other developments could require testing or impairment.
- A $0.7 million Q3 charge was recorded for abandoned operating leases as the company reduced its real-estate footprint following its work-from-home transition. Management reported effective disclosure controls and no material change in internal control over financial reporting.
- No quantitative earnings or premium guidance was provided. Management’s outlook statements are subject to substantial uncertainty; the filing states that the pandemic’s future impact could not be estimated reliably.
Important facts for investors to verify
- Whether payroll, policy-size and premium trends—especially in California—recover, and how premium audits affect reported written and earned premiums.
- Whether favorable prior-year reserve development persists and how COVID-19 claim frequency, severity and delayed reporting affect loss reserves.
- Whether lower investment yields, equity-market movements and credit losses continue to weigh on investment income, earnings and equity.
- Repayment of the $35.0 million FHLB advances, dividend capacity subject to insurance-regulator limits, and the sustainability of share repurchases and dividends.
- Reinsurance recoverability and coverage terms, including exclusions and the company’s exposure if a significant event does not qualify for recovery.