Business context and reporting period
Employers Holdings, Inc. filed this Form 10-K for the fiscal year ended December 31, 2015. Through its insurance subsidiaries, the company provides workers’ compensation coverage to small businesses, primarily in low- to medium-hazard industries. It operates in 33 states and the District of Columbia; California generated about 57% of in-force premiums. The company has one reportable segment.
Financial and operating results
| Metric | 2015 | 2014 |
|---|---|---|
| Total revenue | $752.1 million | $773.5 million |
| Net premiums written | $689.3 million | $687.6 million |
| Net premiums earned | $690.4 million | $684.5 million |
| Net investment income | $72.2 million | $72.4 million |
| Net realized investment gains (losses) | $(10.7) million | $16.3 million |
| Net income | $94.4 million | $100.7 million |
| Diluted EPS | $2.90 | $3.14 |
| Combined ratio | 94.1% | 97.0% |
| Operating cash flow | $116.4 million | $171.9 million |
Underwriting income was $40.4 million, compared with $20.6 million in 2014. The combined ratio below 100% indicates underwriting profitability. The company’s non-GAAP net income before the impact of the Loss Portfolio Transfer (LPT) Agreement rose to $74.0 million from $45.7 million; this measure excludes LPT amortization and reserve and contingent-commission adjustments.
At year-end, total assets were $3.76 billion, investments were $2.49 billion, cash and cash equivalents were $56.6 million, and stockholders’ equity was $760.8 million. Gross unpaid losses and loss adjustment expenses (LAE) were $2.35 billion, with $628.2 million of reinsurance recoverables on unpaid losses. Total liabilities were $3.00 billion. Debt was $32.0 million, down from $92.0 million after repayment of the $60.0 million credit-facility balance in the fourth quarter. The company reported $95.2 million of cash and investments at the holding company and said it expected liquidity needs over the next 24 months to be met from available resources and subsidiary dividends.
Changes versus the prior comparable period
- Total revenue declined 2.8%, principally reflecting the swing from investment gains in 2014 to realized investment losses in 2015. Net premiums earned rose about 1%; gross premiums written were flat.
- Net income declined about 6%, while underwriting income improved and the combined ratio fell by 2.9 percentage points. Lower losses and LAE were partly offset by higher commissions and operating expenses.
- Net realized investment losses included $17.2 million of other-than-temporary impairments on equity securities, primarily associated with the energy-sector downturn.
- In-force premiums fell 1.3% overall and 5.0% in California, while premiums in other states grew 4.0%, consistent with the company’s diversification efforts.
- Operating cash flow fell to $116.4 million from $171.9 million. Cash declined by $47.0 million during 2015, reflecting investing outflows and debt repayment.
- Year-end GAAP equity increased to $760.8 million from $686.8 million. Adjusted stockholders’ equity, a company-defined non-GAAP measure, was $866.7 million versus $786.9 million.
Outlook, commentary, risks and unusual items
The filing gives no quantified earnings or premium guidance. Management’s stated strategy is disciplined underwriting, claims settlement, diversification beyond California, use of multiple pricing platforms, and non-renewal of underperforming business. Management said claim frequency continued to decrease, but medical and indemnity costs per claim showed upward pressure. It considered current accident-year reserves adequate, while cautioning that ultimate losses will take years to emerge.
- 2015 results included $7.2 million of favorable prior-year loss development, $6.4 million of favorable LPT reserve adjustment, and $2.6 million of favorable LPT contingent-commission adjustment. A $56.3 million reserve reallocation from pre-2000 non-taxable periods reduced tax expense by $15.3 million. Together, these items increased reported net income by $31.5 million.
- The fourth quarter included $8.5 million of favorable prior-year loss development and an $11.5 million tax benefit from reserve reallocation. These estimates and tax effects are significant when assessing earnings quality and year-over-year comparability.
- Claims reserves are inherently uncertain. The filing estimates that a 1 percentage-point increase in medical-cost inflation above the level embedded in reserves would increase lifetime medical costs on current claims by about $94 million net of reinsurance.
- California concentration exposes results to state-specific regulatory, economic, competitive, and claims trends. The company also identifies pricing and competition, catastrophe and terrorism losses, investment-market and interest-rate risk, and cyber and technology disruption as material risks.
- The company remains responsible to policyholders if reinsurers fail to pay. LPT-related remaining liabilities were estimated at $498.0 million, supported by $1.4 billion of trust assets; one reinsurer’s collateral includes publicly traded stock and is exposed to market-price changes. The insurance subsidiaries had an A.M. Best rating of A- with a negative outlook.
- Following year-end, the board authorized a share repurchase program of up to $50 million for February 22, 2016 through February 22, 2018, and declared a $0.09-per-share dividend payable in March 2016. These are subsequent events, not 2015 cash distributions. Auditors issued unqualified opinions, and management and the auditor reported effective internal control over financial reporting.
Most important facts for investors to verify
- How much of reported earnings reflects recurring underwriting and investment performance versus reserve releases, LPT adjustments, and the $15.3 million tax benefit; compare GAAP results with the company’s non-GAAP LPT-excluded measure.
- Whether reserve estimates remain adequate, especially for California claims, medical-cost inflation, cumulative trauma claims, and the impact of increased settlement activity.
- The collectability and collateral quality of reinsurance recoverables, including LPT collateral exposed to equity-price fluctuations.
- Whether California exposure continues to decline and growth outside California can offset it profitably; assess reliance on ADP, which generated 11.5% of in-force premiums and can terminate its agreement on 120 days’ notice.
- Investment portfolio performance and sensitivity to interest rates, credit deterioration, and further equity impairments; evaluate liquidity and statutory limits on dividends from insurance subsidiaries.
- Execution and funding of the announced repurchase program and dividend, alongside capital needs, regulatory requirements, and the A.M. Best negative outlook.