Friday, September 22 2017

29

Employers Holdings, Inc. Reports Third Quarter 2014 Earnings and Declares Fourth Quarter 2014 Dividend

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Key Highlights
(Q3, 2014 compared to Q3, 2013 except where noted)

• Overall net rate up 4.9%
• Net written premiums of $164.2 million; down 1.0%
• Net earned premiums of $172.1 million; up 4.6%
• Revenues of $192.1 million; up 4.8% 
• Combined ratio before the LPT down 30 basis points
• Income taxes of $1.3 million; up $4.6 million
• Adjusted book value per common share of $27.67; up 5.9% since 12/31/13

Reno, Nevada-October 29, 2014-Employers Holdings, Inc. (“EHI” or the “Company”) (NYSE:EIG) today reported third quarter  net income of $15.2 million or $0.47 per diluted share in 2014 compared to $27.6 million or $0.86 per diluted share in  2013. Net income includes the impacts of the re-allocation of reserves from non-taxable to taxable periods and three items related to the Loss Portfolio Transfer ("LPT") Agreement: reserve adjustments, adjustments to the contingent profit commission, and amortization of the deferred reinsurance gain. Higher net income in the third quarter of 2013 was primarily attributable to a $10.1 million favorable LPT reserve adjustment and a $5.0 million decrease in income taxes which was related to the re-allocation of non-taxable reserves to taxable periods during the third quarter of 2013. 

Consolidated net income before the impact of the LPT (the Company's non-GAAP measure described below) was $10.4 million or $0.32 per diluted share in the third quarter of 2014 and $13.6 million or $0.42 per diluted share in the third quarter of 2013. Lower net income before the LPT in the third quarter of 2014 reflects a higher loss provision rate than in the third quarter of 2013 and higher income taxes, primarily due to the impacts of the re-allocation of reserves in the third quarter of 2013. 
The third quarter combined ratio before the LPT was 104.4% in 2014 compared with 104.7% in 2013. The third quarter GAAP combined ratio was 101.6% in 2014 compared with 96.2% in 2013. The lower GAAP combined ratio in the third quarter of 2013 was primarily attributable to the favorable $10.1 million LPT reserve adjustment that lowered losses and loss adjustment expense by that amount. 

President and Chief Executive Officer Douglas D. Dirks commented on the results: “Our results in the third quarter demonstrate continuing improvement in underwriting expenses which drove improvement in the third quarter combined ratio before the LPT.  Relative to year-end 2013, the loss provision rate has declined in the first, second and third quarters of this year as our net rate continued to increase. The third quarter 2014 loss provision rate of 73.5% was 0.6 percentage points lower than the prior quarter and 3.5 percentage points lower than the 2013 annual rate. Our loss provision rate in the third quarter of this year was 0.7 points higher than the same quarter last year which primarily drove a one point increase in the loss ratio. In 2013, the provision rate for the then current accident year losses was raised in the fourth quarter to an annual rate of 77.0% in response to a sudden spike in more costly litigated claims in southern California. Importantly, the spike in open litigated indemnity claims that we experienced in the fourth quarter of last year in southern California has not continued in the first, second, or third quarters of this year."

Dirks continued: "In the third quarter, we saw a slight decline in net written premiums and a slightly lower policy retention rate largely related to specific California-related initiatives. Effective June 1 of this year, we began utilizing three operating companies in California with new rates and territorial multipliers which we expected would increase non-renewal rate, lower retention rate and increase our net rate. We have reduced our payroll exposure by 5.1% year-over-year in California while increasing net rate in California 10.7%. At the same time, we continue to target attractive classes of business inside and outside of California to, as much as possible, offset the loss of premium from any non-renewed business. Our Company-wide policy retention was 83% in the third quarter 2014, one percentage point lower than in the third quarter of 2013. Third quarter policy retention in our eastern states increased four percentage points year-over-year, to 87%. At September 30, 2014, California was 60% of our in-force premium and 56% of our policies. In-force policy count grew 0.4% in California year-over-year and 5.0% in all states excluding California."

Dirks concluded: "We are managing the litigation issues in California. We are reducing our payroll exposure in California, particularly southern California. Our net rate continues to increase, our year-to-date loss provision rates continue to improve, and we are targeting customer classes with historically good loss ratio results both inside and outside of California. There has been no material unfavorable loss development related to our voluntary business and our adjusted book value per outstanding share of common stock increased 5.9% since the end of last year."

Fourth Quarter Dividend

The Board of Directors declared a fourth quarter 2014 dividend of six cents per share. The dividend is payable on November 26, 2014 to stockholders of record as of November 12, 2014.

Conference Call and Web Cast; Form 10-Q; Supplemental Information

The Company will host a conference call on Thursday, October 30, 2014, at 8:30 a.m. Pacific Daylight Time. The conference call will be available via a live web cast on the Company's web site at www.employers.com. An archived version will be available several hours after the call. The conference call replay number is (888) 286-8010 with a pass code of 65541153. International callers may dial (617) 801-6888.
EHI expects to file its Form 10-Q for the quarter ended September 30, 2014, with the Securities and Exchange Commission (“SEC”) on or about Thursday, October 30, 2014. The Form 10-Q will be available without charge through the EDGAR system at the SEC's web site and will also be posted on the Company's website, www.employers.com, through the “Investors” link.
The Company provides a list of portfolio securities in the Calendar of Events, “Investors” section of its website at www.employers.com. The Company also provides investor presentations on its website.
Discussion of Non-GAAP Financial Measures

This earnings release includes non-GAAP financial measures used to analyze the Company's operating performance for the periods presented.

These non-GAAP financial measures exclude impacts related to the LPT Agreement deferred reinsurance gain. The 1999 LPT Agreement was a non-recurring transaction that does not result in ongoing cash benefits and, consequently, the Company believes these non-GAAP measures are useful in providing stockholders and management a meaningful understanding of the Company's operating performance. In addition, these measures, as defined, are helpful to management in identifying trends in the Company's performance because the items excluded have limited significance in current and ongoing operations.
The Company strongly urges stockholders and other interested persons not to rely on any single financial measure to evaluate its business. The non-GAAP measures are not a substitute for GAAP measures and investors should be careful when comparing the Company's non-GAAP financial measures to similarly titled measures used by other companies.
Net Income before impact of the LPT Agreement.  Net income less (a) amortization of deferred reinsurance gain–LPT Agreement;   (b) adjustments to LPT Agreement ceded reserves; and (c) adjustments to contingent commission receivable–LPT Agreement.

Deferred reinsurance gain–LPT Agreement (Deferred Gain).  This reflects the unamortized gain from the LPT Agreement. Under GAAP, this gain is deferred and amortized using the recovery method, whereby the amortization is determined by the proportion of actual reinsurance recoveries to total estimated recoveries, except for the contingent profit commission, which is amortized through June 30, 2024. The amortization is reflected in losses and LAE.

Gross Premiums Written.  Gross premiums written is the sum of both direct premiums written and assumed premiums written before the effect of ceded reinsurance. Direct premiums written represents the premiums on all policies the Company's insurance subsidiaries have issued during the year. Assumed premiums written represents the premiums that the insurance subsidiaries have received from an authorized state-mandated pool.

Net Premiums Written.  Net premiums written is the sum of direct premiums written and assumed premiums written less ceded premiums written. Ceded premiums written is the portion of direct premiums written that are ceded to reinsurers under reinsurance contracts. The Company uses net premiums written, primarily in relation to gross premiums written, to measure the amount of business retained after cession to reinsurers.

Losses and LAE before impact of the LPT Agreement.   Losses and LAE less (a) amortization of Deferred Gain; (b) adjustments to LPT Agreement ceded reserves; and (c) adjustments to contingent commission receivable–LPT Agreement.
Losses and LAE Ratio.  The losses and LAE ratio is a measure of underwriting profitability. Expressed as a percentage, it is the ratio of losses and LAE to net premiums earned.
Commission Expense Ratio.  The commission expense ratio is the ratio (expressed as a percentage) of commission expense to net premiums earned.

Underwriting and Other Operating Expense Ratio.  The underwriting and other operating expense ratio is the ratio (expressed as a percentage) of underwriting and other operating expense to net premiums earned.

Combined Ratio.  The combined ratio represents a summary percentage of claims and expenses to net premiums earned. The combined ratio is the sum of the losses and LAE ratio, the commission expense ratio, and the underwriting and other operating expense ratio.

Combined Ratio before impacts of the LPT Agreement.  Combined ratio before impacts of LPT is the GAAP combined ratio before (a) amortization of deferred reinsurance gain–LPT Agreement; (b) adjustments to LPT Agreement ceded reserves; and (c) adjustments to contingent commission receivable–LPT Agreement.

Equity including Deferred Gain.  Equity including Deferred Gain is total equity plus the Deferred Gain.
Book value per share.  Equity including Deferred Gain divided by number of shares outstanding.
Net rate.  Net rate, defined as total premium in-force divided by total insured payroll exposure, is a function of a variety of factors, including rate changes, underwriting risk profiles and pricing, and changes in business mix related to economic and competitive pressures.

Forward-Looking Statements
In this press release, the Company and its management discuss and make statements based on currently available information regarding their intentions, beliefs, current expectations, and projections regarding the Company's future operations, growth and pricing strategies, and financial and operating performance, as well as the status of the Company's litigated indemnity claims in certain geographies and efforts to target classes of business. Certain of these statements may constitute "forward-looking" statements as that term is defined in the Private Securities Litigation Reform Act of 1995.  Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts and are often identified by words such as "may," "will," "could," "would," "should," "expect," "plan," "anticipate," "target," "project," "intend," "believe," "estimate," "predict," "potential," "pro forma," "seek," "likely," or "continue," or other comparable terminology and their negatives. EHI and its management caution investors that such forward-looking statements are not guarantees of future performance. Risks and uncertainties are inherent in EHI's future performance. Factors that could cause the Company's actual results to differ materially from those indicated by such forward-looking statements include, among other things, those discussed or identified from time to time in EHI's public filings with the SEC, including the risks detailed in the Company's Quarterly Reports on Form 10-Q and the Company's Annual Reports on Form 10-K. Except as required by applicable securities laws, the Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

The SEC filings for EHI can be accessed through the “Investors” link on the Company's website, www.employers.com, or through the SEC's EDGAR Database at www.sec.gov (EHI EDGAR CIK No. 0001379041).

CONTACT:
Media: Ty Vukelich, (775) 327-2677, tvukelich@employers.com.
Analysts: Vicki Erickson Mills, (775) 327-2794, vericksonmills@employers.com.

Copyright © 2014 EMPLOYERS. All rights reserved. EMPLOYERS® and America's small business insurance specialist. ® are registered trademarks of Employers Insurance Company of Nevada. Employers Holdings, Inc. is a holding company with subsidiaries that are specialty providers of workers' compensation insurance and services focused on select, small businesses engaged in low to medium hazard industries. Insurance subsidiaries include Employers Insurance Company of Nevada, Employers Compensation Insurance Company, Employers Preferred Insurance Company, and Employers Assurance Company, all rated A- (Excellent) by A.M. Best Company.  Additional information can be found at: http://www.employers.com.



Employers Holdings, Inc. and Subsidiaries

Consolidated Balance Sheets

As of

As of

(in thousands, except share data)

September 30,
 2014

December 31,
 2013

Assets

(unaudited)

Available for sale:

Fixed maturity securities at fair value (amortized cost $2,202,822 at September 30, 2014 and $2,116,064 at December 31, 2013)

$

2,290,718

$

2,182,546

Equity securities at fair value (cost $95,984 at September 30, 2014 and $89,689 at December 31, 2013)

164,548

162,312

Total investments

2,455,266

2,344,858

Cash and cash equivalents

59,006

34,503

Restricted cash and cash equivalents

20,786

6,564

Accrued investment income

19,485

20,255

Premiums receivable (less bad debt allowance of $7,819 at September 30, 2014 and $7,064 at December 31, 2013)

315,115

279,080

Reinsurance recoverable for:

Paid losses

7,954

8,412

Unpaid losses, including bad debt allowance of $389 at December 31, 2013

690,471

742,666

Deferred policy acquisition costs

47,935

43,532

Deferred income taxes, net

51,333

58,062

Property and equipment, net

19,902

16,616

Intangible assets, net

9,180

9,685

Goodwill

36,192

36,192

Contingent commission receivable—LPT Agreement

23,078

25,104

Other assets

23,479

17,920

Total assets

$

3,779,182

$

3,643,449

Liabilities and stockholders’ equity

Claims and policy liabilities:

Unpaid losses and loss adjustment expenses

$

2,370,268

$

2,330,491

Unearned premiums

335,826

303,967

Total claims and policy liabilities

2,706,094

2,634,458

Commissions and premium taxes payable

47,287

45,314

Accounts payable and accrued expenses

20,069

18,711

Deferred reinsurance gain—LPT Agreement

218,654

249,072

Notes payable

102,000

102,000

Other liabilities

32,485

25,191

Total liabilities

3,126,589

3,074,746

Commitments and contingencies

Stockholders’ equity:

Common stock, $0.01 par value; 150,000,000 shares authorized; 54,862,442 and 54,672,904 shares issued and 31,489,468 and 31,299,930 shares outstanding at September 30, 2014 and December 31, 2013, respectively

549

547

Additional paid-in capital

344,814

338,090

Retained earnings

568,080

502,198

Accumulated other comprehensive income, net

101,700

90,418

Treasury stock, at cost (23,372,974 shares at September 30, 2014 and December 31, 2013)

(362,550

)

(362,550

)

Total stockholders’ equity

652,593

568,703

Total liabilities and stockholders’ equity

$

3,779,182

$

3,643,449

Equity including deferred reinsurance gain - LPT

Total stockholders’ equity

$

652,593

$

568,703

Deferred reinsurance gain–LPT Agreement

218,654

249,072

Total equity including deferred reinsurance gain–LPT Agreement (A)

$

871,247

$

817,775

Shares outstanding (B)

31,489,468

31,299,930

Book value per share (A * 1000) / B

$

27.67

$

26.13



Employers Holdings, Inc.

Calculation of Combined Ratio before the Impact of the LPT Agreement

Three Months Ended

Nine Months Ended

September 30,

September 30,

(in thousands, except for percentages)

2014

2013

2014

2013

(unaudited)

Net premiums earned

$

172,053

$

164,429

$

511,866

$

472,357

Losses and loss adjustment expenses

122,357

105,767

343,137

326,677

Loss & LAE ratio

71.1

%

64.3

%

67.0

%

69.2

%

Amortization of Deferred Gain related to losses

$

2,563

$

3,195

$

8,473

$

9,775

Amortization of Deferred Gain related to contingent commission

455

396

1,387

1,184

LPT Reserve Adjustment

1,514

10,112

22,335

10,112

LPT Contingent Commission Adjustment

254

318

7,893

1,617

Loss & LAE before impact of LPT

$

127,143

$

119,788

$

383,225

$

349,365

Impact of LPT

2.8

%

8.6

%

7.9

%

4.8

%

Loss & LAE ratio before impact of LPT

73.9

%

72.9

%

74.9

%

74.0

%

Commission expense

$

20,607

$

19,946

$

60,983

$

58,466

Commission expense ratio

12.0

%

12.1

%

11.9

%

12.4

%

Underwriting & other operating expenses

$

31,854

$

32,493

$

98,311

$

96,282

Underwriting & other operating expenses ratio

18.5

%

19.8

%

19.3

%

20.3

%

Total expenses

$

174,818

$

158,206

$

502,431

$

481,425

Combined ratio

101.6

%

96.2

%

98.2

%

101.9

%

Total expense before impact of the LPT

$

179,604

$

172,227

$

542,519

$

504,113

Combined ratio before the impact of the LPT

104.4

%

104.7

%

106.0

%

106.7

%

Reconciliations to Current Accident Period Combined Ratio:

Losses & LAE before impact of LPT

$

127,143

$

119,788

$

383,225

$

349,365

Plus: Favorable (unfavorable) prior period reserve development

(671

)

(146

)

(3,992

)

(1,797

)

Accident period losses & LAE before impact of LPT

$

126,472

$

119,642

$

379,233

$

347,568

Losses & LAE ratio before impact of LPT

73.9

%

72.9

%

74.9

%

74.0

%

Plus: Favorable (unfavorable) prior period reserve development ratio

(0.4

)

(0.1

)

(0.8

)

(0.4

)

Accident period losses & LAE ratio before impact of LPT

73.5

%

72.8

%

74.1

%

73.6

%

Combined ratio before impact of the LPT

104.4

%

104.7

%

106.0

%

106.7

%

Plus: Favorable (unfavorable) prior period reserve development ratio

(0.4

)

(0.1

)

(0.8

)

(0.4

)

Accident period combined ratio before impact of LPT

104.0

%

104.6

%

105.2

%

106.3

%


Employers Holdings, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

Nine Months Ended

September 30,

(in thousands)

2014

2013

Operating activities

(unaudited)

Net income

$

71,550

$

49,663

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization

5,240

4,324

Stock-based compensation

4,310

5,815

Amortization of premium on investments, net

7,809

6,574

Deferred income tax expense

655

(5,482

)

Net realized gains on investments

(14,202

)

(5,735

)

Excess tax benefits from stock-based compensation

(1,154

)

(386

)

Other

352

1,007

Change in operating assets and liabilities:

Premiums receivable

(36,790

)

(61,368

)

Reinsurance recoverable for paid and unpaid losses

53,042

26,065

Federal income taxes

4,424

(925

)

Unpaid losses and loss adjustment expenses

39,777

73,767

Unearned premiums

31,859

53,834

Accounts payable, accrued expenses and other liabilities

8,652

6,201

Deferred reinsurance gain—LPT Agreement

(30,418

)

(20,441

)

Contingent commission receivable—LPT Agreement

2,026

(2,247

)

Other

(10,736

)

(6,622

)

Net cash provided by operating activities

136,396

124,044

Investing activities

Purchase of fixed maturity securities

(293,689

)

(340,343

)

Purchase of equity securities

(20,565

)

(22,058

)

Proceeds from sale of fixed maturity securities

42,232

32,706

Proceeds from sale of equity securities

27,614

22,266

Proceeds from maturities and redemptions of investments

158,252

148,418

Proceeds from sale of fixed assets

285

Capital expenditures

(8,510

)

(5,552

)

Change in restricted cash and cash equivalents

(14,222

)

(725

)

Net cash used in investing activities

(108,888

)

(165,003

)

Financing activities

Cash transactions related to stock-based compensation

1,492

5,315

Dividends paid to stockholders

(5,651

)

(5,580

)

Excess tax benefits from stock-based compensation

1,154

386

Net cash used in financing activities

(3,005

)

121

Net increase (decrease) in cash and cash equivalents

24,503

(40,838

)

Cash and cash equivalents at the beginning of the period

34,503

140,661

Cash and cash equivalents at the end of the period

$

59,006

$

99,823

Employers Holdings, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

Three Months Ended

Nine Months Ended

September 30,

September 30,

(in thousands, except per share data)

2014

2013

2014

2013

Revenues

(unaudited)

(unaudited)

Gross premiums written

$

166,397

$

168,569

$

546,132

$

533,600

Net premiums written

$

164,234

$

165,885

$

538,333

$

524,907

Net premiums earned

$

172,053

$

164,429

$

511,866

$

472,357

Net investment income

18,179

17,799

54,477

52,849

Net realized gains on investments

1,776

1,075

14,202

5,735

Other income

48

29

274

276

Total revenues

192,056

183,332

580,819

531,217

Expenses

Losses and loss adjustment expenses

122,357

105,767

343,137

326,677

Commission expense

20,607

19,946

60,983

58,466

Underwriting and other operating expenses

31,854

32,493

98,311

96,282

Interest expense

743

815

2,274

2,420

Total expenses

175,561

159,021

504,705

483,845

Net income before income taxes

16,495

24,311

76,114

47,372

Income tax expense (benefit)

1,295

(3,274

)

4,564

(2,291

)

Net income

$

15,200

$

27,585

$

71,550

$

49,663

Less impact of LPT Agreement:

Amortization of the Deferred Gain related to losses

2,563

3,195

8,473

9,775

Amortization of the Deferred Gain related to contingent commission

455

396

1,387

1,184

Impact of LPT Reserve Adjustment

1,514

10,112

22,335

10,112

Impact of LPT Contingent Commission Adjustments

254

318

7,893

1,617

Net income before impact of the LPT Agreement

$

10,414

$

13,564

$

31,462

$

26,975

Comprehensive income

Unrealized gains (losses) during the period (net of tax expense (benefit) of $(3,099) and $2,236 for the three months ended September 30, 2014 and 2013, respectively, and $11,045 and $(18,635) for the nine months ended September 30, 2014 and 2013, respectively)

$

(5,755

)

$

4,154

$

20,513

$

(34,607

)

Reclassification adjustment for realized gains in net income (net of taxes of $622 and $376 for the three months ended September 30, 2014 and 2013, respectively, and $4,971 and $2,007 for the nine months ended September 30, 2014 and 2013, respectively)

(1,154

)

(699

)

(9,231

)

(3,728

)

Other comprehensive income (loss), net of tax

(6,909

)

3,455

11,282

(38,335

)

Total comprehensive income

$

8,291

$

31,040

$

82,832

$

11,328

Weighted average shares outstanding

Basic

31,591,457

31,214,230

31,507,097

31,070,571

Diluted

32,109,420

32,033,676

32,044,128

31,801,370

Earnings per common share

Basic

$

0.48

$

0.88

$

2.27

$

1.60

Diluted

0.47

0.86

2.23

1.56

Earnings per common share attributable to the LPT Agreement

Basic

$

0.15

$

0.45

$

1.27

$

0.73

Diluted

0.15

0.44

1.25

0.71

Earnings per common share before the LPT Agreement

Basic

$

0.33

$

0.43

$

1.00

$

0.87

Diluted

0.32

0.42

0.98

0.85

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