Reno, Nevada-August 7, 2012-Employers Holdings, Inc. (“EHI” or the “Company”) (NYSE:EIG) today reported second quarter 2012 net income of $5.0 million or $0.16 per diluted share. Net income in the second quarter of 2011 was $8.3 million or $0.21 per diluted share. As expected, during the second quarter of 2012, we recorded a $2.2 million or $0.07 per diluted share addition to underwriting and other operating expense as a result of our prospective adoption of the Financial Accounting Standards Board's change in accounting methods for deferred acquisition costs (DAC). This change in accounting method, which became effective in 2012, alters the definition of acquisition costs which may be capitalized and lowered our reported net income as a result of having to expense certain costs that were previously capitalized. Adjusted for the change in DAC accounting, non-GAAP net income was $7.3 million or $0.23 per diluted share, an increase of $0.02 per share compared with last year's second quarter. We continue to estimate that our underwriting and other operating expenses in 2012 will increase further by approximately $2 million, in addition to the year-to-date expense of $5 million, as a result of the new DAC accounting, with approximately 16% of the total $7 million to be recorded in Q3 and the remaining 6% to be recorded in Q4.
Net income includes amortization of the deferred reinsurance gain related to the Loss Portfolio Transfer (“LPT”) Agreement. Consolidated net income before the impact of the LPT deferred reinsurance gain (the Company's non-GAAP measure described below) was $1.2 million or $0.04 per diluted share in the second quarter of 2012 and $4.0 million or $0.10 per diluted share in the second quarter of 2011. Adjusted for the change in DAC accounting, net income before the impact of the LPT deferred reinsurance gain was $3.5 million or $0.11 per diluted share in the second quarter of 2012, which was $0.5 million or $0.01 per diluted share higher than the second quarter of 2011.
The change in DAC accounting impacts year-over-year comparisons of our results, which have not been retroactively adjusted. Reconciliations of results which illustrate the impact of the change in DAC accounting for the second quarter and year-to-date are included in the tables attached to this press release.
President and Chief Executive Officer Douglas D. Dirks commented on the results: “Net income, excluding the LPT and the DAC accounting change, increased one cent per diluted share relative to last year's second quarter. Our second quarter combined ratio, excluding the LPT and the DAC accounting change, improved more than six percentage points as cost controls and increases in net premiums earned drove the underwriting and other operating expense ratio down. The loss provision rate of 77.0% has been stable for the last year and a half. Our focus in 2012 is on getting more rate across the entire book of business in order to improve our loss ratio and our operating margin.”
Dirks continued: “In the second quarter, we continued to regain scale and grow our business given what we believe are improving market conditions. Over the last twelve months, we added nearly 20,000 policies for an increase of 38% in policy count. We increased net premiums written by 42% in the last twelve months. ”
Commenting on the balance sheet, Dirks added: “Since the end of last year, our book value increased 3% to $25.85 (not adjusted for the exclusion of the DAC accounting change). We continued to actively purchase shares in the second quarter with repurchases of 1.1 million common shares at a cost of $18.6 million."
"As we continue to expand our business and grow into an improving pricing environment, our operating companies will require additional capital. We have aggressively moved capital out of the operating companies into the holding company during the soft part of the cycle. We did this because it provided the greatest flexibility for deployment of capital, either back into the business, into a strategic opportunity, or to return it to shareholders through repurchases and dividends. We now expect to contribute back down to the operating subsidiaries up to $70 million of the capital that we moved to the holding company in recent years. The ultimate amount of capital contributed back to the operating subsidiaries will be governed by our expectations relative to growth and internal capital generation as well as regulatory and rating agency considerations. We expect that the contribution will be made prior to the close of the third quarter. We will continue to evaluate our best uses of capital including organic growth, capital retention needs, investment opportunities, and share repurchases and dividends.”
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