Employers Holdings, Inc. Reports Third Quarter 2013 Earnings and Declares Fourth Quarter 2013 Dividend

Key Highlights
(Q3, 2013 compared to Q3, 2012 except where noted)

  • Net income before the LPT of $13.6 million; up $0.33 per diluted share
  • Overall net rate up 9.3%
  • Net written premiums of $165.9 million; up 15%
  • Net earned premiums of $164.4 million; up 25%
  • Revenues of $183.3 million; up 21%
  • Combined ratio before the LPT improved 8.2 percentage points
  • Estimated reserves ceded under the LPT Agreement were reduced by $14.5 million
    • This resulted in a Q3 and year-to-date (YTD) cumulative adjustment to the deferred gain of $10.1 million which reduced losses and LAE and increased net income by $10.1 million or $0.32 per diluted share
  • Reallocation of carried reserves from non-taxable to taxable accident years reduced income taxes and increased net income by $5 million or $0.16 per diluted share for the third quarter and YTD

Business Wire

RENO, Nev.--(BUSINESS WIRE)--

Employers Holdings, Inc. (“EHI” or the “Company”) (EIG) today reported third quarter 2013 net income of $27.6 million or $0.86 per diluted share. Net income in the third quarter of 2012 was $7.8 million or $0.25 per diluted share.

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 $13.6 million or $0.42 per diluted share in the third quarter of 2013 and $2.7 million or $0.09 per diluted share in the third quarter of 2012.

The third quarter 2013 combined ratio was 96.2% and 104.7% before the impact of the LPT deferred reinsurance gain, compared with 109.0% and 112.9% before the impact of the LPT deferred reinsurance gain for the third quarter of 2012. Year over year, the combined ratio improved 12.8 percentage points on a GAAP basis and 8.2 percentage points before the impact of the LPT.

President and Chief Executive Officer Douglas D. Dirks commented on the results: “Our strong financial performance continued into the third quarter. Net income before the LPT increased $0.33 per diluted share relative to the third quarter of last year. Our substantive growth in earnings reflects the 25% year over year increase in net premiums earned, solid improvement in our underwriting performance and tax benefits related to a reassignment of reserves from non-taxable to taxable years. Our combined ratio before the LPT improved 8.2 points relative to the third quarter of 2012, and 1.4 points compared to the second quarter of this year. Year over year net rate increases of 9.3% at quarter-end continued to more than offset increases in loss costs. We are still seeing improvement in our loss and loss adjustment expense (LAE) ratio, but the rate of improvement was lower than in the first and second quarters of this year. We lowered our provision rate for losses in the third quarter by 0.2 points relative to the second quarter of this year and 4.4 points relative to the third quarter of last year. As rate trends continue to exceed loss trends, we would anticipate continuing improvement in our loss and LAE ratio."

Dirks continued: "In the third quarter, our analysis of ultimate losses resulted in a reallocation of $24.3 million of carried reserves from tax-exempt to taxable accident years. This reallocation was a cumulative adjustment and was largely the result of loss trends observed in 2012 and 2013. The reallocation does not reflect a change in loss trends and had no impact on total net carried reserves."

Dirks concluded: “As you know, our company has a history of setting ambitious goals and meeting them. Over the past three years, our focus has been to increase policy count, premium and add new agents. We have more than met those goals, yet we believe that we can always do better. We are now beginning the first phase of a new long-term initiative focusing on customer service and process improvement, with the goal of further reducing our expense ratio while bettering customer satisfaction. This initiative includes a re-structuring and centralization of our insurance operations. We will discuss this project more as it unfolds."

Fourth Quarter Dividend

The Board of Directors declared a fourth quarter 2013 dividend of six cents per share. The dividend is payable on December 4, 2013 to stockholders of record as of November 20, 2013.

Conference Call and Web Cast; Form 10-Q; Supplemental Portfolio Listing

The Company will host a conference call on Thursday, November 7, 2013, 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 21661548. International callers may dial (617) 801-6888.

EHI expects to file its Form 10-Q for the quarter ended September 30, 2013, with the Securities and Exchange Commission (“SEC”) on or about Thursday, November 7, 2013. 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 by CUSIP in the Calendar of Events, Third Quarter “Investors” section of its web site at www.employers.com.

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 gainLPT Agreement; (b) adjustments to LPT Agreement ceded reserves; and (c) adjustments to contingent commission receivableLPT 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 receivableLPT 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. 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 gainLPT Agreement; (b) adjustments to LPT Agreement ceded reserves; and (c) adjustments to contingent commission receivableLPT 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 underwriting performance, trends in loss and LAE ratios, expectations regarding provision rate, achievement of corporate goals and long-term initiatives and the impact of those initiatives on operations. 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).

Copyright © 2013 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 Statements of Comprehensive Income
 
  Three Months Ended   Nine Months Ended
September 30, September 30,
(in thousands, except per share data) 2013   2012 2013   2012
Revenues (unaudited) (unaudited)
Gross premiums written $ 168,569   $ 147,032   $ 533,600   $ 442,920  
Net premiums written $ 165,885   $ 144,353   $ 524,907   $ 435,081  
Net premiums earned $ 164,429 $ 131,766 $ 472,357 $ 360,621
Net investment income 17,799 17,506 52,849 54,188
Realized gains on investments, net 1,075 1,838 5,735 4,561
Other income 29   30   276   225  
Total revenues 183,332 151,140 531,217 419,595
Expenses
Losses and loss adjustment expenses 105,767 96,823 326,677 265,150
Commission expense 19,946 16,681 58,466 47,118
Underwriting and other operating expenses 32,493 30,147 96,282 93,452
Interest expense 815   896   2,420   2,656  
Total expenses 159,021 144,547 483,845 408,376
 
Net income before income taxes 24,311 6,593 47,372 11,219
Income tax benefit (3,274 ) (1,173 ) (2,291 ) (7,903 )
Net income $ 27,585   $ 7,766   $ 49,663   $ 19,122  
Less impact of LPT Agreement:
Amortization of the Deferred Gain related to losses 3,195 3,646 9,775 11,630
Amortization of the Deferred Gain related to contingent commission 396 293 1,184 818
Impact of LPT Reserve Adjustment 10,112 10,112
Impact of LPT Contingent Commission Adjustments 318   1,139   1,617   1,503  
Net income before LPT Agreement $ 13,564   $ 2,688   $ 26,975   $ 5,171  
Comprehensive income
Unrealized gains (losses) during the period (net of tax expense (benefit) of $2,236 and $8,639 for the three months ended September 30, 2013 and 2012, respectively, and $(18,635) and $13,963 for the nine months ended September 30, 2013 and 2012, respectively) $ 4,154 $ 16,045 $ (34,607 ) $ 25,933
Reclassification adjustment for realized gains in net income (net of taxes of $376 and $643 for the three months ended September 30, 2013 and 2012, respectively, and $2,007 and $1,596 for the nine months ended September 30, 2013 and 2012, respectively) (699 ) (1,195 ) (3,728 ) (2,966 )
Other comprehensive income (loss), net of tax 3,455   14,850   (38,335 ) 22,967  
Total comprehensive income $ 31,040   $ 22,616   $ 11,328   $ 42,089  
Weighted average shares outstanding
Basic 31,214,230 30,891,648 31,070,571 31,689,844
Diluted 32,033,676 31,077,378 31,801,370 31,918,620
Earnings per common share
Basic $ 0.88 $ 0.25 $ 1.60 $ 0.60
Diluted 0.86 0.25 1.56 0.60
Earnings per common share attributable to the LPT Agreement
Basic $ 0.45 $ 0.16 $ 0.73 $ 0.44
Diluted 0.44 0.16 0.71 0.44
Earnings per common share before the LPT Agreement
Basic $ 0.43 $ 0.09 $ 0.87 $ 0.16
Diluted 0.42 0.09 0.85 0.16
Employers Holdings, Inc. and Subsidiaries
Consolidated Balance Sheets
 
  As of   As of
(in thousands, except share data) September 30,
2013
December 31,
2012
Assets (unaudited)
Available for sale:
Fixed maturity securities at fair value (amortized cost $2,022,240 at September 30, 2013 and $1,869,142 at December 31, 2012) $ 2,101,357 $ 2,024,428
Equity securities at fair value (cost $86,384 at September 30, 2013 and $81,067 at December 31, 2012) 147,595   125,086  
Total investments 2,248,952 2,149,514
Cash and cash equivalents 99,823 140,661
Restricted cash and cash equivalents 6,078 5,353
Accrued investment income 19,100 19,356
Premiums receivable (less bad debt allowance of $7,397 at September 30, 2013 and $5,957 at December 31, 2012) 282,940 223,011
Reinsurance recoverable for:
Paid losses 8,946 9,467
Unpaid losses 779,842 805,386
Deferred policy acquisition costs 45,682 38,852
Deferred income taxes, net 52,356 26,231
Property and equipment, net 16,490 14,680
Intangible assets, net 9,881 10,558
Goodwill 36,192 36,192
Contingent commission receivable—LPT Agreement 21,388 19,141
Other assets 17,846   12,937  
Total assets $ 3,645,516   $ 3,511,339  
Liabilities and stockholders’ equity
Claims and policy liabilities:
Unpaid losses and loss adjustment expenses $ 2,305,307 $ 2,231,540
Unearned premiums 318,983   265,149  
Total claims and policy liabilities 2,624,290 2,496,689
Commissions and premium taxes payable 44,493 40,825
Accounts payable and accrued expenses 20,333 19,522
Deferred reinsurance gain—LPT Agreement 260,602 281,043
Notes payable 112,000 112,000
Other liabilities 27,269   21,879  
Total liabilities 3,088,987 2,971,958
Commitments and contingencies
Stockholders’ equity:
Common stock, $0.01 par value; 150,000,000 shares authorized; 54,579,523 and 54,144,453 shares issued and 31,206,549 and 30,771,479 shares outstanding at September 30, 2013 and December 31, 2012, respectively 546 541
Additional paid-in capital 337,403 325,991
Retained earnings 489,916 445,850
Accumulated other comprehensive income, net 91,214 129,549
Treasury stock, at cost (23,372,974 shares at September 30, 2013 and December 31, 2012) (362,550 ) (362,550 )
Total stockholders’ equity 556,529   539,381  
Total liabilities and stockholders’ equity $ 3,645,516   $ 3,511,339  
 
Equity including deferred reinsurance gain - LPT
Total stockholders’ equity $ 556,529 $ 539,381
Deferred reinsurance gain–LPT Agreement 260,602   281,043  
Total equity including deferred reinsurance gain–LPT Agreement (A) $ 817,131   $ 820,424  
Shares outstanding (B) 31,206,549 30,771,479
Book value per share (A * 1000) / B $ 26.18   $ 26.66  
Employers Holdings, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
 
  Nine Months Ended
September 30,
(in thousands) 2013   2012
Operating activities (unaudited)
Net income $ 49,663 $ 19,122
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 4,324 4,193
Stock-based compensation 5,815 3,942
Amortization of premium on investments, net 6,574 5,342
Deferred income tax expense (5,482 ) (10,031 )
Realized gains on investments, net (5,735 ) (4,561 )
Excess tax benefits from stock-based compensation (386 )
Other 1,007 860
Change in operating assets and liabilities:
Premiums receivable (61,368 ) (65,455 )
Reinsurance recoverable for paid and unpaid losses 26,065 29,393
Federal income taxes (925 ) 2,054
Unpaid losses and loss adjustment expenses 73,767 32,061
Unearned premiums 53,834 75,910
Accounts payable, accrued expenses and other liabilities 6,201 1,130
Deferred reinsurance gain—LPT Agreement (20,441 ) (11,501 )
Contingent commission receivable—LPT Agreement (2,247 ) (2,450 )
Other (6,622 ) 10,584  
Net cash provided by operating activities 124,044 90,593
Investing activities
Purchase of fixed maturities (340,343 ) (260,797 )
Purchase of equity securities (22,058 ) (28,336 )
Proceeds from sale of fixed maturities 32,706 45,799
Proceeds from sale of equity securities 22,266 13,534
Proceeds from maturities and redemptions of investments 148,418 181,640
Proceeds from sale of fixed assets 285 107
Capital expenditures (5,552 ) (5,177 )
Restricted cash and cash equivalents provided by (used in) investing activities (725 ) 837  
Net cash used in investing activities (165,003 ) (52,393 )
Financing activities
Acquisition of treasury stock (41,385 )
Cash transactions related to stock-based compensation 5,315 (209 )
Dividends paid to stockholders (5,580 ) (5,664 )
Excess tax benefits from stock-based compensation 386    
Net cash provided by (used in) financing activities 121   (47,258 )
Net decrease in cash and cash equivalents (40,838 ) (9,058 )
Cash and cash equivalents at the beginning of the period 140,661   252,300  
Cash and cash equivalents at the end of the period $ 99,823   $ 243,242  
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) 2013   2012 2013   2012
(unaudited)
Net premiums earned $ 164,429   $ 131,766   $ 472,357   $ 360,621  
 
Losses and loss adjustment expenses 105,767   96,823   326,677   265,150  
Loss & LAE ratio 64.3 % 73.5 % 69.2 % 73.5 %
 
Amortization of Deferred Gain related to losses $ 3,195 $ 3,646 $ 9,775 $ 11,630
Amortization of Deferred Gain related to contingent commission 396 293 1,184 818
LPT Reserve Adjustment 10,112 10,112
LPT Contingent Commission Adjustment 318 1,139 1,617 1,503
Impact of LPT 8.5 % 3.9 % 4.8 % 3.9 %
Loss & LAE before impact of LPT $ 119,788   $ 101,901   $ 349,365   $ 279,101  
Loss & LAE ratio before impact of LPT 72.9 % 77.3 % 74.0 % 77.4 %
 
Commission expense $ 19,946   $ 16,681   $ 58,466   $ 47,118  
Commission expense ratio 12.1 % 12.6 % 12.4 % 13.1 %
 
Underwriting & other operating expenses $ 32,493   $ 30,147   $ 96,282   $ 93,452  
Underwriting & other operating expenses ratio 19.8 % 22.9 % 20.3 % 25.9 %
 
Total expenses $ 158,206   $ 143,651   $ 481,425   $ 405,720  
Combined ratio 96.2 % 109.0 % 101.9 % 112.5 %
 
Total expense before impact of the LPT $ 172,227   $ 148,729   $ 504,113   $ 419,671  
Combined ratio before the impact of the LPT 104.7 % 112.9 % 106.7 % 116.4 %
 
Reconciliations to Current Accident Period Combined Ratio:
Losses & LAE before impact of LPT $ 119,788 $ 101,901 $ 349,365 $ 279,101
Plus: Favorable (unfavorable) prior period reserve development (146 ) (227 ) (1,797 ) (1,281 )
Accident period losses & LAE before impact of LPT $ 119,642   $ 101,674   $ 347,568   $ 277,820  
 
Losses & LAE ratio before impact of LPT 72.9 % 77.3 % 74.0 % 77.4 %
Plus: Favorable (unfavorable) prior period reserve development ratio (0.1 ) (0.1 ) (0.4 ) (0.4 )
Accident period losses & LAE ratio before impact of LPT 72.8 % 77.2 % 73.6 % 77.0 %
 
Combined ratio before impact of the LPT 104.7 % 112.9 % 106.7 % 116.4 %
Plus: Favorable (unfavorable) prior period reserve development ratio (0.1 ) (0.1 ) (0.4 ) (0.4 )
Accident period combined ratio before impact of LPT 104.6 % 112.8 % 106.3 % 116.0 %

Contact:
Employers Holdings, Inc.
Media:
Ty Vukelich, 775-327-2677
tvukelich@employers.com
Analysts:
Vicki Erickson Mills, 775-327-2794
vericksonmills@employers.com

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