Employers (EIG) - 2019 Q1 - Quarterly Report

PART I – FINANCIAL INFORMATION This section presents the unaudited consolidated financial statements, management's discussion and analysis, market risk disclosures, and internal controls for the reporting period Item 1. Consolidated Financial Statements This section presents the unaudited consolidated financial statements, including balance sheets, statements of comprehensive income, stockholders' equity, and cash flows, along with detailed notes explaining accounting policies, fair value measurements, investments, and other financial disclosures for the periods ended March 31, 2019, and December 31, 2018 Consolidated Balance Sheets This section presents the Company's financial position, detailing assets, investments, liabilities, and equity as of March 31, 2019, and December 31, 2018 | Metric | March 31, 2019 (in millions) | December 31, 2018 (in millions) | | :----------------------------------- | :--------------------------- | :---------------------------- | | Total Assets | $3,973.1 | $3,919.2 | | Total Investments | $2,757.4 | $2,727.7 | | Unpaid Losses and Loss Adjustment Expenses | $2,189.3 | $2,207.9 | | Total Liabilities | $2,901.4 | $2,901.0 | Consolidated Statements of Comprehensive Income This section details the Company's financial performance, including revenues, expenses, net income, and comprehensive income for the three months ended March 31, 2019 and 2018 | Metric | Three Months Ended March 31, 2019 (in millions) | Three Months Ended March 31, 2018 (in millions) | | :----------------------------------- | :------------------------------------------ | :------------------------------------------ | | Net Premiums Earned | $174.8 | $176.6 | | Net Investment Income | $21.8 | $19.4 | | Net Realized and Unrealized Gains (Losses) on Investments | $23.3 | $(8.0) | | Total Revenues | $220.3 | $188.0 | | Total Expenses | $158.5 | $158.6 | | Net Income Before Income Taxes | $61.8 | $29.4 | | Income Tax Expense | $10.0 | $3.8 | | Net Income | $51.8 | $25.6 | | Total Comprehensive Income (Loss) | $89.1 | $(9.8) | | Basic Earnings Per Common Share | $1.60 | $0.78 | | Diluted Earnings Per Common Share | $1.57 | $0.77 | | Cash Dividends Declared Per Common Share | $0.22 | $0.20 | Consolidated Statements of Stockholders' Equity This section outlines changes in stockholders' equity, including net income, stock acquisitions, dividends, and unrealized investment gains for the three months ended March 31, 2019 and 2018 | Metric | March 31, 2019 (in millions) | January 1, 2019 (in millions) | | :----------------------------------- | :--------------------------- | :---------------------------- | | Balance, Stockholders' Equity | $1,071.7 | $1,018.2 | | Net Income for the Period | $51.8 | N/A | | Acquisition of Common Stock | $(27.5) | N/A | | Dividends Declared | $(7.4) | N/A | | Change in Net Unrealized Gains on Investments, Net of Taxes | $37.3 | N/A | Consolidated Statements of Cash Flows This section presents the Company's cash inflows and outflows from operating, investing, and financing activities for the three months ended March 31, 2019 and 2018 | Cash Flow Activity | Three Months Ended March 31, 2019 (in millions) | Three Months Ended March 31, 2018 (in millions) | | :----------------------------------- | :------------------------------------------ | :------------------------------------------ | | Net Cash Provided by Operating Activities | $20.1 | $46.2 | | Net Cash Provided by (Used in) Investing Activities | $9.9 | $(53.7) | | Net Cash Used in Financing Activities | $(37.2) | $(9.6) | | Net Decrease in Cash, Cash Equivalents and Restricted Cash | $(7.2) | $(17.1) | | Cash, Cash Equivalents and Restricted Cash at End of Period | $94.8 | $57.2 | Notes to Consolidated Financial Statements This section provides detailed explanations of the accounting policies, fair value measurements, investments, and other financial disclosures supporting the consolidated financial statements 1. Basis of Presentation and Summary of Operations This section describes the Company's operational segment and the basis for preparing the financial statements, including details on a pending acquisition - The Company operates as a single segment, specializing in workers' compensation insurance through its wholly owned subsidiaries[28] - A pending acquisition of PartnerRe Insurance Company of New York (PRNY) is expected to be funded with cash on hand, with PRUS indemnifying all PRNY liabilities[30][31] 2. New Accounting Standards This section discusses the adoption of new accounting standards and their impact on the Company's financial statements, including ASU 2016-02 and ongoing evaluations - The adoption of ASU Number 2016-02 (Leases) resulted in the recognition of $16.8 million in Operating lease right-of-use assets and $19.0 million in Lease liabilities on the Consolidated Balance Sheet as of March 31, 2019[42] - Most recently issued ASUs (2019-01, 2018-13, 2017-04) are not expected to have a material impact on the Company's financial condition or results of operations[34][35][36] - The Company is currently evaluating the impact of ASU Number 2016-13 (Financial Instruments - Credit Losses)[37] 3. Fair Value of Financial Instruments This section details the fair value measurements of financial instruments, including investments and notes payable, categorized by valuation input levels | Financial Instrument | March 31, 2019 (in millions) | December 31, 2018 (in millions) | | :----------------------------------- | :--------------------------- | :---------------------------- | | Total Investments at Fair Value | $2,751.0 | $2,721.3 | | Notes Payable (Fair Value) | $25.6 | $23.5 | - Fixed maturity securities are primarily valued using Level 2 inputs, while equity securities at fair value are primarily Level 1[51] 4. Investments This section provides a breakdown of the Company's investment portfolio, including available-for-sale securities and equity securities, and discusses investment income and impairments | Investment Type | March 31, 2019 (Fair Value, in millions) | December 31, 2018 (Fair Value, in millions) | | :----------------------------------- | :--------------------------------------- | :---------------------------------------- | | Total AFS Investments | $2,521.0 | $2,521.4 | | Total Equity Securities at Fair Value | $230.0 | $199.9 | - Net investment income increased to $21.8 million for Q1 2019 from $19.4 million for Q1 2018[67] - No other-than-temporary impairments on fixed maturity securities were recognized during the three months ended March 31, 2019[60] 5. Property and Equipment This section details the Company's property and equipment, net of depreciation, and capitalized cloud computing arrangements, along with lease expenses | Metric | March 31, 2019 (in millions) | December 31, 2018 (in millions) | | :----------------------------------- | :--------------------------- | :---------------------------- | | Property and Equipment, Net | $21.8 | $18.2 | | Capitalized Cloud Computing Arrangements | $25.1 | $26.0 | - Total lease expense for the three months ended March 31, 2019, was $1.4 million, comprising $1.3 million operating lease expense and $0.1 million finance lease expense[74] 6. Income Taxes This section presents the Company's income tax expense and effective tax rates for the three months ended March 31, 2019 and 2018 | Metric | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :----------------------------------- | :-------------------------------- | :-------------------------------- | | Income Tax Expense | $10.0 million | $3.8 million | | Effective Tax Rate | 16.2% | 12.9% | 7. Liability for Unpaid Losses and Loss Adjustment Expenses This section details the Company's reserves for unpaid losses and loss adjustment expenses, including net amounts and favorable prior period development | Metric | March 31, 2019 (in millions) | March 31, 2018 (in millions) | | :----------------------------------- | :--------------------------- | :--------------------------- | | Unpaid Losses and LAE at End of Period | $2,189.3 | $2,258.1 | | Net Unpaid Losses and LAE at End of Period | $1,690.6 | $1,727.0 | | Favorable Prior Periods Development | $22.2 | $12.4 | 8. LPT Agreement This section outlines the remaining deferred gain and estimated liabilities subject to the Loss Portfolio Transfer (LPT) Agreement, including amortization details | Metric | March 31, 2019 (in millions) | December 31, 2018 (in millions) | | :----------------------------------- | :--------------------------- | :---------------------------- | | Remaining Deferred Gain | $147.1 | $149.6 | | Estimated Remaining Liabilities Subject to LPT Agreement | $402.3 | $408.2 | - The Company amortized $2.5 million under the LPT Agreement for the three months ended March 31, 2019[84] 9. Notes Payable and Other Financing Arrangements This section details the Company's notes payable and other financing arrangements, including surplus notes and standby letter of credit agreements | Note Type | March 31, 2019 (in millions) | December 31, 2018 (in millions) | | :----------------------------------- | :--------------------------- | :---------------------------- | | Dekania Surplus Note | $10.0 | $10.0 | | Alesco Surplus Note | $10.0 | $10.0 | | Total Notes Payable | $20.0 | $20.0 | - Standby Letter of Credit Reimbursement Agreements with FHLB were amended to increase credit amounts, totaling $260.0 million issued as of March 31, 2019[89] 10. Accumulated Other Comprehensive Income This section presents the components of accumulated other comprehensive income, including unrealized gains/losses on investments and deferred tax impacts | Metric | March 31, 2019 (in millions) | December 31, 2018 (in millions) | | :----------------------------------- | :--------------------------- | :---------------------------- | | Net Unrealized Gains (Losses) on Investments, Before Taxes | $29.9 | $(17.3) | | Deferred Tax (Expense) Benefit | $(6.3) | $3.6 | | Total Accumulated Other Comprehensive Income (Loss) | $23.6 | $(13.7) | 11. Stock-Based Compensation This section details the Company's stock-based compensation awards, including restricted stock units, performance share units, and stock option exercises | Award Type | Number Awarded (March 2019) | Aggregate Fair Value (in millions) | | :----------------------------------- | :-------------------------- | :------------------------------- | | Restricted Stock Units (RSUs) | 72,060 | $2.9 | | Performance Share Units (PSUs) | 95,940 | $3.9 | - Stock options exercised totaled 1,300 for the three months ended March 31, 2019, compared to 275 for the same period in 2018[97] 12. Earnings Per Share This section provides the calculation of basic and diluted earnings per common share, including net income and weighted average shares outstanding | Metric | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :----------------------------------- | :-------------------------------- | :-------------------------------- | | Net Income—Basic and Diluted | $51.8 million | $25.6 million | | Weighted Average Shares Outstanding—Basic | 32,442,287 | 32,830,481 | | Dilutive Potential Shares | 511,792 | 489,939 | 13. Subsequent Events This section discloses significant events occurring after the balance sheet date, specifically the approval and payment of a surplus note - The Florida Office of Insurance Regulation approved EPIC's request to pay off the Dekania surplus note, which was formally called for payment of $10.2 million effective May 15, 2019[102] Item 2. Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations This section provides management's perspective on the Company's financial performance and condition, highlighting key operational strategies, market dynamics, and financial results. It covers revenue drivers, expense trends, liquidity, capital resources, and critical accounting estimates, emphasizing the Company's focus on profitable growth in workers' compensation insurance for small businesses and strategic investments in technology Overview This section provides an overview of the Company's business, market concentration, strategic initiatives, and pricing trends in workers' compensation insurance - The Company provides workers' compensation insurance in 45 states and D.C., with a concentration in California (over half of business)[107] - Strategic initiatives include disciplined underwriting, claims management, strong agency relationships, and development of new technologies like Cerity for digital, direct-to-customer solutions[109] - Pricing on renewals showed an overall decrease of 11.6% for the three months ended March 31, 2019, year-over-year[111] Results of Operations This section details the Company's financial performance, including net income, underwriting income, and the impact of loss development and investment gains | Metric | Three Months Ended March 31, 2019 (in millions) | Three Months Ended March 31, 2018 (in millions) | | :----------------------------------- | :------------------------------------------ | :------------------------------------------ | | Net Income | $51.8 | $25.6 | | Underwriting Income | $16.7 | $18.3 | | Net Income Before Impact of the LPT Agreement | $49.3 | $23.0 | - Q1 2019 net income was significantly impacted by $22.2 million in favorable prior accident year loss development and $21.2 million in net unrealized gains on equity securities[119] Gross Premiums Written This section details the Company's gross premiums written, highlighting the year-over-year decrease primarily due to final audit premiums | Metric | Three Months Ended March 31, 2019 (in millions) | Three Months Ended March 31, 2018 (in millions) | | :----------------------------------- | :------------------------------------------ | :------------------------------------------ | | Gross Premiums Written | $210.0 | $211.6 | - The year-over-year decrease was primarily due to a decrease in final audit premiums[124] Net Premiums Written This section presents the Company's net premiums written for the three months ended March 31, 2019 and 2018 | Metric | Three Months Ended March 31, 2019 (in millions) | Three Months Ended March 31, 2018 (in millions) | | :----------------------------------- | :------------------------------------------ | :------------------------------------------ | | Net Premiums Written | $208.7 | $210.1 | Net Premiums Earned This section details the Company's net premiums earned for the three months ended March 31, 2019 and 2018 | Metric | Three Months Ended March 31, 2019 (in millions) | Three Months Ended March 31, 2018 (in millions) | | :----------------------------------- | :------------------------------------------ | :------------------------------------------ | | Net Premiums Earned | $174.8 | $176.6 | In-force Premiums and Policy Count This section analyzes changes in in-force premiums, policy count, average policy size, and payroll exposure, including alternative distribution channels | Metric | Overall YoY Change | California YoY Change | All Other States YoY Change | | :----------------------------------- | :----------------- | :-------------------- | :-------------------------- | | In-force Premiums | +4.7% | -0.2% | +10.6% | | In-force Policy Count | +8.3% | +6.3% | +10.1% | | Average In-force Policy Size | -3.4% | -6.1% | +0.4% | | In-force Payroll Exposure | +22.0% | +24.4% | +20.6% | - Alternative distribution channels generated 23.7% of in-force premiums as of March 31, 2019, up from 23.4% in the prior year[128] Net Investment Income and Net Realized and Unrealized Gains on Investments This section details net investment income and realized/unrealized gains/losses on investments, including changes in pre-tax book yield and equity security performance - Net investment income increased by 12.4% year-over-year, with the average pre-tax book yield on invested assets rising to 3.4% as of March 31, 2019, from 3.1% a year prior[130] | Metric | Three Months Ended March 31, 2019 (in millions) | Three Months Ended March 31, 2018 (in millions) | | :----------------------------------- | :------------------------------------------ | :------------------------------------------ | | Net Realized and Unrealized Gains (Losses) on Investments | $23.3 | $(8.0) | | Unrealized Gains (Losses) on Equity Securities | $21.2 (gains) | $(12.9) (losses) | | Net Realized Gains on Investments | $2.1 (gains) | $4.9 (gains) | | Other-than-Temporary Impairments | $0 | $2.0 (losses) | Losses and LAE, Commission Expenses, and Underwriting and Other Operating Expenses This section analyzes key expense ratios, including loss and LAE, underwriting and other operating expenses, and commission expenses, and their drivers | Ratio | March 31, 2019 | March 31, 2018 | | :----------------------------------- | :------------- | :------------- | | Combined Ratio | 90.4% | 89.6% | | Loss and LAE Ratio | 50.7% | 54.0% | | Underwriting and Other Operating Expenses Ratio | 27.1% | 22.2% | | Commission Expense Ratio | 12.6% | 13.4% | Loss and LAE Ratio This section details the loss and LAE ratio, attributing changes to favorable prior accident year development and current year competitive pressures - The loss and LAE ratio decreased by 3.3 percentage points, primarily due to increased favorable prior accident year loss development of $22.2 million in Q1 2019 (vs. $12.4 million in Q1 2018)[140] - The current accident year loss and LAE ratio increased to 64.8% in Q1 2019 from 62.5% in Q1 2018, mainly due to competitive pressures and price decreases[141] Underwriting and Other Operating Expenses Ratio This section analyzes the increase in the underwriting and other operating expenses ratio, driven by higher compensation, professional fees, taxes, and bad debt - The underwriting and other operating expenses ratio increased by 4.9 percentage points, driven by higher compensation-related expenses (+$2.3M), professional fees (+$1.7M), premium taxes (+$0.9M), and bad debt expense (+$1.7M), largely due to investments in digital technologies[147] Commission Expense Ratio This section details the decrease in the commission expense ratio, primarily due to lower projected agency incentive commissions - The commission expense ratio decreased by 0.8 percentage points, primarily due to a decrease in projected 2019 agency incentive commissions[149] Income Tax Expense This section presents the Company's income tax expense and effective tax rates for the three months ended March 31, 2019 and 2018 | Metric | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :----------------------------------- | :-------------------------------- | :-------------------------------- | | Income Tax Expense | $10.0 million | $3.8 million | | Effective Tax Rate | 16.2% | 12.9% | Liquidity and Capital Resources This section discusses the Company's liquidity position, capital resources, and cash flow activities, including holding company and operating subsidiary liquidity, dividends, and share repurchases Holding Company Liquidity This section details the cash and investments held at the holding company level and the dividend capacity from insurance subsidiaries - Total cash and investments at the holding company was $124.1 million at March 31, 2019[154] - Dividend capacity from insurance subsidiaries varies, with EICN having $0.1 million remaining for 2019 without prior regulatory approval after a $19.7 million payment[152] Operating Subsidiaries' Liquidity This section outlines the cash and investments held by operating subsidiaries, including immediate liquidity and FHLB Letter of Credit arrangements - Total cash and investments held by operating subsidiaries was $2,728.1 million at March 31, 2019[156] - Immediate and unencumbered liquidity included $45.7 million cash, $178.8 million publicly traded equity, and $1,017.5 million highly liquid fixed maturity securities[156] - FHLB Letter of Credit Agreements were amended to increase credit amounts, with $260.0 million issued as of March 31, 2019, for state insurance deposit requirements[158] Sources of Liquidity This section presents the Company's cash flow activities from operations, investing, and financing, showing the net decrease in cash | Cash Flow Activity | Three Months Ended March 31, 2019 (in millions) | Three Months Ended March 31, 2018 (in millions) | | :----------------------------------- | :------------------------------------------ | :------------------------------------------ | | Operating Activities | $20.1 | $46.2 | | Investing Activities | $9.9 | $(53.7) | | Financing Activities | $(37.2) | $(9.6) | | Decrease in Cash, Cash Equivalents, and Restricted Cash | $(7.2) | $(17.1) | Dividends This section details stockholder dividends paid and declared, including the per-share amount for the reporting period | Metric | Three Months Ended March 31, 2019 (in millions) | Three Months Ended March 31, 2018 (in millions) | | :----------------------------------- | :------------------------------------------ | :------------------------------------------ | | Stockholder Dividends Paid | $7.3 | $6.6 | - A $0.22 dividend per share was declared on April 24, 2019, payable May 22, 2019[172] Share Repurchases This section outlines the Company's share repurchase program, including its expansion, extension, and shares repurchased during the period - The 2018 share repurchase program was expanded by $50 million to $100 million and extended through June 30, 2020[173] - Through March 31, 2019, 783,365 shares were repurchased for a total cost of $32.0 million at an average price of $40.90 per share[173] Capital Resources This section summarizes the Company's capital resources, including stockholders' equity, deferred gain, and surplus notes | Capital Resource | March 31, 2019 (in millions) | | :----------------------------------- | :--------------------------- | | Stockholders' Equity | $1,071.7 | | Deferred Gain | $147.1 | | Surplus Notes | $20.0 | Contractual Obligations and Commitments This section lists the Company's contractual obligations and commitments, including operating leases, notes payable, and unpaid losses and LAE reserves | Obligation Type | Total (in millions) | | :----------------------------------- | :------------------ | | Operating Leases | $21.2 | | Non-cancellable Contracts | $17.4 | | Notes Payable | $41.3 | | Capital Leases | $0.8 | | Unpaid Losses and LAE Reserves | $2,189.3 | | Unfunded Investments | $50.0 | | Total Contractual Obligations | $2,320.0 | - Reinsurance recoverables on unpaid losses and LAE totaled $(498.7) million[179] Investments This section describes the composition and quality of the Company's investment portfolio, including fixed maturity and equity securities, yields, and impairments - The investment portfolio consists of 92% fixed maturity securities and 8% equity securities, with a weighted average quality of 'AA-' for fixed maturity securities and a duration of 3.9 at March 31, 2019[182][183] | Metric | March 31, 2019 | | :----------------------------------- | :------------- | | Total Amortized Cost of Investments at Fair Value | $2,631.9 million | | Fair Value of Investments | $2,751.0 million | | Average Book Yield | 3.4% | | Average Tax Equivalent Yield | 3.6% | - No impairments on fixed maturity securities were recognized during the three months ended March 31, 2019[188] Off-Balance Sheet Arrangements This section confirms the absence of any off-balance sheet arrangements for the Company - The Company has no off-balance sheet arrangements[189] Critical Accounting Policies This section highlights the critical accounting policies involving significant management estimates and judgments, such as reserves and investment valuation - Critical accounting policies involve significant management estimates and judgments related to reserves for losses and LAE, reinsurance recoverables, recognition of premium income, deferred income taxes, and valuation of investments[190] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section outlines the Company's exposure to market risks, primarily credit risk, interest rate risk, and equity price risk. It highlights that interest rate risk is the main exposure for the investment portfolio, managed by duration, and confirms no material changes in market risk since the last annual report - Major components of market risk include credit risk, interest rate risk, and equity price risk[193] - The primary market risk exposure to the investment portfolio is interest rate risk, with fixed maturity securities having a duration of 3.9 at March 31, 2019[194] - No material changes in market risk have occurred since December 31, 2018[193] Item 4. Controls and Procedures Management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Company's disclosure controls and procedures were effective as of the end of the reporting period. No material changes to internal control over financial reporting occurred during the period - Disclosure controls and procedures were evaluated and deemed effective as of the end of the reporting period[195] - There have been no material changes in internal control over financial reporting during the period[196] PART II – OTHER INFORMATION This section details legal proceedings, risk factors, equity sales, and other miscellaneous information relevant to the Company's operations and disclosures Item 1. Legal Proceedings The Company is involved in routine legal proceedings, but management does not anticipate that the ultimate liability from such litigation will have a material adverse effect on its financial position, results of operations, or liquidity - Management does not expect the ultimate liability from pending or threatened litigation to materially affect results of operations, liquidity, or financial position[201] Item 1A. Risk Factors The Company confirms that there have been no material changes to the risk factors previously disclosed in its Annual Report on Form 10-K as of the date of this quarterly report - No material changes to the risk factors contained in the Annual Report have occurred as of the date of this report[202] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details the Company's common stock repurchases during the first quarter of 2019 under its share repurchase program, which was recently expanded and extended | Period | Total Number of Shares Purchased | Average Price Paid Per Share | Approximate Dollar Value of Shares that May Yet be Purchased Under the Program (in millions) | | :----------------------------------- | :------------------------------- | :--------------------------- | :--------------------------------------------------------------------------------------- | | January 1 – January 31, 2019 | 50,772 | $41.69 | $43.3 | | February 1 – February 28, 2019 | — | — | $43.3 | | March 1 – March 31, 2019 | 620,065 | $40.83 | $18.0 | | Total (Q1 2019) | 670,837 | $40.90 | N/A | - The 2018 share repurchase program was expanded by $50 million to $100 million and extended through June 30, 2020[204] Item 3. Defaults Upon Senior Securities The Company reports that there have been no defaults upon senior securities during the period - None[205] Item 4. Mine Safety Disclosures This item is not applicable to the Company's operations - Not applicable[206] Item 5. Other Information The Company has no other information to report under this item - None[207] Item 6. Exhibits This section lists all exhibits filed as part of the Form 10-Q, including amendments to irrevocable letters of credit and various certifications - Exhibits include amendments to irrevocable letters of credit (10.1, 10.2, 10.3) and certifications (31.1, 31.2, 32.1, 32.2)[209] Signatures The report is duly signed on behalf of Employers Holdings, Inc. by Michael S. Paquette, Executive Vice President and Chief Financial Officer - The report was signed by Michael S. Paquette, Executive Vice President and Chief Financial Officer, on April 25, 2019[214]