Employers (US:EIG)2023-02-23 16:00markdown PART I [Business](index=5&type=section&id=Item%201.%20Business) EHI specializes in workers' compensation insurance for small businesses, operating through agent and direct channels, with significant California concentration - EHI is a holding company specializing in workers' compensation insurance for small, low-to-medium hazard businesses across the United States, with all its insurance subsidiaries holding an A.M. Best rating of **"A-" (Excellent)**[20](index=20&type=chunk) - The company's business is significantly concentrated in California, which accounted for **45% of its in-force premiums** as of December 31, 2022[27](index=27&type=chunk)[63](index=63&type=chunk) - EHI operates through two primary distribution channels: the traditional 'Employers' brand via agents and the direct-to-customer 'Cerity' brand for digital solutions[78](index=78&type=chunk)[79](index=79&type=chunk) Key Financial Results (2020-2022) | Indicator | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | **Net Premiums Written** | $707.2M | $583.1M | $574.9M | | **Total Revenues** | $713.5M | $703.1M | $711.4M | | **Net Income** | $48.4M | $119.3M | $119.8M | - The company's strategy focuses on profitable growth through disciplined underwriting, claims management, technology investments (including direct-to-customer platforms), and diversifying risk exposure[33](index=33&type=chunk) - A key distribution partner, ADP, generated **15.0% of the company's total in-force premiums** as of December 31, 2022, up from 13.1% in 2021 and 12.9% in 2020[122](index=122&type=chunk) [Risk Factors](index=19&type=section&id=Item%201A.%20Risk%20Factors) The company faces operational, financial, and regulatory risks, including policy mispricing, intense competition, California concentration, and reserve adequacy - Operational risks include the failure to price policies sufficiently, intense competition from larger, multi-line carriers, and the cyclical nature of the property and casualty insurance industry[144](index=144&type=chunk)[146](index=146&type=chunk)[149](index=149&type=chunk) - A significant concentration of business in California (**45% of in-force premiums** as of Dec 31, 2022) exposes the company to localized economic, regulatory, and natural peril risks[151](index=151&type=chunk) - The company relies heavily on distribution partners, with its largest agent, ADP, accounting for **15.0% of total in-force premiums**, creating a concentration risk[154](index=154&type=chunk) - Financial risks include the possibility that loss and loss adjustment expense (LAE) reserves, which are based on estimates, may be inadequate to cover actual losses, and a downgrade in the company's **"A-" A.M. Best rating** could adversely affect business[172](index=172&type=chunk)[168](index=168&type=chunk) - As a holding company, EHI's ability to pay dividends and meet obligations depends on funds transferred from its insurance subsidiaries, which are restricted by state laws[175](index=175&type=chunk) - Regulatory and legal risks are extensive, including changes in state insurance laws, potential federal legislation like single-payer healthcare proposals, and state laws that could prevent or delay a change in control[182](index=182&type=chunk)[188](index=188&type=chunk)[191](index=191&type=chunk) [Unresolved Staff Comments](index=29&type=section&id=Item%201B.%20Unresolved%20Staff%20Comments) The company reports that there are no unresolved staff comments - None [Properties](index=29&type=section&id=Item%202.%20Properties) The company leases 131,882 square feet of office space across 5 states, including its principal executive offices in Reno, Nevada, and is actively reducing its real estate footprint - The company leases **131,882 square feet** of office space in **5 states**, with its main executive offices in Reno, Nevada[214](index=214&type=chunk) - Since 2021, the company has been reducing its real estate footprint by closing offices in several states and may continue this trend[214](index=214&type=chunk)[215](index=215&type=chunk) [Legal Proceedings](index=30&type=section&id=Item%203.%20Legal%20Proceedings) The company is involved in routine litigation but does not anticipate any material impact on its financial condition - The company is involved in routine litigation but does not anticipate any material impact on its financial condition from these proceedings[216](index=216&type=chunk)[218](index=218&type=chunk) [Mine Safety Disclosures](index=30&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This section is not applicable to the company - Not applicable PART II [Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=31&type=section&id=Item%205.%20Market%20for%20Registrant%27s%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) The company's common stock trades on the NYSE, returning capital to shareholders via dividends and share repurchases - The company's common stock is listed on the New York Stock Exchange (NYSE) under the symbol **"EIG"**[222](index=222&type=chunk) - The company expects to continue paying quarterly cash dividends and may also pay special dividends, as it did in 2022[223](index=223&type=chunk) Q4 2022 Share Repurchases | Period | Total Shares Purchased | Average Price Paid Per Share | Approximate Dollar Value Remaining Under Program | | :--- | :--- | :--- | :--- | | Oct 2022 | — | $— | $49.1M | | Nov 2022 | — | $— | $49.1M | | Dec 2022 | 40,355 | $42.15 | $47.4M | - The Board of Directors expanded the share repurchase program to **$100.0 million** and extended its expiration to December 31, 2023[224](index=224&type=chunk) [Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations](index=33&type=section&id=Item%207.%20Management%27s%20Discussion%20and%20Analysis%20of%20Consolidated%20Financial%20Condition%20and%20Results%20of%20Operations) Net income decreased in 2022 due to investment losses despite premium growth, with the company maintaining strong capital and managing critical loss reserve estimates - Net income decreased significantly to **$48.4 million** in 2022 from **$119.3 million** in 2021, largely due to a swing from net investment gains in 2021 to net investment losses in 2022[238](index=238&type=chunk)[239](index=239&type=chunk) - Premium growth in 2022 was driven by higher new and renewal business and increased final audit premiums, reflecting U.S. labor market strengthening and wage inflation[234](index=234&type=chunk)[235](index=235&type=chunk) - Rising market interest rates in 2022 negatively impacted the fair value of the company's fixed maturity investments, resulting in unrealized losses, but favorably impacted net investment income[236](index=236&type=chunk) - The company believes its capital position remains strong, with adequate liquidity at both the holding company and operating subsidiary levels, despite market volatility[304](index=304&type=chunk) [Results of Operations](index=34&type=section&id=Results%20of%20Operations) Total revenues increased slightly in 2022 driven by higher net premiums and investment income, but net income significantly decreased due to substantial net investment losses Consolidated Results of Operations (2020-2022) | (in millions) | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | **Net premiums earned** | $675.2 | $574.4 | $615.3 | | **Net investment income** | $89.8 | $72.7 | $76.3 | | **Net realized/unrealized (losses) gains** | $(51.8) | $54.6 | $19.0 | | **Total revenues** | $713.5 | $703.1 | $711.4 | | **Losses and LAE** | $391.0 | $315.2 | $302.4 | | **Total expenses** | $657.7 | $556.1 | $563.7 | | **Net income** | $48.4 | $119.3 | $119.8 | - The increase in net investment income in 2022 to **$89.8 million** was primarily due to higher market interest rates and higher invested balances[244](index=244&type=chunk) - The **$51.8 million net investment loss** in 2022 was driven by unrealized losses on equity securities consistent with market performance and realized losses on fixed maturity securities due to rising interest rates[246](index=246&type=chunk)[247](index=247&type=chunk) [Summary of Financial Results by Segment](index=38&type=section&id=Summary%20of%20Financial%20Results%20by%20Segment) The Employers segment drove premium growth and underwriting income, while the Cerity segment showed growth but incurred an underwriting loss, with Corporate and Other reflecting LPT impacts Employers Segment - Key Metrics (2022) | Metric | Amount | | :--- | :--- | | Gross Premiums Written | $707.5M | | Net Premiums Earned | $672.1M | | Underwriting Income | $39.9M | | Combined Ratio | 94.1% | - The Employers segment's premium growth in 2022 was due to higher new/renewal business and a **$24.6 million increase** in final audit premium accruals, reflecting a stronger labor market[268](index=268&type=chunk) Cerity Segment - Key Metrics (2022) | Metric | Amount | | :--- | :--- | | Gross Premiums Written | $6.7M | | Net Premiums Earned | $3.1M | | Underwriting Loss | $(12.7)M | - The Corporate and Other segment's results include the impact of the Loss Portfolio Transfer (LPT) agreement, which reduced consolidated Losses and LAE by **$8.3 million** in 2022[299](index=299&type=chunk)[300](index=300&type=chunk)[301](index=301&type=chunk) [Liquidity and Capital Resources](index=45&type=section&id=Liquidity%20and%20Capital%20Resources) The company maintains strong liquidity and capital, supported by holding company cash, a credit facility, FHLB advances, and an investment portfolio, while returning capital to shareholders - The holding company held **$98.9 million** in cash and investments as of December 31, 2022, and has access to a **$75.0 million revolving credit facility** for liquidity[306](index=306&type=chunk)[307](index=307&type=chunk) - In 2022, insurance subsidiaries received **$182.5 million** in advances from the FHLB, which were used to purchase an equivalent amount of high-quality collateralized loan obligation securities[316](index=316&type=chunk) - The company returned significant capital to shareholders in 2022, paying **$28.8 million** in regular dividends, **$55.0 million** in special dividends, and repurchasing **$30.4 million** of common stock[335](index=335&type=chunk)[337](index=337&type=chunk) - The company's investment portfolio totaled over **$2.5 billion** at year-end 2022, with **85%** in fixed maturity securities having a duration of **3.9 years** and a weighted average quality of **"A"**[112](index=112&type=chunk)[347](index=347&type=chunk) [Critical Accounting Estimates](index=51&type=section&id=Critical%20Accounting%20Estimates) The most critical accounting estimate is the inherently uncertain valuation of unpaid losses and LAE reserves, based on actuarial methods and sensitive to future medical cost inflation - The estimation of unpaid losses and LAE is the company's most critical accounting estimate due to its inherent uncertainty and significant impact on financial statements[358](index=358&type=chunk)[360](index=360&type=chunk) Unpaid Losses and LAE Reserves (as of Dec 31) | (in millions) | 2022 | 2021 | | :--- | :--- | :--- | | Gross unpaid losses and LAE | $1,960.7 | $1,981.2 | | Less: Reinsurance recoverable | $445.4 | $476.9 | | **Net unpaid losses and LAE** | **$1,515.3** | **$1,504.3** | - For 2022, management's best estimate for net reserves (**$1,515.3 million**) is positioned within the actuarial range of **$1,365.8 million (low)** to **$1,687.3 million (high)**[377](index=377&type=chunk) - A **1% increase** in medical claim cost inflation above the rate assumed in the reserves could increase future net medical costs by approximately **$63.9 million**[383](index=383&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=56&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company is exposed to credit, interest rate, and equity price risks, with interest rate sensitivity showing a $74.3 million decrease in portfolio fair value for a 100 basis point rate rise, and inflation posing a risk to loss reserves - The company's primary market risks are credit risk, interest rate risk, and equity price risk[394](index=394&type=chunk) - Interest rate risk is a key exposure for the fixed maturity portfolio, which had a duration of **3.9 years** as of December 31, 2022[398](index=398&type=chunk) Interest Rate Sensitivity Analysis (Fixed Maturity & Short-Term Investments) | Hypothetical Change in Interest Rates | Estimated Pre-tax (Decrease) / Increase in Fair Value | | :--- | :--- | | 100 basis point rise | $(74.3)M | | 100 basis point decline | $124.5M | - A hypothetical **10% decrease** in the market price of the company's equity securities would result in a pre-tax loss of **$19.7 million**[403](index=403&type=chunk) - Elevated inflation poses a risk to the adequacy of loss reserves, particularly for medical costs, and could also increase operating expenses[405](index=405&type=chunk) [Financial Statements and Supplementary Data](index=59&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) This section presents consolidated financial statements, an effective internal control report, and an unqualified auditor's opinion, with loss reserve valuation identified as a Critical Audit Matter - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2022[415](index=415&type=chunk) - The independent auditor, Ernst & Young LLP, issued an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting[417](index=417&type=chunk)[424](index=424&type=chunk) - The auditor identified the 'Valuation of reserve for Unpaid Losses and Loss Adjustment Expenses' as a Critical Audit Matter due to the highly judgmental nature of the assumptions used in the actuarial reserving process[428](index=428&type=chunk)[430](index=430&type=chunk)[431](index=431&type=chunk) [Changes in and Disagreements With Accountants on Accounting and Financial Disclosure](index=106&type=section&id=Item%209.%20Changes%20in%20and%20Disagreements%20With%20Accountants%20on%20Accounting%20and%20Financial%20Disclosure) The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None [Controls and Procedures](index=106&type=section&id=Item%209A.%20Controls%20and%20Procedures) Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective at a reasonable level of assurance as of December 31, 2022 - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of December 31, 2022[632](index=632&type=chunk)[634](index=634&type=chunk) - There were no material changes to the company's internal control over financial reporting during the fourth quarter of 2022[637](index=637&type=chunk) [Other Information](index=108&type=section&id=Item%209B.%20Other%20Information) The company reports no other information - None PART III [Directors, Executive Officers, and Corporate Governance](index=109&type=section&id=Item%2010.%20Directors%2C%20Executive%20Officers%2C%20and%20Corporate%20Governance) This section provides information on executive officers and incorporates by reference details on directors, the audit committee, and compliance from the 2023 Proxy Statement - Lists the executive officers of the company as of February 24, 2023, including Katherine H. Antonello (President and CEO) and Michael S. Paquette (EVP, CFO)[642](index=642&type=chunk)[643](index=643&type=chunk)[644](index=644&type=chunk) - Information regarding directors, the audit committee, and Section 16 compliance is incorporated by reference from the 2023 Annual Meeting of Stockholders Proxy Statement[650](index=650&type=chunk)[651](index=651&type=chunk)[652](index=652&type=chunk) [Executive Compensation](index=110&type=section&id=Item%2011.%20Executive%20Compensation) All required information regarding executive compensation is incorporated by reference from the 2023 Proxy Statement - Information is incorporated by reference from the 2023 Proxy Statement[654](index=654&type=chunk) [Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](index=110&type=section&id=Item%2012.%20Security%20Ownership%20of%20Certain%20Beneficial%20Owners%20and%20Management%20and%20Related%20Stockholder%20Matters) Security ownership information is incorporated by reference from the 2023 Proxy Statement, detailing securities to be issued and available for future issuance under equity compensation plans - Security ownership details are incorporated by reference from the 2023 Proxy Statement[655](index=655&type=chunk) Equity Compensation Plan Information (as of Dec 31, 2022) | Plan Category | Securities to be Issued Upon Exercise | Securities Remaining for Future Issuance | | :--- | :--- | :--- | | Stock options | 23,500 | 1,801,631 | | RSUs | 257,313 | 1,544,318 | | PSUs | 478,405 | 1,065,913 | | **Total** | **759,218** | **1,065,913** | [Certain Relationships and Related Transactions, and Director Independence](index=111&type=section&id=Item%2013.%20Certain%20Relationships%20and%20Related%20Transactions%2C%20and%20Director%20Independence) All required information for this item is incorporated by reference from the 2023 Proxy Statement - Information is incorporated by reference from the 2023 Proxy Statement[659](index=659&type=chunk) [Principal Accountant Fees and Services](index=111&type=section&id=Item%2014.%20Principal%20Accountant%20Fees%20and%20Services) All required information regarding principal accountant fees and services is incorporated by reference from the 2023 Proxy Statement - Information is incorporated by reference from the 2023 Proxy Statement[660](index=660&type=chunk) PART IV [Exhibits and Financial Statement Schedules](index=112&type=section&id=Item%2015.%20Exhibits%20and%20Financial%20Statement%20Schedules) This section lists financial statements, schedules, and exhibits, including governance documents, material contracts, and Sarbanes-Oxley Act certifications - This section contains a list of all financial statements, schedules, and exhibits filed with the report[663](index=663&type=chunk) - Filed exhibits include governance documents, material contracts (reinsurance, credit agreements), and executive compensation plans[673](index=673&type=chunk) - Includes required CEO and CFO certifications pursuant to the Sarbanes-Oxley Act[677](index=677&type=chunk) [Form 10-K Summary](index=119&type=section&id=Item%2016.%20Form%2010-K%20Summary) The company indicates that there is no Form 10-K summary - None