Employers Holdings, Inc. Reports Q4 And 2011 Earnings

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 $15.2 million or $0.44 per diluted share in the fourth quarter of 2011 and $15.4 million or $0.39 per diluted share in the fourth quarter of 2010.

Net income for the full year of 2011 was $47.8 million or $1.28 per diluted share compared with $62.8 million or $1.51 per diluted share for the full year 2010. Net income before the impact of the LPT deferred reinsurance gain was $30.6 million or $0.82 per diluted share in 2011 compared with $44.6 million or $1.07 per diluted share in 2010.

In the fourth quarter of 2011 relative to the third quarter of 2011 and, for the first time in recent years, the change in net rate was a positive 1% with improvements in a number of states including California, Tennessee, and Georgia. At December 31, 2011, the Company's year over year change in net rate was a negative 1% compared with a negative 5% at December 31, 2010. The Company's year over year change in total payroll exposure was a positive 24% compared with a negative 12% at December 31, 2010.

The fourth quarter 2011 combined ratio was 111.5% (115.7% before the impact of the LPT deferred reinsurance gain), compared with 107.6% (113.3% before the impact of the LPT deferred reinsurance gain) for the fourth quarter of 2010, an increase of 3.9 percentage points in the GAAP combined ratio. For the full year of 2011, the combined ratio was 114.2% (119.0% before the impact of the LPT deferred reinsurance gain), an increase of 7.4 percentage points from 106.8% (112.4% before the impact of the LPT deferred reinsurance gain) for the same period in 2010. Current accident year combined ratios were stable from 2010 to 2011.

President and Chief Executive Officer Douglas D. Dirks commented on the results: “Reflecting on this past year, we are pleased with what we have achieved in terms of reducing our underwriting and other operating expenses and growing premium. By year-end 2011, as a result of the growth initiatives we implemented in mid-2010, we added over 16,000 policies for an increase of 36% in policy count, increased net premiums written by 31% and added over 1,100 agents to our distribution pipeline. At the same time, year over year, our underwriting remained selective as we succeeded in shifting a larger percentage of our in force premium to the least hazardous groups “A” and “B” with increases in those groups totaling an aggregate of 5% at year-end. Hazard groups A and B represent 18% and 24%, respectively, of our total in-force premium at December 31, 2011. Our full year underwriting and other operating expenses decreased by 4% from cost control efforts and our continuing process improvements to drive efficiencies.”

Dirks continued: “In the fourth quarter, we repositioned the investment portfolio to achieve a number of strategic objectives. The majority of portfolio activity in the quarter was driven by changes in asset allocation which reduced tax-exempt municipal exposure, shortened duration, and added high dividend equities. Realized gains of approximately $18 million were from the sale of municipals and longer-term treasury, agency and corporate bonds.”

“The loss provision rate that we raised in the first quarter of 2011, primarily in response to losses and loss adjustment expenses in California, remained stable throughout the remainder of 2011. But with loss provision rates in the high seventies, the combined ratio was pressured throughout the year. We believe we have been appropriately conservative in terms of reserves. Reserving practices are critical, particularly for a mono-line carrier, and we set reserve levels in light of the long-term interests of policyholders, shareholders and the Company.”

Commenting on the balance sheet, Dirks added: “Book value per share increased 13% since December 31, 2010. At the same time, we returned nearly $93 million to stockholders through share repurchases during 2011.”

Looking ahead, Dirks concluded: “We expect increases in non-loss operating expenses in 2012 resulting from an accounting change in deferred acquisition costs (DAC) and growth in premiums. We currently estimate that our underwriting and other operating expenses will increase approximately $8 million as a result of the new DAC accounting guidance. Based on deferred acquisition costs in 2011, we expect these expenses in 2012 to be recorded as follows: approximately 47% in Q1, 31% in Q2, 16% in Q3 and the remaining 6% in Q4. Excluding the accounting change and costs related to premium growth, we estimate an annual increase in underwriting and other operating expenses to be in the low single digits. We continue to build scale going into this year and our change in net rate was positive in the fourth quarter of 2011 relative to the third quarter of 2011. While economic recovery coming out of the 2008-2009 recession continues to be a lengthy process, we are hearing anecdotal evidence that our markets are beginning to firm. We had good January 2012 renewal results across our regions.”

Fourth Quarter 2011 Comparison to Fourth Quarter 2010
Net premiums written increased 28.7% to $100.8 million in the fourth quarter of 2011 compared with $78.3 million in 2010. In-force premiums of $393.9 million at year-end 2011 increased 22.7% relative to year-end 2010.

Net premiums earned were $100.3 million, an increase of $16.7 million or 20.0% from the fourth quarter of 2010, primarily due to increases in policy count. Policy count is discussed in the full year review which follows the fourth quarter discussion.

Net investment income was $19.7 million compared with net investment income of $20.4 million in the fourth quarter of 2010. The decrease in the fourth quarter of 2011 was primarily due to a decrease in invested assets resulting from the return of capital to stockholders through common share repurchases and dividends in 2011.

Realized gains on investments increased to $18.2 million from $9.2 million in the fourth quarter of 2010. The increase in 2011 was largely attributable to the sale of securities associated with the rebalancing of the portfolio. In the fourth quarter of 2011, the portfolio was repositioned to reduce tax-exempt municipal exposure, to shorten duration, and to add high dividend equities.

Losses and loss adjustment expenses (LAE) were $73.7 million compared with $56.7 million in the fourth quarter of 2010 primarily as a result of increases in net premiums earned and the current accident year provision rate for losses which was 77.1% in the fourth quarter of 2011 compared with 73.5% in the fourth quarter of 2010. The increase in the loss provision rate was largely due to losses and LAE in California. Before the impact of the LPT deferred reinsurance gain, losses and LAE were $77.8 million in the fourth quarter of 2011 and $61.4 million in the fourth quarter of 2010. Additionally, in the fourth quarter of 2010, the Company recorded a $0.9 million expense related to the write-off of reinsurance recoverables.

Commission expense was $13.1 million compared with $9.4 million, or $3.7 million higher than in the fourth quarter of 2010. Commission expense increased in the fourth quarter of 2011 due to agency incentives and higher net premiums earned. In the fourth quarter of 2010, we recorded a $3.0 million reduction in the estimate (accrual) of certain administrative fees due to Anthem Blue Cross under our joint marketing agreement and a $1.8 million commission fee to re-negotiate the terms of a reinsurance agreement with Clarendon National Insurance Company (Clarendon).

Dividends to policyholders were $0.7 million compared with $0.9 million in the fourth quarter of 2010.

Underwriting and other operating expenses were $24.4 million compared with $22.9 million in the fourth quarter of 2010, an increase of $1.5 million primarily as a result of increases in premium taxes and assessments related to increased net premiums earned. The increase was partially offset by salary, benefit and facility savings from cost control actions undertaken by management. Underwriting and other operating expenses include a restructuring charge of $0.9 million in the fourth quarter of 2010.

Interest expense was $0.9 million in the fourth quarter of 2011 compared with $0.9 million in the fourth quarter of 2010.

Income tax expense increased to $6.3 million in the fourth quarter of 2011 compared to $2.4 million in the fourth quarter of 2010 as a result of realized gains. The effective tax rate was 24.6% in the quarter compared to 10.5% in the prior year's quarter.

Full Year 2011 Comparison to Full Year 2010
Net premiums earned of $363.4 million increased 12.9% from $321.8 million in the prior year primarily due to increases in policy count. Overall policy count increased 36.2% to 60,693 policies at December 31, 2011 from 44,561 policies at December 31, 2010. Average in-force policy size was $6,490 at December 31, 2011 compared with $7,200 at December 31, 2010.

Net investment income of $80.1 million in 2011 decreased 3.5% from $83.0 million in 2010 largely due to a slight decrease in invested assets resulting from common share repurchases and dividends paid to stockholders, as well as a slight decline in yield. The average pre-tax and tax equivalent yields on invested assets were 4.1% and 5.0%, respectively, at December 31, 2011 compared with 4.2% and 5.3%, respectively, at December 31, 2010. Duration of the portfolio was 4.2 in 2011 compared with 4.9 in 2010. Realized gains on investments were $20.2 million for the year compared with realized gains of $10.1 million in 2010. Realized gains occurred largely in the fourth quarter of 2011 as a result of a strategic rebalancing of our investment portfolio.

Losses and LAE increased to $264.7 million in 2011 from $194.8 million in 2010 primarily as a result of an increase in the current accident year loss estimate, increased earned premiums, and the impact of favorable prior accident year loss development in the first two quarters of 2010. The current accident year loss estimate was 77.2% in 2011 compared with 70.6% in 2010. Prior accident year loss development of $1.1 million in 2011 was entirely related to assigned risk business. Before the impact of the LPT deferred reinsurance gain, losses and LAE were $281.8 million in 2011 and $213.0 million in 2010.

Commission expense in 2011 increased to $45.5 million from $38.5 million in 2010 largely due to the increase in net earned premiums.

Dividends to policyholders were $3.4 million in 2011 compared with $4.3 million in 2010.

Underwriting and other operating expenses of $101.6 million in 2011 decreased $4.5 million or 4.2% compared with 2010. Active cost management resulted in decreases in total compensation and facilities of $8.0 million and $3.3 million, respectively, year over year. These decreases were partially offset by a $5.2 million increase in premium taxes and assessments in 2011 compared to 2010 and one-time charges totaling $1.2 million during 2011 for professional service fees related to acquisition due diligence activities. Excluding restructuring costs in 2010 and the one-time professional service fees incurred in 2011, underwriting and other operating expenses increased $0.5 million from 2010 to 2011.

Interest expense of $3.6 million in 2011 decreased from $5.7 million in 2010, primarily due to the expiration of an interest rate swap agreement associated with the Wells Fargo Credit Facility in 2010.

The income tax benefit in 2011 was $2.4 million compared with an income tax expense of $3.5 million in 2010. The effective tax rates for 2011 and 2010 were (5.3)% and 5.3%, respectively. The decreased tax expense from 2010 through 2011 was primarily due to increases in tax exempt income as a percentage of pre-tax net income over that period.

Debt, Capital Structure
Total outstanding debt at December 31, 2011, was $122 million with a debt to total capitalization ratio, including the deferred reinsurance gain – LPT Agreement, of 12.9%. As of December 31, 2011, the Company's capital structure consisted of $90 million principal balance on the Wells Fargo Amended Credit Facility, $32 million in surplus notes maturing in 2034, and $827 million of stockholders' equity including the deferred reinsurance gain – LPT Agreement.

Investments
Total invested assets were $2 billion at December 31, 2011. The Company's investment portfolio, which is classified as available-for-sale, consisted of 95% fixed maturity securities and 5% equity securities at year-end 2011. Please see the prior discussions of portfolio strategy for more information concerning the portfolio strategy employed in 2011.

The Company is providing a list of portfolio securities by CUSIP in the Calendar of Events, Fourth Quarter “Investors” section of its web site at www.employers.com.

Common Share Repurchases and Dividends
In November of 2011, the Board of Directors authorized a $100 million expansion of the Company's existing $100 million share repurchase program and extended the repurchase authority under the repurchase program through June 30, 2013. Since the inception of this repurchase program, the Company has repurchased over 7 million shares of common stock at an average price of $15.28 per share for a total of $107 million. At December 31, 2011, approximately $93 million remained available for share repurchases.

The Board of Directors declared a first quarter 2012 dividend of six cents per share. The dividend is payable on March 26, 2012 to stockholders of record as of March 12, 2012.

The Complete Earnings Release is available here: Employers Holdings, Inc. 4Q and FY 2011 Earnings

Share This Article: