-Employers Holdings, Inc. ("EHI" or the "Company") (NYSE:EIG) today
reported fourth quarter 2012 net income of $87.8 million or $2.82 per
diluted share compared with net income of $20.0 million or $0.58 per
diluted share in the fourth quarter of 2011. Full year net income was
$106.9 million or $3.37 per diluted share in 2012 compared with $48.6
million or $1.30 per diluted share in 2011.
Reported results in the fourth quarter and the full year 2012 include
two factors related to the LPT Agreement. First, we recognized $100
million of favorable development in the estimated reserves ceded under
the LPT Agreement. This adjustment to the estimated reserves ceded
resulted in a $73.3 million cumulative adjustment to the Deferred Gain,
which reduced our losses and LAE by the same amount during the fourth
quarter of 2012 (LPT Reserve Adjustment). Second, an increase in the
estimate of contingent commission receivable and the related Deferred
Gain under the LPT Agreement resulted in an $8.6 million cumulative
adjustment and reduced our losses and LAE during the fourth quarter of
2012 (LPT Contingent Commission Adjustment). The full year 2012 impact
of adjustments to our contingent commission under the LPT was to reduce
our losses and LAE by $9.6 million.
President and Chief Executive Officer Douglas D. Dirks commented on the
results: "We are pleased to report continued improvement in our
operating performance during the fourth quarter of 2012. For the fourth
consecutive quarter, we increased net earned premiums and net rate
which, combined with other factors, yielded a year over year 2.9
percentage point improvement in our fourth quarter combined ratio
excluding the impact of the LPT Agreement. Additionally, our loss
provision rate remained in the high seventies in the fourth quarter. As
we stated last quarter, if positive rate trends continue to exceed our
loss trends, we will incrementally lower the loss provision rate
throughout 2013, beginning in the first quarter."
Dirks continued: "In terms of the favorable adjustment to LPT-related
reserves, we last booked a favorable adjustment to the LPT reserves in
2005, prior to our initial public offering. Recent claim patterns over
several quarters indicated a favorable adjustment in the fourth quarter
was warranted. The higher LPT contingent profit commission was also
driven by these favorable LPT loss trends."
In closing, Dirks stated: "You may have noticed our new EMPLOYERS logo.
I note with pleasure and pride that the year 2013 is a major milestone
for EMPLOYERS. As of this year, with our history as the state fund, we
have been doing business as a workers' compensation specialist for one
hundred years. While we have only been a public company since early
2007, in that time and during one of the most challenging operating
environments for our industry, we have succeeded in growing our adjusted
book value (including the LPT Agreement deferred reinsurance gain) more
than 75% since year-end 2006 and 6% in the twelve months ended December
31, 2012. We remain committed to providing long-term value to our
shareholders and we look forward to continuing to provide high quality,
competitively priced products to our policyholders for many more years
Revision of Previously Issued Financial Statements
Please note that the information presented in this release has been
restated for prior periods as a result of a revision to the manner in
which we account for the contingent profit commission to which we are
entitled under the LPT Agreement, which was a non-recurring transaction
that does not affect our ongoing operations. This revision resulted in
an increase to the contingent commission receivable-LPT Agreement on our
consolidated balance sheets, which impacts the Deferred reinsurance
gain-LPT Agreement (Deferred Gain) and is reflected in losses and LAE
incurred in our consolidated statements of income and comprehensive
income over the life of the contingent profit commission. Historically,
any adjustment to the contingent profit commission was reflected in
commission expense in the period that the estimate was revised. We
assessed the impact of these revisions and concluded that they were not
material to any of our financial statements for each of the three
quarters within the nine months ended September 30, 2012, or fiscal
years ended December 31, 2011, 2010, 2009, or 2008. As a result, we have
not filed amendments to any of our previously filed Annual Reports on
Form 10-K or Quarterly Reports on Form 10-Q. Although the effect of
these revisions was not material to those previously issued financial
statements, the cumulative effect of reflecting these revisions in the
current year would have been material for the fiscal year ended December
31, 2012. Since these revisions are treated as corrections to our prior
period financial results, the revisions are considered to be a
restatement under U.S. generally accepted accounting principles (GAAP).
Accordingly, the revised financial information included in this release
and our Annual Report on Form 10-K has been identified as "restated."
The effect of the revisions to the previously issued consolidated
statements of income and comprehensive income for the years ended
December 31, 2011 and 2010 was to increase the commission expense and
decrease the losses and LAE, with the net effect of increasing net
income and earnings per share. Additionally, total stockholders' equity
at December 31, 2011 decreased and there was an increase to the
contingent commission receivable-LPT Agreement and the deferred
reinsurance gain-LPT Agreement on the consolidated balance sheets as of
December 31, 2011.
The following table presents the summary impacts of the restatement
adjustments on our previously reported losses and LAE, commission
expense, and net income for the fourth quarter and year ended December
31, 2011 and total stockholders' equity as of the year ended December
For more information regarding the impact on our financial results,
please refer to the notes to our consolidated financial statements
included in our Annual Report on Form 10-K, which will be filed with the
Securities and Exchange Commission on March 1, 2013.
President and Chief Executive Officer Douglas D. Dirks commented on the
revision to the manner in which we account for the contingent profit
commission: "Previously and since 2002, we have accounted for paid and
accrued contingent profit commission as a reduction in commission
expense in the period that the estimate was revised. Under our restated
accounting practice, we treat the contingent profit commission as a
reduction in the premium paid at the onset of the LPT Agreement, thereby
reducing the consideration paid for the agreement and consequently
reducing the deferred gain. We will continue to amortize any gain
related to the contingent profit over the first twenty five years of the
LPT agreement, or until June 30, 2024. The change to this new accounting
method did not change the amount of our estimated gain related to the
contingent profit commission, which was approximately $44 million at
December 31, 2012 and is being amortized into income over that 25 year
period. As a result of this change in accounting, our non-GAAP
disclosures 'before the impact of the LPT Agreement' now also exclude
the impact of the contingent profit commission."
The following table shows the reconciliations of net income, earnings
per diluted share and the combined ratio to these measures adjusted for
the impact of the LPT Agreement (the Company's non-GAAP measures
described in the definitions below), as redefined.
Reconciliation of Net income to Net income before impact of the LPT
Agreement, Earnings per diluted common share to Earnings per diluted
common share before impact of the LPT Agreement and Combined ratio to
Combined ratio before impact of the LPT Agreement
As we have previously disclosed, implementation of the new accounting
guidance related to the definition of acquisition costs which may be
capitalized, effective in January 2012, also impacted our financial
results in the fourth quarter and the full year 2012. This change in the
definition of deferred acquisition costs (DAC) lowered our reported net
income throughout the year as a result of having to expense certain
costs that were capitalized in prior years. The Company's financial
results have not been retroactively adjusted for the change in DAC
accounting. For ease of comparison, reconciliations of fourth quarter
and full year results, which illustrate the year over year impact of the
change in DAC accounting and the LPT impact, are included in the tables
attached to this press release.
Fourth Quarter 2012
Net premiums written increased 33.5% to $134.6 million in the fourth
quarter of 2012 compared with $100.8 million in 2011. In-force premiums
of $537.3 million at year-end 2012 increased 36.4% compared to the end
of the year 2011.
Net premiums earned were $140.8 million, an increase of 40.5% from the
fourth quarter of 2011, primarily due to policy count growth of 31.5%
year over year at December 31, 2012. There were 79,814 policies in force
at the end of the fourth quarter of 2012, an increase of 19,121 policies
in the last twelve months.
Net investment income was $18.2 million compared with net investment
income of $19.7 million in the fourth quarter of 2011. The decrease in
the fourth quarter of 2012 was primarily related to a slight decrease in
Realized gains on investments were $0.5 million compared with $18.2
million in the fourth quarter of 2011. The higher realized gains in 2011
resulted from the strategic re-balancing of our investment portfolio to
increase portfolio allocations to taxable fixed income sectors, shorten
portfolio duration following the decline in interest rates in the second
half of 2011, and increase the allocation of the portfolio to high
dividend equity securities.
Losses and LAE were $22.8 million compared with $73.0 million in the
fourth quarter of 2011. The year over year decrease was primarily
related to increased net premiums earned, partially offset by the $73.3
impact of the LPT Reserve Adjustment and the $8.6 million impact of the
LPT Contingent Commission Adjustment in the fourth quarter of 2012.
Fourth quarter losses and LAE before the LPT were $108.7 million in 2012
compared with $77.8 million in 2011. The current accident year loss
provision rate was 76.8% in the fourth quarter of 2012 compared with
77.1% in the fourth quarter of 2011.
Fourth quarter commission expense was $18.5 million compared with $13.7
million in 2011. Commission expense increased primarily due to the
higher net premiums earned and higher agency incentive commissions due
to increased agent production in 2012 compared to 2011.
Our Underwriting and other operating expenses ratio declined 1.8
percentage points in the fourth quarter year over year as we continued
to increase premium and scale. Overall, underwriting and other operating
expenses were $30.5 million compared with $23.5 million in the fourth
quarter of 2011, an increase of $7.0 million, primarily as a result of a
$5.0 million increase in equity and incentive related compensation
expenses and a $1.9 million increase in premium taxes and assessments as
net premiums earned increased. These increases were partially offset by
a $0.4 million decrease in professional services fees compared to the
same period in 2011. Additionally, implementation of the new accounting
guidance for DAC resulted in a $0.6 million increase in our underwriting
and other operating expenses for the three months ended December 31,
An income tax benefit of $1.4 million was recorded in the fourth quarter
of 2012 compared with an income tax expense of $6.6 million in the
fourth quarter of 2011. The tax benefit was primarily related to
increased non-taxable income resulting from the favorable LPT reserve
adjustment and the LPT Contingent Commission Adjustment, both of which
were tax exempt.
At the end of the fourth quarter of 2012, the year over year change in
net rate was a positive 8.3%, continuing the positive trend in net rate
begun in the fourth quarter of 2011. The net rate change in California
was an increase of 13.7% year over year. Our change in total payroll
exposure increased 25.9% year over year.
The fourth quarter 2012 combined ratio was 51.4% (112.5% before the
impact of the LPT), compared with 110.6% (115.4% before the impact of
the LPT) for the fourth quarter of 2011. Year over year, the combined
ratio before the LPT improved 2.9 percentage points.
Full Year 2012
Net premiums written increased 38.9% to $569.7 million in 2012 compared
with $410.0 million in 2011.
Net premiums earned were $501.5 million, an increase of 38.0% from 2011,
primarily due to policy count growth of 31.5% year over year at December
Net investment income was $72.4 million compared with net investment
income of $80.1 million in 2011. The decrease was primarily related to a
decrease in yield from 4.1% at December 31, 2011 to 3.7% at December 31,
Realized gains on investments were $5.0 million compared with $20.2
million in 2011. The higher realized gains in 2011 resulted from the
strategic re-balancing of our investment portfolio to increase portfolio
allocations to taxable fixed income sectors, shorten portfolio duration
following the decline in interest rates in the second half of 2011, and
increase the allocation of the portfolio to high dividend equity
Losses and LAE were $287.9 million compared with $262.5 million in 2011
primarily as a result of an increase in net premiums earned, partially
offset by a $9.6 million LPT Contingent Commission Adjustment and the
$73.3 million favorable LPT Reserve Adjustment in 2012. The current
accident year provision rate for losses was 77.0% in 2012 compared with
77.2% in 2011. Before the impact of the LPT, losses and LAE were $387.8
million in 2012 and $281.8 million in 2011.
Commission expense was $65.6 million compared with $47.3 million in
2011. Higher commission expense in 2012 was primarily due to higher net
premiums earned and higher agency incentive commissions from increased
Dividends to policyholders were $3.2 million in 2012 compared with $3.4
million in 2011. Policyholder dividends fluctuate due to changes in
premium levels on dividend policies and the eligibility of policyholders
to receive dividend payments.
Underwriting and other operating expenses were $121.4 million compared
with $100.7 million in 2011, an increase of 20.6% primarily as a result
of a $7.2 million increase in bonus and equity compensation expenses, an
increase in premium taxes and assessments of $3.1 million and an
increase in bad debt expense of $2.1 million. These increases were
partially offset by a $1.6 million decrease in professional services
fees compared to 2011. Additionally, implementation of the new
accounting guidance for DAC resulted in a $7.1 million increase in our
underwriting and other operating expenses for the full year 2012. This
increase was partially offset by a $1.4 million net reduction in
underwriting and other operating expenses in 2012 related to a change in
estimate for guarantee fund assessments.
An income tax benefit of $9.3 million was recorded in 2012 compared with
an income tax benefit of $2.1 million in 2011. The increased tax benefit
was primarily related to higher tax exempt income as a percentage of
pre-tax net income. The change in estimate of the contingent commission
receivable - LPT Agreement also resulted in an additional $0.6 million
bonus accrual that increased the income tax benefit by $0.2 million
during the year ended December 31, 2012. This change in estimate
increased net income by $8.2 million or $0.26 per diluted share.
The 2012 combined ratio was 95.3% (115.3% before the impact of the LPT),
compared with 113.9% (119.2% before the impact of the LPT) in 2011. The
year over year combined ratio improved 18.6 percentage points on a GAAP
basis and 3.9 percentage points before the impact of the LPT.
Debt, Capital Structure
Total outstanding debt at December 31, 2012, was $112.0 million, with a
debt to total capitalization ratio, including the deferred reinsurance
gain - LPT Agreement, of 12.0%. As of December 31, 2012, the Company's
capital structure consisted of $80.0 million principal balance on its
credit facility with Wells Fargo, $32.0 million in surplus notes
maturing in 2034, and $820.4 million of stockholders' equity including
the deferred reinsurance gain - LPT Agreement.
In September of 2012, the Company made a cash capital contribution of
$70 million to its operating subsidiaries to support future growth and
maintain financial strength ratings.
Total invested assets were approximately $2.1 billion at December 31,
2012. The Company's investment portfolio, which is classified as
available-for-sale, consisted of 94% fixed maturity securities and 6%
equity securities at the end of the fourth quarter of 2012.
The Company provides a list of portfolio securities by CUSIP in the
Calendar of Events, Fourth Quarter "Investors" section of its web site
Common Stock Repurchases and First Quarter 2013
The Company repurchased 22,824 shares of common stock during the fourth
quarter of 2012 at an average price of $17.95 per share for a total cost
of $0.4 million. Since the inception of its current stock repurchase
program in November of 2010, the Company has repurchased 9.4 million
shares of common stock at an average price of $15.79 per share for a
total of $148.8 million. At December 31, 2012, approximately $51.2
million remained available for share repurchases through June 30, 2013
pursuant to the Company's current stock repurchase program.
Since the Company's initial public offering in January 2007 through
December 31, 2012, the Company repurchased a total of 23,372,974 shares
of common stock at an average cost per share of $15.51 for a total cost
of $362.6 million.
The Board of Directors declared a first quarter 2013 dividend of six
cents per share. The dividend is payable on March 27, 2013 to
stockholders of record as of March 13, 2013.
Conference Call and Web Cast; Form 10-K
The Company will host a conference call on Thursday, February 28, 2013,
at 8:00 a.m. Pacific Standard 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 following the call. The conference
call replay number is (888) 286-8010 with a pass code of 20377630.
International callers may dial (617) 801-6888.
EHI expects to file its Form 10-K for the year ended December 31, 2012,
with the Securities and Exchange Commission ("SEC") on Friday, March 1,
2013. The Form 10-K will be available without charge through the EDGAR
system at the SEC's web site at www.sec.gov,
and will also be posted on the Company's website, www.employers.com,
through the "Investors" link.
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
before (i) amortization of deferred reinsurance gain-LPT Agreement (ii)
adjustments to LPT Agreement ceded reserves and (iii) adjustments to the
contingent profit commission.
Deferred reinsurance gain-LPT Agreement. Deferred reinsurance
gain-LPT Agreement reflects the unamortized gain from our LPT Agreement.
Under GAAP, this gain is deferred and is being amortized using the
recovery method. Amortization is determined by the proportion of actual
reinsurance recoveries to total estimated recoveries over the life of
the LPT Agreement, except for the contingent profit commission, which is
amortized through June30, 2024. The amortization is reflected in losses
and LAE. We periodically reevaluate the remaining direct reserves
subject to the LPT Agreement and the expected losses and LAE subject to
the contingent profit commission under the LPT Agreement. Our
reevaluations result in corresponding adjustments, if needed, to
reserves, ceded reserves, contingent commission receivable, and the
Deferred Gain, with the net effect being an increase or decrease, as the
case may be, to net income.
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
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
includes (i) amortization of deferred reinsurance gain-LPT Agreement
(ii) adjustments to LPT Agreement ceded reserves and (iii) adjustments
to the contingent profit commission.
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
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, the policyholder dividends 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 (i)
amortization of deferred reinsurance gain-LPT Agreement (ii) adjustments
to LPT Agreement ceded reserves and (iii) adjustments to the contingent
Equity including deferred reinsurance gain-LPT Agreement.
Equity including deferred reinsurance gain-LPT is total equity plus the
deferred reinsurance gain-LPT Agreement.
Book value per share. Equity including deferred reinsurance
gain-LPT Agreement 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.
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 and performance. 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, the Company's Annual Reports on Form
10-K and the Company's plans and expectations with respect to loss
provision rates, its commitment to providing long-term shareholder value
and its ability to continue to provide high quality, competitively
priced service to policyholders.
All forward-looking statements made in this press release reflect EHI's
current views with respect to future events, business transactions and
business performance and are made pursuant to the safe harbor provisions
of the Private Securities Litigation Reform Act of 1995. Such statements
involve risks and uncertainties, which may cause actual results to
differ materially from those set forth in these statements. The business
and results of EHI could be affected by, among other things,
competition, pricing and policy term trends, the levels of new and
renewal business achieved, market acceptance, changes in demand, the
frequency and severity of catastrophic events, actual loss experience
including increased loss costs nationally and in California,
uncertainties in the loss reserving and claims settlement process, new
theories of liability, judicial, legislative, regulatory and other
governmental developments, litigation tactics and developments,
investigation developments, accounting changes, the amount and timing of
reinsurance recoverables, credit developments among reinsurers, changes
in the cost or availability of reinsurance, market developments
(including adverse developments in financial markets as a result of,
among other things, changes in local, regional or national economic
conditions and volatility and deterioration of financial markets),
credit and other risks associated with EHI's investment activities,
significant changes in investment yield rates, rating agency action,
possible terrorism or the outbreak and effects of war, economic,
political, regulatory, insurance and reinsurance business conditions
(including pricing conditions), relations with and performance of
employees and agents, observed market conditions (including trends in
rates and losses), EHI's growth rate, capital needs at EHI's operating
companies, strategic initiatives, and other factors identified in EHI's
filings with the SEC. Readers are cautioned not to place undue reliance
on these forward-looking statements, which speak only as of the date on
which they are made.
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). EHI assumes no obligation to update this
release or the information contained herein, which speaks as of the date
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
Unrealized gains during the period (net of taxes of $8,675 and
$24,602 for the periods ended December 31, 2012 and 2011,
Less: reclassification adjustment for realized gains in net
income (net of taxes of $1,767 and $7,056 for the period
ended December 31, 2012 and 2011)
Reconciliation of net income to net income before impact of
Fixed maturity securities at fair value (amortized cost $1,869,142
31, 2012 and $1,706,216 at December 31, 2011)
Equity securities at fair value (amortized cost $81,067 at
December 31, 2012
and $64,962 at December 31, 2011)
Premiums receivable, less bad debt allowance of $5,957 at December
and $5,546 at December 31, 2011
Common stock, $0.01 par value; 150,000,000 shares authorized;
and 53,948,442 shares issued and 30,771,479 and 32,996,809 shares
outstanding at December 31, 2012 and 2011, respectively
Treasury stock, at cost (23,372,974 shares at December 31, 2012 and
20,951,633 shares at December 31, 2011)
Employers Holdings, Inc.
Reconciliation of GAAP to Non-GAAP Net Income before Taxes,
Income Tax Benefit, Net Income before LPT,
Earnings and Earnings before the LPT per Common Diluted Shares
Reconciliation of GAAP to Non-GAAP Underwriting and Other
Operating Expenses and Underwriting and Other
Operating Expense Ratio, Combined Ratio, and Combined Ratio
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