RENO, Nev.–(BUSINESS WIRE)–Employers Holdings, Inc. (“EHI” or the “Company”) (NYSE:EIG) today reported first quarter 2011 net income of $8.3 million or $0.21 per diluted share compared with $16.1 million or $0.38 per diluted share in the first quarter of 2010, a decrease of $7.8 million or $0.17 per share.
(Q1, 2011 compared to Q1, 2010 except where noted)
- Increased net written premiums 26.8%; increased net premiums earned 4.0%
- Decreased underwriting and other operating expense $6.6 million or 20.4%
- No favorable prior accident year development compared with $11.1 million in 2010; unfavorable prior period reserve development of $0.8 million in 2011 was related to assigned risk (involuntary) business
- Current year loss provision rate of 76.6%, an increase of approximately 6 percentage points primarily as a result of increasing claim costs in California
- Accident year combined ratio before impact of LPT improved nearly 4 percentage points
- $2.4 million tax benefit due to higher percentage of tax-exempt pre-tax income
- Overall net rate flattening; continued positive net rate in California
- Additional pure premium rate filing planned in California
- Expanded rapid quote technology to all 30 states
- Generated book value per share growth from $22.08 at December 31, 2010 to $22.11 at March 31, 2011
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 (the Company’s non-GAAP measure described below) was $3.8 million or $0.10 per diluted share in the first quarter of 2011 compared with $11.7 million or $0.27 per diluted share in the first quarter of 2010.
As of March 31, 2011, the Company had a calendar year combined ratio of 116.9% (122.4% before the LPT), an increase of 11 percentage points from the first quarter of 2010 combined ratio of 105.9% (111.3% before the LPT). On an accident quarter basis, the Company had a combined ratio before the LPT of 121.4% in the first quarter of 2011 compared to 125.3% in the first quarter of 2010, an improvement of 3.9 percentage points (see Page 12 for the accident year reconciliations).
Douglas D. Dirks, President and Chief Executive Officer of EHI, commented: “Lower earnings and the higher calendar year combined ratio in the quarter are the direct result of a 47% increase in losses and loss adjustment expense (LAE). In the current quarter, we reported no prior period favorable reserve development compared to $11.1 million of favorable development in the first quarter of 2010. Additionally, we increased our current period loss provision rate by 6.3 points relative to last year’s first quarter. The rise in our current year loss provision rate largely reflects increasing medical and indemnity costs in our largest state, California, which represented over half of our book of business at the end of the first quarter. We believe rising claims costs are related to increased litigation, increased medical utilization and higher disability awards, especially in Southern California. Our increased provision rate reflects both the claims cost trends reported by the California Workers’ Compensation Insurance Rating Bureau (WCIRB) as well as our own views on increased frequency and severity. Nationally, continuing high levels of unemployment have impacted our ability to return injured employees to work, thereby lengthening duration and increasing total claim costs. Despite these trends, on an accident year basis, our combined ratio before impact of the LPT improved nearly four points year over year, as underwriting expense savings offset deteriorating loss experience.”
Dirks continued: “Positives in the quarter include a year over year increase of 26.8% in written premium and a 4.0% increase in earned premium, both resulting from the implementation of our growth strategies. We added 5,027 policies since March 31, 2010 for a twelve-month policy count increase of 11.7%. We expanded our rapid quote technology to all thirty states in our geographic footprint. In addition to expanding premium and policies, our underwriting and other operating expenses decreased 20.4%, to $25.7 million in the first quarter of 2011 from $32.3 million in the first quarter of 2010, as headcount declined by approximately 225 positions since March 31, 2010. We grew adjusted book value three cents per share since year-end 2010 due to accretive share repurchases of $8.6 million in the first quarter of 2011.”
“Our total payroll exposure declined 2.8% since March 31, 2010, but increased 2.6% in the first quarter of 2011. Our net rate, which is defined as total premium in-force divided by total insured payroll, declined 5.3% since March 31, 2010. However, net rate decreased less than one percent in the first quarter of 2011, largely as a result of positive net rate in California.”
Dirks concluded: “We are pleased with the progress we have made in reducing expenses while growing policies and premium. In terms of losses, we believe we are appropriately providing for expected current accident year losses based on our own data, and the data provided by the rating bureau in California. We will continue to closely monitor these trends and will adjust our provision rates and loss reserves in future periods, if warranted. We have increased our filed premium rates in California over 28% since early 2009 with the most recent increase of 2.5% effective March 15th of this year. Even so, the current claims environment indicates that further increases in rates will be required. We continue to believe that our underwriting strategy produces fewer claims and better claims experience than the industry in general. However, even in our lower hazard business, we are observing increasing indemnity claims frequency and severity in California. In response to these trends, we expect to file for an additional pure premium rate increase in California.”
First quarter net premiums written increased $21.4 million or 26.8% to $101.1 million in 2011 from $79.8 million in 2010. First quarter net premiums earned increased $3.1 million or 4.0% to $82.4 million in 2011 from $79.3 million in 2010.
First quarter net investment income of $20.5 million decreased $0.8 million or 3.6% due to a 0.2 percentage point decrease in the average pre-tax book yield on invested assets in the first quarter of 2011. The average pre-tax book yield was 4.1% at the end of the first quarter. The first quarter tax-equivalent yield on invested assets was 5.3% in 2011 compared with 5.5% for the same period in 2010.
Realized gains on investments in the first quarter were $0.2 million compared with $0.5 million in the first quarter of 2010.
First quarter losses and LAE increased 47.5% to $59.4 million in 2011 from $40.3 million in 2010. First quarter losses and LAE before the LPT increased 43.2% to $63.9 million from $44.6 million in the first quarter of 2010. These increases were largely the result of no favorable prior accident year development in the first quarter of 2011 compared with $11.1 million in the first quarter of 2010. Unfavorable development of $0.8 million in the current quarter was related to assigned risk (involuntary) business. Current accident year loss estimates were 76.6% and 70.3% in the first quarters of 2011 and 2010, respectively. The increase in the current accident year loss estimate is primarily due to continued increasing claims costs in California. In April 2011, the WCIRB stated it would make an informational filing highlighting the cost drivers that indicate a 39.8% increase in the claims cost benchmark since January 1, 2009, based on an analysis of December 31, 2010 loss experience. This represents a deterioration of more than ten percentage points in the claims cost benchmark since the WCIRB analysis as of June 30, 2010. The WCIRB indicated that this further deterioration was due to: (a) continued adverse loss development on the 2009 accident year; (b) high emerging costs on the 2010 accident year, primarily due to increased claims frequency; (c) less optimistic forecasts for statewide wage growth in California; and (d) increased LAE that are likely a result of certain Workers Compensation Appeals Board decisions.
In the first quarter of 2011, commission expense of $10.3 million increased from $9.9 million in the first quarter of 2010 primarily due to higher net premiums earned.
First quarter underwriting and other operating expenses decreased 20.4% to $25.7 million from $32.3 million in the first quarter of 2010. These substantial expense savings were largely the result of cost control efforts and total staff reductions of approximately 225 positions since March 31, 2010. Non-recurring costs associated with restructuring and integration were $0.9 million in the first quarter of 2010.
Dividends to policyholders were $1.0 million and $1.5 million for the first quarters of 2011 and 2010, respectively. This decrease was primarily due to lower premium levels on dividend policies in Florida and Wisconsin and fewer policies eligible for dividend payments in 2011.
First quarter interest expense decreased to $0.9 million in 2011 from $1.6 million in 2010 primarily due to the expiration of an interest rate swap on the Company’s credit facility in the third quarter of 2010.
The first quarter 2011 income tax benefit was $2.4 million compared with $0.5 million in the first quarter of 2010. The increased tax benefit was primarily due to higher tax exempt income as a percentage of pre-tax income relative to the same period last year.
In the first quarter of 2011, the Company repurchased 497,536 shares of common stock at an average price of $17.27 per share for a total of $8.6 million. This week, the Board of Directors declared a second quarter cash dividend of six cents per share. The dividend is payable on June 1, 2011, to stockholders of record as of May 18, 2011.
The fair market value of invested assets was $2.0 billion at March 31, 2011 with an average pre-tax book yield of 4.1%, a tax equivalent yield of 5.3% and a duration of 4.9. A list of portfolio securities by CUSIP as of March 31, 2011, will be included in the “Investors” section of the web site at www.employers.com.
The full earnings release can be found here.