Key Highlights
(Q2, 2011 compared to Q2, 2010 except where noted)
- Net written premiums of $106 million; up 43%
- Net premiums earned of $88 million; up 13%
- Increase in payroll exposures of 5.6%
- Increase in final audit premium of $4.5 million
- Rate of decline in net rate improved to 1% in the first six months of 2011 versus 4% year over year
- Positive net rate change in California of 10%
- Total revenues of $110 million, up 10%
- Book value per share growth of 3% from $22.08 at December 31, 2010 to $22.73 at June 30, 2011
RENO, Nev.–(BUSINESS WIRE)–Employers Holdings, Inc. (“EHI” or the “Company”) (NYSE:EIG) today reported second quarter 2011 net income of $8.3 million or $0.21 per diluted share compared with $16.5 million or $0.39 per diluted share in the second quarter of 2010, a decrease of $8.2 million or $0.18 per share.
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 $4.0 million or $0.10 per diluted share in the second quarter of 2011 compared with $12.1 million or $0.29 per diluted share in the second quarter of 2010.
In the second quarter of 2011, the Company had a calendar year combined ratio of 116.2% (121.0% before the LPT), an increase of 14.3 percentage points from the second quarter of 2010 combined ratio of 101.9% (107.4% before the LPT). On an accident quarter basis, the Company had a combined ratio before the LPT of 121.4% in the second quarter of 2011 compared to 114.4% in the second quarter of 2010.
Douglas D. Dirks, President and Chief Executive Officer of EHI, commented: “Positives in the quarter include substantive year-over-year increases of 43.2% in written premium and 12.6% in earned premium, both resulting from the implementation of our strategies to grow agents and policies. We added 8,705 policies since June 30, 2010 for a twelve-month policy count increase of 20.1%. We have also added over 730 producers in the last year.”
“Another positive note is that our total payroll exposure increased 5.6% since June 30, 2010 and 9.3% since December 31, 2010. This represents the first year-over-year increase in our payroll exposure since the acquisition of AmCOMP, Inc. in 2008. Our net rate, which is defined as total premium in-force divided by total insured payroll, declined 4% since June 30, 2010. Net rate decreased just one percent year to date in 2011, largely as a result of the positive net rate increase in California.”
Dirks continued: “Loss trends in the second quarter were largely unchanged from the first quarter of this year with the slight increase in the second quarter current accident year loss provision rate primarily attributable to assigned risk experience and continuing loss cost trends in California. Overall losses for prior periods on a cumulative basis were stable. Our calendar year combined ratio for the second quarter was approximately 14 points higher than for the second quarter of 2010. Nearly half of the difference in the combined ratio is attributable to a difference in favorable prior period reserve development – the combined ratio in the second quarter of 2011 included no prior period favorable reserve development for voluntary business – compared with $5.5 million of favorable development in the second quarter of 2010. The remainder of the difference was attributable to an increase in our provision rate for current accident year losses relative to the second quarter of 2010. Underwriting and other operating expenses were generally stable relative to last year’s second quarter, but these expenses as a percentage of net premiums earned declined 2.3 percentage points in this year’s second quarter, only partially offsetting the increased loss ratios.”
Dirks concluded: “As I have said in past quarters, the current workers’ compensation market is characterized by a unique set of challenges – a slow but stabilizing economy, historically low yields on investments, and continuing price competition. Given these operating conditions, we have made difficult decisions to reduce staffing and have successfully reduced underwriting and other operating costs. We have improved and expanded service delivery through technology, increased our number of agents, and expanded unique strategic alliances and programs. We have responded to increasing loss cost trends in California and nationally by providing for current accident year losses at rates higher than historic norms. We continue to focus on loss trends in California as we recently received approval for an average pure premium rate increase of 3.9% effective September 15th of this year. In the second quarter, our strong capital base enabled us to repurchase 763,300 common shares at a cost of $12.5 million. We grew adjusted book value per share 2.9% since year-end 2010 largely because of accretive share repurchases. Our growth initiatives are yielding the results we anticipated. Looking forward, we see opportunities for the Company to continue to expand its presence in the 30 states in which we operate.”
Second Quarter, 2011
Net premiums written of $105.6 million increased 43.2% in the second quarter of 2011 compared to the second quarter of 2010. Net premiums earned increased 12.6% to $88.1 million in the second quarter of 2011 from $78.2 million in 2010. Final audit results increased net premiums earned by $4.5 million in the second quarter compared to the same period of 2010. Policy count at June 30, 2011 increased 20.1% to 52,038 from 43,333 at June 30, 2010.
Net investment income of $20.3 million decreased 1.7% in the second quarter of 2011 due to a 0.1% decrease in the average pre-tax book yield compared to the same period in 2010. The average book yield in the second quarter of 2011 was 4.1% and the tax-equivalent yield on invested assets was 5.2% compared with 4.2% and 5.5%, respectively, in the same periods last year.
Realized gains on investments in the second quarter of 2011 were $1.1 million compared to $0.4 million in the second quarter of 2010.
Losses and LAE increased 42.4% to $64.2 million in the second quarter of 2011 from $45.0 million in the same period in 2010. Losses and LAE before the LPT increased 38.4% to $68.4 million in the second quarter of 2011 from $49.4 million in the second quarter of 2010. These increases were largely the result of only $0.4 million of favorable prior accident year development in the second quarter of 2011, all related to assigned risk business, compared with $5.5 million in the second quarter of 2010, and an increase in the current accident year loss estimate.
In the second quarter of 2011, commission expense increased 21.2% to $11.1 million from $9.2 million in the second quarter of 2010 as a result of higher net premiums earned.
Dividends to policyholders of $0.9 million increased $0.6 million relative to the prior year’s quarter.
Second quarter underwriting and other operating expenses increased 4.2% to $26.2 million from $25.1 million in the same period of 2010. Premium taxes and assessments increased $2.6 million, but were partially offset by a decrease in compensation expense.
The Company recorded an income tax benefit of $2.0 million in the second quarter of 2011 compared to an income tax expense of $1.6 million in the second quarter of 2010. The effective tax rate was (32.0%) in the second quarter of 2011 compared to 9.0% for the same period of 2010. The increased tax benefit was primarily due to an increase in tax exempt income as a percentage of pretax net income to approximately 128% in the second quarter of 2011 compared with 44% in the second quarter of 2010, and the impact of the deferred reinsurance gain – LPT Agreement.
During the second quarter, the operating companies paid $67.4 million in ordinary dividends to the holding company. Common stock repurchases in the quarter totaled 763,300 shares at an average price of $16.34 for a total of $12.5 million.
Year-to-Date 2011
Net premiums earned of $170.6 million in the first six months of the year increased 8.3% from $157.5 million in the same period of 2010. Final audits increased net earned premiums by $15.7 million for the six months ended June 30, 2011, compared to the same period of 2010.
In the first six months of this year, net investment income of $40.8 million decreased 2.6% from $41.9 million in the first six months of 2010, largely due to a 0.2% decrease in the average pre-tax book yield. Realized gains on investments were $1.3 million in the first six months of this year compared with $0.9 million for the six months ended June 30, 2010.
Losses and LAE increased 44.8% to $123.6 million in the first six months of 2011 from $85.3 million for the same period in 2010. Before the impact of the LPT, losses and LAE totaled $132.4 million and $94.1 million for the six months ended June 30, 2011 and 2010, respectively. There was $0.5 million of unfavorable prior accident year loss development in the first six months of this year compared with $16.6 million of favorable development in the first six months of 2010. The small unfavorable development in 2011 was entirely related to assigned risk business. The current period loss provision rate was 77.3% for the first six months of this year compared with 70.3% for the same period last year with the increase primarily related to increasing loss costs in California.
Commission expense for the first six months of 2011 increased 12.2% to $21.4 million from $19.1 million for the same period in 2010 due to higher net premiums earned.
Dividends to policyholders increased slightly to $1.9 million in the first six months of 2011 from $1.8 million in the first six months of 2010.
In the first six months of 2011, underwriting and other operating expenses were $51.9 million compared with $57.4 million in the first six months of 2010, a reduction of $5.5 million or 9.6%. In the first six months of this year, compensation expenses declined $5.8 million and facilities expenses declined $1.1 million, while premium taxes and assessments increased $2.2 million compared to the same period in 2010. The Company incurred one-time restructuring charges of $0.9 million in the first quarter of 2010.
The Company recorded an income tax benefit of $4.4 million for the six months ended June 30, 2011, compared to an income tax expense of $1.1 million for the corresponding period of 2010. The effective tax rate was (35.9%) compared to 3.3% for the same period of 2010. The increased tax benefit was primarily due to an increase in tax exempt interest income as a percentage of pretax net income to 133% in the first six months of this year compared with 48% for the same period in 2010, and the impact of the deferred reinsurance gain – LPT Agreement.
As of June 30, 2011, book value (total stockholders’ equity including the deferred reinsurance gain – LPT Agreement) per share, increased 2.9% to $22.73 from $22.08 at December 31, 2010, largely due to accretive share repurchases.
In November 2010, the EHI Board of Directors authorized a share repurchase program for the repurchase of up to $100 million of the Company’s common stock from November 8, 2010 through June 30, 2012 (the 2011 Program). From inception of the 2011 Program through June 30, 2011, the Company repurchased a total of 2,127,985 shares of common stock at an average price of $16.66 per share, including commissions, for a total of $35.4 million.
The fair market value of invested assets was $2.0 billion at June 30, 2011 with an average pre-tax yield of 4.1%, a tax equivalent yield of 5.2% and a duration of 4.85. A list of portfolio securities by CUSIP as of June 30, 2011 is included in the “Investors” section of EHI’s web site at www.employers.com.
In addition, this week, EHI’s Board of Directors declared a third quarter cash dividend of six cents per share. The dividend is payable on August 30, 2011, to stockholders of record as of August 16, 2011.
Conference Call and Web Cast, Form 10-Q
The Company will host a conference call on Thursday, August 4, 2011 at 10:30 a.m. Pacific Daylight 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 passcode of 84802035. International callers may dial (617) 801-6888.
The complete earnings release is available here.
Source: BusinessWire