Reno, NV -(BusinessWire)- Employers Holdings, Inc. (NYSE:EIG) today reported third quarter 2012 net income of $8.2 million or $0.26 per diluted share. Net income in the third quarter of 2011 was $11.8 million or $0.31 per diluted share. As expected, during the third quarter of 2012, we recorded a $1.3 million or $0.01 per diluted share addition to underwriting and other operating expense as a result of our prospective adoption of the Financial Accounting Standards Board’s change in accounting standards for deferred acquisition costs (“DAC”). This change in accounting method, which became effective in 2012, alters the definition of acquisition costs which may be capitalized and lowered our reported net income as a result of having to expense certain costs that were capitalized in prior years. Adjusted for the change in DAC accounting, non-GAAP net income was $8.4 million or $0.27 per diluted share, a decrease of $0.04 per share compared with last year’s third quarter. We continue to estimate that as a result of the new DAC accounting, our underwriting and other operating expenses will increase in the fourth quarter by less than $1 million (or 6% of the total $7 million increase in underwriting and other operating expenses in 2012). The year-to-date increase in these expenses was $6.5 million at the end of the third quarter.
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 $4.5 million or $0.14 per diluted share in the third quarter of 2012 and $7.6 million or $0.20 per diluted share in the third quarter of 2011. Adjusted for the change in DAC accounting, net income before the impact of the LPT deferred reinsurance gain was $4.8 million or $0.15 per diluted share in the third quarter of 2012, which was $2.8 million or $0.05 per diluted share lower than the third quarter of 2011.
The change in DAC accounting impacts year-over-year comparisons of our results, which have not been retroactively adjusted. Reconciliations of results which illustrate the impact of the change in DAC accounting and the LPT impact for the third quarter and year-to-date are included in the tables attached to this press release
President and Chief Executive Officer Douglas D. Dirks commented on the results: “We are pleased with the momentum we are seeing in our business. Earned premium increased 42% in the quarter relative to last year’s third quarter and as we grew into an improving pricing environment, our net rate increased 7.4% year over year. We achieved stronger performance demonstrated by the continued improvement in our combined ratio. Our third quarter combined ratio before the LPT improved 5.9 points relative to last year’s third quarter and 5.0 points relative to the second quarter of this year. Recently, we announced our new partnership with Paychex Insurance Agency, Inc. Now, in combination with ADP, we have strategic partnerships with the largest companies in payroll outsourcing services.”
Dirks continued: “Clearly, our focus on pricing is yielding a higher net rate. Additionally, it appears that the current trends in rates continue to exceed the trends in our losses. We believe that we have correctly provided for ultimate losses and appropriately priced our products. Consequently, we have not had to strengthen overall reserves for prior periods. While our loss provision rate remains in the high seventies at the end of the third quarter, if the more positive rate trends continue to exceed our loss trends, we will incrementally lower the loss provision rate throughout 2013.”
Commenting on the balance sheet, Dirks continued: “Since the end of last year, our book value increased 5.8% to $26.52. We repurchased 228,564 shares of common stock in the third quarter of 2012 at a cost of $4.1 million. As expected, we contributed $70 million of capital back to the operating companies in line with our capital management strategy to strategically invest capital in the business when warranted.”
Third Quarter 2012
Net premiums written increased 40.8% to $144.4 million in the third quarter of 2012 compared with $102.6 million in 2011. In-force premiums of $510.8 million at quarter-end 2012 increased 38.6% relative to the end of the third quarter in 2011.
Net premiums earned were $131.8 million, an increase of $39.2 million or 42.3% from the third quarter of 2011, primarily due to policy count growth of 34.7% year over year at September 30, 2012. There were 76,264 policies in force at the end of this year’s third quarter, an increase of 19,663 policies in the last twelve months.
Net investment income was $17.5 million compared with net investment income of $19.6 million in the third quarter of 2011. The decrease in the third quarter of 2012 was primarily related to a decrease in yield. The pre-tax book yield on invested assets was 3.6% for the third quarter of 2012 compared with 4.0% in the third quarter of 2011. The tax equivalent yield on invested assets decreased to 4.7% at the end of the third quarter in 2012 compared with 5.2% at the end of the third quarter in 2011.
Realized gains on investments were $1.8 million compared with $0.6 million in the third quarter of 2011.
Losses and loss adjustment expenses (“LAE”) were $98.3 million compared with $67.4 million in the third quarter of 2011 primarily as a result of increases in net premiums earned. The current accident year provision rate for losses was 77.2% in the third quarters of 2012 and 2011. Before the impact of the LPT deferred reinsurance gain, losses and LAE were $101.9 million in the third quarter of 2012 and $71.6 million in the third quarter of 2011.
Third quarter commission expense was $14.9 million in 2012 compared with $11.0 million in 2011. Commission expense increased in the third quarter of 2012 primarily due to higher net premiums earned.
Dividends to policyholders were $0.9 million compared with $0.8 million in the third quarter of 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 $29.3 million compared with $25.3 million in the third quarter of 2011, an increase of $4.0 million primarily as a result of a $1.9 million increase in compensation, a $1.3 million increase related to the DAC accounting change, and a $0.9 million change in bad debt expense. These increases were partially offset by a decrease in professional services fees of $1.1 million relative to the same period in 2011 and a $1.4 million net reduction in underwriting and other operating expenses related to a change in the estimate for guaranty fund assessments for the third quarter of 2012.
An income tax benefit of $1.2 million was recorded in the third quarter of 2012 compared with an income tax benefit of $4.4 million in the third quarter of 2011. The decreased tax benefit was primarily related to decreased tax exempt interest income as a percentage of pre-tax net income.
At the end of the third quarter of 2012, the change in net rate was a positive 7.4% year over year and 6.4% year to date, continuing the positive trend begun in the fourth quarter of 2011. The net rate change in California was an increase of 14.6% year over year and 11.2% year to date. Our change in total payroll exposure increased 29.1% year over year and 21.9% year to date.
The third quarter 2012 combined ratio was 108.7% (111.5% before the impact of the LPT deferred reinsurance gain), compared with 112.9% (117.4% before the impact of the LPT deferred reinsurance gain) for the third quarter of 2011. Year over year, the combined ratio improved 4.2 percentage points on a GAAP basis and 5.9 percentage points before the impact of the LPT. The combined ratio, adjusted for the DAC accounting change, was 107.7% (110.5% before the impact of the LPT deferred reinsurance gain), an improvement of 5.2 percentage points relative to the combined ratio for the third quarter of last year (please see the attached reconciliations excluding the impact of the DAC accounting change for the third quarter of 2012).
Year-to-Date 2012
Net premiums written increased 40.7% to $435.1 million in the first nine months of 2012 compared with $309.2 million in the same period for 2011.
Net premiums earned were $360.6 million, an increase of $97.5 million or 37.0% from the first nine months of 2011, primarily due to policy count growth of 34.7% year over year at September 30, 2012.
Net investment income was $54.2 million compared with net investment income of $60.4 million in the first nine months of 2011. The decrease was primarily related to a decrease in yield.
Realized gains on investments were $4.6 million compared with $2.0 million in the first nine months of 2011.
Losses and LAE were $267.5 million compared with $191.0 million in the first nine months of 2011 primarily as a result of increases in net premiums earned. The current accident year provision rate for losses was 77.0% in the first nine months of 2012 compared with 77.3% in the first nine months of 2011. The current accident year provision rates were impacted by medical and indemnity cost trends nationally. Before the impact of the LPT deferred reinsurance gain, losses and LAE were $279.1 million in the first nine months of 2012 and $204.0 million in the first nine months of 2011.
Commission expense was $44.5 million compared with $32.4 million in the first nine months of 2011. Commission expense increased in the first nine months of 2012 primarily due to higher net premiums earned and higher agency incentive commissions through the third quarter of this year.
Dividends to policyholders were $2.5 million compared with $2.8 million in the first nine months of 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 $90.9 million compared with $77.2 million in the first nine months of 2011, an increase of $13.7 million primarily as a result of a $6.5 million increase related to the DAC accounting change, a $3.7 million increase in compensation, a $2.2 million change in bad debt expense and an increase in premium taxes and assessments of $1.3 million. These increases were partially offset by a $1.2 million decrease in professional services fees relative to the same period last year and a $1.4 million net reduction in underwriting and other operating expenses related to a change in the estimate for guaranty fund assessments in the first nine months of 2012.
An income tax benefit of $7.9 million was recorded in the first nine months of 2012 compared with an income tax benefit of $8.7 million in the first nine months of 2011. The decreased tax benefit was primarily related to decreased pre-tax net income.
The year-to-date 2012 combined ratio was 112.4% (115.6% before the impact of the LPT deferred reinsurance gain), compared with 115.3% (120.2% before the impact of the LPT deferred reinsurance gain) for the same period of 2011. In the first nine months of 2012 compared to the same period of 2011, the combined ratio improved 2.9 percentage points on a GAAP basis and 4.6 percentage points before the impact of the LPT. The combined ratio, adjusted for the DAC accounting change, was 110.6% (113.8% before the impact of the LPT deferred reinsurance gain), an improvement of 4.7 percentage points relative to the combined ratio for the same period last year (please see the attached reconciliations excluding the impact of the DAC accounting change for the first nine months of 2012).
Debt, Capital Structure
Total outstanding debt at September 30, 2012, was $122.0 million, with a debt to total capitalization ratio, including the deferred reinsurance gain – LPT Agreement, of 13.0%. As of September 30, 2012, the Company’s capital structure consisted of $90.0 million principal balance on its credit facility with Wells Fargo, $32.0 million in surplus notes maturing in 2034, and $814.8 million of stockholders’ equity including the deferred reinsurance gain – LPT Agreement.
Investments
Total invested assets were approximately $2 billion at September 30, 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 third quarter of 2012.
Common Stock Repurchases and Fourth Quarter Dividend
The Company repurchased 228,564 shares of common stock during the third quarter of 2012 at an average price of $17.77 per share for a total cost of $4.1 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 $15.78 per share for a total of $148.4 million. At September 30, 2012, approximately $51.6 million remained available for share repurchases through June 30, 2013 pursuant to the Company’s current stock repurchase program.
The Board of Directors declared a fourth quarter 2012 dividend of six cents per share. The dividend is payable on December 5, 2012 to stockholders of record as of November 21, 2012.
The complete earnings release is available here: Employers Holdings, Inc. Third Quarter 2012 Earnings