Reno, NV -(BusinessWire)- Employers Holdings, Inc. (“EHI” or the “Company”) (NYSE:EIG) recently 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 to come.”
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 yield.
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, 2012.
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 31, 2012.
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, 2012.
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 securities.
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 agent production.
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.
Investments
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 at www.employers.com.
Common Stock Repurchases and First Quarter 2013 Dividend
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.
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.
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.”
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.
The complete earnings release is available here: Employers Holdings, Inc. Fourth Quarter and Full Year 2012 Earnings
Source: BusinessWire