Reno, NV – Employers Holdings, Inc. (NYSE:EIG) recently reported net income and net income excluding the impact of the LPT of $26.3 million, or $0.80 per diluted share, and $18.7 million, or $0.57 per diluted share, respectively, for the second quarter of 2016. Operating income was $14.9 million, or $0.45 per diluted share, for the quarter ended June 30, 2016. The Company’s loss ratio before the LPT increased approximately one percentage point in the quarter. The Company’s commission expense ratio declined one percentage point while the other underwriting expense ratio was relatively unchanged over the previous year’s second quarter. Per diluted share amounts also benefited from the impact of $5.9 million in share repurchases.
Chief Executive Officer Douglas Dirks commented on the results:
“Our positive results in the quarter were impacted by four large losses totaling approximately $6.5 million in excess of expected large losses. Every day, businesses and individuals face a variety of risks. We allow select businesses to exchange the risk of a large loss for the certainty of smaller periodic payments – premiums. This results in a transfer of risk for covered losses and the assumed risk has two dimensions: “frequency,” how often losses occur; and “severity,” how costly losses can be. Small businesses, the kind we underwrite, generally have fewer and less severe losses. Occasionally, however, large losses do occur and this is to be expected.
Favorably, in the second quarter of this year, frequency improved relative to the same period last year. Severity increased compared with last year’s second quarter due to the large loss activity, which raised our quarterly and annual provision rate for losses. We do not believe these four large losses are indicative of an underlying trend or cause for underwriting concerns. These were large, random losses and these are the kinds of losses expected in the insurance industry from time to time. Excluding the impact of the large losses, our current accident year loss estimate declined in the second quarter year-over-year, driven in large part by solid execution of our ongoing strategic initiatives.
Also in the second quarter and reflecting the confidence we have in our book of business, we renewed our reinsurance treaty and raised our retention rate from $7 million to $10 million, effective July 1, 2016. While this increased retention rate can lead to greater volatility in quarterly results, similar to what we experienced in this year’s second quarter, we believe a higher retention rate is in the long-term economic interest of the Company.
Our operating earnings per share declined six cents in the quarter compared with last year’s second quarter. Our adjusted book value per share increased 9% year-over-year at June 30th. We repurchased $5.9 million or 204,954 common shares at an average price of $28.71 per share.
We are confident in the strength of our balance sheet and we are pleased with the execution of our strategies in our markets, as we continued to retain high levels of policy retention in the quarter.”
Second Quarter 2016 Results
(All comparisons vs. second quarter 2015, unless noted otherwise).
Net income of $26.3 million after-tax decreased $2.9 million due to a $4.0 million decline in underwriting income. Underwriting income of $9.7 million decreased primarily due to a higher current accident year loss estimate (68.6% compared with 66.5% in last year’s second quarter) resulting from $6.5 million related to four large losses recognized in the second quarter which increased our losses and LAE. The large losses raised our loss provision rate by 3.7 percentage points in the quarter. Our assigned risk business raised the loss provision rate an additional 0.8 of a percentage point. Excluding the impact of the large losses and assigned risk business, our current accident year loss estimate of 64.1% declined 2.4 percentage points relative to last year’s second quarter. This decrease reflects the impact of key business initiatives, including an increased emphasis on the settlement of open indemnity claims, diversification of our risk exposure across our markets, non-renewing under-performing business, targeting profitable business across all of our markets, increasing rates on business in the Los Angeles area and continuing to grow in other territories in California and outside California.
- The combined ratio before the impact of the LPT remained strong at 98.8%.
- The loss ratio before the LPT of 67.4% increased 1.1 percentage point primarily due to the large loss activity mentioned previously.
- The commission expense ratio of 12.4% declined one point.
- The underwriting and other expense ratio was generally flat at 19.0%.
The Company’s results were also impacted by favorable prior period development in LPT reserves and re-estimation of the LPT contingent profit commission which collectively lowered losses and LAE $4.9 million and raised GAAP net income by $4.9 million or $0.15 per diluted share.
Gross written premiums of $190.6 million were flat year-over-year however there was a $10.3 million increase in final audit premium year-over-year, offset by a slight decline in new and renewal premium. Gross written premium in states outside California grew 1.1% while gross written premium in California decreased by 4.4%. Policy count outside of California grew 6.5% while policy count in California declined 5.6%.
Net rate (total in-force premiums divided by total insured payroll exposure) decreased 3.0%.
Net investment income of $18.4 million pre-tax was flat relative to the second quarter of last year. Net realized gains on investments were $6.0 million in the second quarter compared with $1.9 million in the second quarter of last year.
Stockholders’ Equity including the Deferred Gain
Stockholders’ equity plus Deferred reinsurance gain – LPT Agreement was $1,026.0 million, an increase of 8.0% from year-end 2015, including an increase in after-tax net unrealized investment gains of $39.2 million from year-end 2015. After-tax net unrealized investment gains were $122.8 million compared to $83.6 million at year-end 2015. Also, at the end of the second quarter, the ratio of debt to capital was 3.0%. The Company repurchased 204,954 shares in the quarter ended June 30, 2016 at an average price of $28.71 per share, including commissions, for a total of $5.9 million.
The Board of Directors declared a third quarter 2016 dividend of nine cents per share. The dividend is payable on August 24, 2016 to stockholders of record as of August 10, 2016.
The complete earnings release is available here: Employers Holdings, Inc. Second Quarter 2016 Results