XNYS:EIG Employers Holdings Inc Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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EIG-3.31.2012-10Q


UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549


FORM 10-Q

R  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended March 31, 2012

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ____  to ____

Commission file number: 001-33245

EMPLOYERS HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Nevada
(State or other jurisdiction
of incorporation or organization)
 
04-3850065
(I.R.S. Employer
Identification Number)
 
 
 
10375 Professional Circle, Reno, Nevada  89521
(Address of principal executive offices and zip code)
(888) 682-6671
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes R No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes R No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” “non-accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer R
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No R
 
Class
 
April 30, 2012
Common Stock, $0.01 par value per share
 
31,613,958 shares outstanding




 
 
Page
No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2



PART IFINANCIAL INFORMATION
Item 1.  Consolidated Financial Statements
Employers Holdings, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share data)
 
 
As of
 
As of
 
 
March 31,
2012
 
December 31,
2011
Assets
 
(unaudited)
 
 
Available for sale:
 
 
 
 
Fixed maturity securities at fair value (amortized cost $1,739,320 at March 31, 2012
and $1,706,216 at December 31, 2011)
 
$
1,881,346

 
$
1,852,699

Equity securities at fair value (cost $80,064 at March 31, 2012 and $64,962 at
December 31, 2011)
 
125,126

 
98,046

Total investments
 
2,006,472

 
1,950,745

Cash and cash equivalents
 
201,555

 
252,300

Restricted cash and cash equivalents
 
10,611

 
6,299

Accrued investment income
 
18,901

 
19,537

Premiums receivable (less bad debt allowance of $5,761 at March 31, 2012 and $5,546 at December 31, 2011)
 
186,361

 
160,443

Reinsurance recoverable for:
 
 

 


Paid losses
 
10,719

 
10,729

Unpaid losses
 
929,349

 
940,840

Funds held by or deposited with reinsureds
 
496

 
1,102

Deferred policy acquisition costs
 
38,763

 
37,524

Federal income taxes recoverable
 
972

 
1,993

Deferred income taxes, net
 
24,656

 
22,140

Property and equipment, net
 
11,998

 
11,360

Intangible assets, net
 
11,425

 
11,728

Goodwill
 
36,192

 
36,192

Other assets
 
17,621

 
18,812

Total assets
 
$
3,506,091

 
$
3,481,744

 
 
 
 
 
Liabilities and stockholders’ equity
 
 

 
 

Claims and policy liabilities:
 
 

 
 

Unpaid losses and loss adjustment expenses
 
$
2,271,422

 
$
2,272,363

Unearned premiums
 
225,698

 
194,933

Policyholders’ dividends accrued
 
3,734

 
3,838

Total claims and policy liabilities
 
2,500,854

 
2,471,134

Commissions and premium taxes payable
 
31,267

 
28,905

Accounts payable and accrued expenses
 
17,357

 
16,446

Deferred reinsurance gain—LPT Agreement
 
349,038

 
353,194

Notes payable
 
122,000

 
122,000

Other liabilities
 
19,855

 
15,879

Total liabilities
 
3,040,371

 
3,007,558

 
 
 
 
 
Commitments and contingencies
 


 


 
 
 
 
 
Stockholders’ equity:
 
 

 
 

Common stock, $0.01 par value; 150,000,000 shares authorized; 53,969,903 and 53,948,442
shares issued and 31,935,474 and 32,996,809 shares outstanding at March 31, 2012 and
December 31, 2011, respectively
 
540

 
540

Preferred stock, $0.01 par value; 25,000,000 shares authorized; none issued
 

 

Additional paid-in capital
 
320,086

 
318,989

Retained earnings
 
362,972

 
358,693

Accumulated other comprehensive income, net
 
121,607

 
116,719

Treasury stock, at cost (22,034,429 shares at March 31, 2012 and 20,951,633 shares
at December 31, 2011)
 
(339,485
)
 
(320,755
)
Total stockholders’ equity
 
465,720

 
474,186

Total liabilities and stockholders’ equity
 
$
3,506,091

 
$
3,481,744

See accompanying unaudited notes to the consolidated financial statements.

3



Employers Holdings, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
(in thousands, except per share data)
 
 
 
Three Months Ended
 
 
March 31,
 
 
2012
 
2011
Revenues
 
(unaudited)
Net premiums earned
 
$
109,900

 
$
82,427

Net investment income
 
18,385

 
20,493

Realized gains on investments, net
 
1,778

 
234

Other income
 
81

 
120

Total revenues
 
130,144

 
103,274

 
 
 
 
 
Expenses
 
 

 
 

Losses and loss adjustment expenses
 
80,923

 
59,421

Commission expense
 
13,529

 
10,281

Policyholder dividends
 
847

 
1,012

Underwriting and other operating expenses
 
32,142

 
25,678

Interest expense
 
902

 
917

Total expenses
 
128,343

 
97,309

 
 
 
 
 
Net income before income taxes
 
1,801

 
5,965

Income tax (benefit)
 
(4,421
)
 
(2,380
)
Net income
 
$
6,222

 
$
8,345


 
 
 
 
Comprehensive income
 
 
 
 
Unrealized gains (losses) during the period (net of taxes of $3,255 and $(1,530) for the three months ended March 31, 2012 and March 31, 2011, respectively)
 
$
6,044

 
$
(2,844
)
Less: reclassification adjustment for realized gains in net income (net of taxes of $622 and $82 for the three months ended March 31, 2012 and March 31, 2011, respectively)
 
1,156

 
152

Other comprehensive income (loss), net of tax
 
4,888

 
(2,996
)
 
 
 
 
 
Total comprehensive income
 
$
11,110

 
$
5,349

 
 
 
 
 
Earnings per common share (Note 10):
 
 
 
 
Basic
 
$
0.19

 
$
0.22

Diluted
 
$
0.19

 
$
0.21

Cash dividends declared per common share
 
$
0.06

 
$
0.06

 
 
 
 
 
Realized gains on investments, net
 
 
 
 
Net realized gains on investments before credit related impairments on fixed maturity securities
 
$
2,246

 
$
234

Other than temporary impairment, credit losses recognized in earnings
 
(468
)
 

Portion of impairment recognized in other comprehensive income
 

 

Realized gains on investments, net
 
$
1,778

 
$
234


See accompanying unaudited notes to the consolidated financial statements.

4



Employers Holdings, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
 
 
Three Months Ended
 
 
March 31,
 
 
2012
 
2011
Operating activities
 
(unaudited)
Net income
 
$
6,222

 
$
8,345

Adjustments to reconcile net income to net cash provided by operating activities:
 
 

 
 

Depreciation and amortization
 
1,414

 
1,841

Stock-based compensation
 
1,241

 
640

Amortization of premium on investments, net
 
1,533

 
2,017

Allowance for doubtful accounts
 
215

 
(599
)
Deferred income tax expense
 
(5,149
)
 
(1,397
)
Realized gains on investments, net
 
(1,778
)
 
(234
)
Realized losses on retirement of assets
 
346

 
68

Change in operating assets and liabilities:
 
 

 
 

Accrued investment income
 
636

 
1,597

Premiums receivable
 
(26,133
)
 
(19,196
)
Reinsurance recoverable for paid and unpaid losses
 
11,501

 
11,419

Funds held by or deposited with reinsureds
 
606

 
1,019

Federal income taxes recoverable
 
1,021

 
(997
)
Unpaid losses and loss adjustment expenses
 
(941
)
 
(11,990
)
Unearned premiums
 
30,765

 
18,086

Accounts payable, accrued expenses and other liabilities
 
4,886

 
467

Deferred reinsurance gain – LPT Agreement
 
(4,156
)
 
(4,519
)
Other
 
2,211

 
(1,252
)
Net cash provided by operating activities
 
24,440

 
5,315

Investing activities
 
 

 
 

Purchase of fixed maturities
 
(108,315
)
 
(23,925
)
Purchase of equity securities
 
(18,520
)
 
(1,054
)
Proceeds from sale of fixed maturities
 
28,657

 
22,099

Proceeds from sale of equity securities
 
3,497

 
1,096

Proceeds from maturities and redemptions of investments
 
46,721

 
49,457

Proceeds from sale of fixed assets
 
42

 

Capital expenditures and other
 
(2,138
)
 
(863
)
Restricted cash and cash equivalents (used in) provided by investing activities
 
(4,312
)
 
5,628

Net cash (used in) provided by investing activities
 
(54,368
)
 
52,438

Financing activities
 
 

 
 

Acquisition of treasury stock
 
(18,730
)
 
(8,591
)
Cash transactions related to stock-based compensation
 
(148
)
 
554

Dividends paid to stockholders
 
(1,939
)
 
(2,310
)
Net cash used in financing activities
 
(20,817
)
 
(10,347
)
Net (decrease) increase in cash and cash equivalents
 
(50,745
)
 
47,406

Cash and cash equivalents at the beginning of the period
 
252,300

 
119,825

Cash and cash equivalents at the end of the period
 
$
201,555

 
$
167,231

 See accompanying unaudited notes to the consolidated financial statements.

5



Employers Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
 (Unaudited)
1. Basis of Presentation and Summary of Operations
Employers Holdings, Inc. (EHI) is a Nevada holding company. Through its wholly owned insurance subsidiaries, Employers Insurance Company of Nevada (EICN), Employers Compensation Insurance Company (ECIC), Employers Preferred Insurance Company (EPIC), and Employers Assurance Company (EAC), EHI is engaged in the commercial property and casualty insurance industry, specializing in workers' compensation products and services. Unless otherwise indicated, all references to the “Company” refer to EHI, together with its subsidiaries.
The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities Exchange Act of 1934, as amended. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal, recurring adjustments) necessary for a fair presentation of the Company’s consolidated financial position and results of operations for the periods presented have been included. The results of operations for an interim period are not necessarily indicative of the results for an entire year. These financial statements have been prepared consistent with the accounting policies described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.
The Company considers an operating segment to be any component of its business whose operating results are regularly reviewed by the Company’s chief operating decision makers to make decisions about resources to be allocated to the segment and assess its performance based on discrete financial information. Currently, the Company has one operating segment, workers’ compensation insurance and related services.
Use of Estimates
The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. As a result, actual results could differ from these estimates. The most significant areas that require management judgment are the estimate of unpaid losses and loss adjustment expenses (LAE), evaluation of reinsurance recoverables, recognition of premium revenue, deferred income taxes, investments, and the valuation of goodwill and intangible assets.
Reclassifications
Certain prior period information has been reclassified to conform to the current period presentation.
2. Deferred Policy Acquisition Costs (DAC)
In October 2010, the Financial Accounting Standards Board (FASB) issued guidance on Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts that became effective in 2012. This guidance changed the definition of acquisition costs which may be capitalized to specify costs that relate directly to the successful acquisition of new or renewal insurance contracts, including underwriting, policy issuance and processing, medical and inspection, and sales force contract selling. It also defines incremental direct costs that must be capitalized as costs that result directly from contract transactions that are essential to contract issuance, which would not have been incurred had the contract transaction not occurred. All other costs are expensed as incurred. Capitalized costs are amortized over the life of the contract.
The Company adopted this standard on a prospective basis on January 1, 2012. During the first quarter of 2012, the Company capitalized $22.1 million of acquisition costs under the new guidance. Under the previous guidance, the amount capitalized would have been $25.7 million. During the first quarter of 2012, the total effect of implementing this guidance was a $3.6 million decrease in the amount capitalized and a $0.6 million decrease in the amortization expense. The total amortization expense during the first quarter of 2012 was $20.8 million. The Company expects that the total impact of this new guidance for 2012 will be approximately $7 million in increased underwriting and other operating expenses.

6



3. Fair Value of Financial Instruments
The carrying value and the estimated fair value of the Company’s financial instruments were as follows:
 
 
March 31, 2012
 
December 31, 2011
 
 
Carrying Value
 
Estimated Fair Value
 
Carrying Value
 
Estimated Fair Value
 
 
(in thousands)
Financial assets
 
 
 
 
 
 
 
 
Investments
 
$
2,006,472

 
$
2,006,472

 
$
1,950,745

 
$
1,950,745

Cash and cash equivalents
 
201,555

 
201,555

 
252,300

 
252,300

Restricted cash and cash equivalents
 
10,611

 
10,611

 
6,299

 
6,299

Financial liabilities
 
 

 
 

 
 
 
 
Notes payable
 
122,000

 
125,877

 
122,000

 
130,447

The Company's estimates of fair value for financial liabilities are based on a combination of the variable interest rates for the Company's existing line of credit and notes with similar durations to discount the projection of future payments on notes payable, and have been determined to be Level 2 fair value measurements, as defined below. Assets and liabilities recorded at fair value on the consolidated balance sheets are categorized based upon the levels of judgment associated with the inputs used to measure their fair value. Level inputs are defined as follows:
Level 1 - Inputs are unadjusted quoted market prices for identical assets or liabilities in active markets at the measurement date.
Level 2 - Inputs other than Level 1 prices that are observable for similar assets or liabilities through corroboration with market data at the measurement date.
Level 3 - Inputs that are unobservable that reflect management's best estimate of what market participants would use in pricing the assets or liabilities at the measurement date.
The following methods and assumptions were used to determine the fair value of each class of assets and liabilities recorded at fair value in the consolidated balance sheets:
Fair values of available-for-sale fixed maturity and equity securities are based on quoted market prices, where available. These fair values are obtained primarily from third party pricing services, who generally use Level 1 or Level 2 inputs. The Company obtains a quoted price for each security from third party pricing services. The quoted prices are derived through recently reported trades for identical or similar securities. For securities not actively traded, the third party pricing services may use quoted market prices of similar instruments or discounted cash flow analyses, incorporating inputs that are currently observable in the markets for similar securities. Inputs that are often used in the valuation methodologies include, but are not limited to, broker quotes, benchmark yields, credit spreads, default rates, and prepayment speeds. The Company also performs quarterly analysis on the prices received from third parties to determine whether the prices are reasonable estimates of fair value, including confirming the fair values of these securities through observable market prices using an alternative pricing source. If unusual fluctuations are noted in this review, the Company may obtain additional information from other pricing services to validate the quoted price. There were no adjustments to prices obtained from third party pricing services as of March 31, 2012 or December 31, 2011 that were material to the consolidated financial statements.
If quoted market prices and an estimate determined by using objectively verifiable information are unavailable, the Company produces an estimate of fair value based on internally developed valuation techniques, which, depending on the level of observable market inputs, will render the fair value estimate as Level 2 or Level 3. The Company bases all of its estimates of fair value for assets on the bid price as it represents what a third party market participant would be willing to pay in an arm's length transaction.
These methods of valuation will only produce an estimate of fair value if there is objectively verifiable information to produce a valuation. If objectively verifiable information is not available, the Company would be required to produce an estimate of fair value using some of the same methodologies, making assumptions for market based inputs that are unavailable.
Most estimates of fair value for fixed maturity securities are based on estimates using objectively verifiable information and are included in the amount disclosed in Level 2 of the hierarchy. The fair value estimates for determining Level 3 fair value include the Company's assumptions about risk assessments and market participant assumptions based on the best information available, including quotes from market makers and other broker/dealers recognized as market participants, using standard or trade derived inputs, new issue data, monthly payment information, cash flow generation, prepayment speeds, spread adjustments, or rating updates.

7



The following table presents the items on the accompanying consolidated balance sheets that are stated at fair value and the fair value measurements.
 
 
March 31, 2012
 
December 31, 2011
 
 
Level 1
 
Level 2
 
Level 3
 
Level 1
 
Level 2
 
Level 3
 
 
(in thousands)
Fixed maturity securities
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasuries
 
$

 
$
149,572

 
$

 
$

 
$
137,365

 
$

U.S. Agencies
 

 
100,965

 

 

 
108,448

 

States and municipalities
 

 
758,181

 

 

 
789,636

 

Corporate
 

 
547,636

 

 

 
501,669

 

Residential mortgage-backed securities
 

 
279,714

 

 

 
281,511

 

Commercial mortgage-backed securities
 

 
33,069

 

 

 
21,665

 

Asset-backed securities
 

 
12,209

 

 

 
12,405

 

Total fixed maturity securities
 
$

 
$
1,881,346

 
$

 
$

 
$
1,852,699

 
$

Equity securities
 
$
125,126

 
$

 
$

 
$
98,046

 
$

 
$

4. Investments
The cost or amortized cost, gross unrealized gains, gross unrealized losses, and estimated fair value of the Company’s investments were as follows:
 
 
Cost or Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
At March 31, 2012
 
(in thousands)
Fixed maturity securities
 
 
 
 
 
 
 
 
U.S. Treasuries
 
$
137,091

 
$
12,609

 
$
(128
)
 
$
149,572

U.S. Agencies
 
94,432

 
6,546

 
(13
)
 
100,965

States and municipalities
 
693,261

 
64,920

 

 
758,181

Corporate
 
508,602

 
39,505

 
(471
)
 
547,636

Residential mortgage-backed securities
 
261,965

 
18,227

 
(478
)
 
279,714

Commercial mortgage-backed securities
 
32,169

 
951

 
(51
)
 
33,069

Asset-backed securities
 
11,800

 
409

 

 
12,209

Total fixed maturity securities
 
1,739,320

 
143,167

 
(1,141
)
 
1,881,346

Equity securities
 
80,064

 
45,407

 
(345
)
 
125,126

Total investments
 
$
1,819,384

 
$
188,574

 
$
(1,486
)
 
$
2,006,472

At December 31, 2011
 
 
Fixed maturity securities
 
 
 
 
 
 
 
 
U.S. Treasuries
 
$
122,144

 
$
15,222

 
$
(1
)
 
$
137,365

U.S. Agencies
 
101,520

 
6,942

 
(14
)
 
108,448

States and municipalities
 
719,431

 
70,391

 
(186
)
 
789,636

Corporate
 
467,470

 
35,745

XNYS:EIG Employers Holdings Inc Quarterly Report 10-Q Filling

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