Employers Holdings, Inc. recently reported fourth quarter 2013 net income of $14.2 million or $0.44 per diluted share compared with net income of $87.8 million or $2.82 per diluted share in the fourth quarter of 2012.
In a release on February 19, the Company noted that full year net income was $63.8 million or $2.00 per diluted share in 2013 compared with $106.9 million or $3.37 per diluted share in 2012.
Net income includes the impact of the Loss Portfolio Transfer ("LPT") Agreement. Fourth quarter net income before impact of the LPT was negative $1.1 million or $(0.03) per diluted share in the fourth quarter of 2013 and $1.8 million or $0.06 per diluted share in the fourth quarter of 2012. Full year net income before impact of the LPT was $25.9 million or $0.81 per diluted share in 2013 compared with $7.0 million or $0.22 per diluted share in 2012.
Results of operations in the fourth quarter were primarily impacted by an increase in the current accident year loss estimate to 77.0 percent from 73.6 percent at September 30, 2013, which increased losses and LAE by $21.5 million. Results were impacted to a lesser extent by the following factors: (1) favorable development in the estimated reserves ceded under the LPT Agreement during 2013 which resulted in an $8.9 million adjustment to the Deferred Gain (LPT Reserve Adjustment) and an increase in net income of $8.9 million or $0.28 per diluted share; (2) unfavorable prior accident year loss development of $5.0 million, related to California loss reserves for the 2009 through 2011 accident years which increased losses and LAE by the same amount; and (3) an increase in the contingent commission receivable under the LPT Agreement that resulted in a $2.7 million adjustment to the deferred reinsurance gain, which reduced losses and LAE by the same amount (LPT Contingent Commission Adjustment) and resulted in an increase in net income of $2.7 million or $0.08 per diluted share.
Results of operations in the full year 2013 were primarily impacted by: (1) favorable development in the estimated reserves ceded under the LPT Agreement during 2013 which resulted in a $19.0 million cumulative adjustment to the Deferred Gain (LPT Reserve Adjustment); (2) unfavorable prior accident year loss development of $6.9 million, including $5.0 million related to California loss reserves for the 2009 through 2011 accident years and $1.9 million related to assigned risk business, which increased losses and LAE by the same amount during 2013; (3) an increase in the contingent commission receivable under the LPT Agreement that resulted in a $4.3 million cumulative adjustment, which reduced losses and LAE by the same amount (LPT Contingent Commission Adjustment); and (4) a reallocation of reserves from non-taxable periods prior to January 1, 2000, which reduced the effective tax rate by 13.9 percentage points, or $7.4 million, in 2013. Collectively, these items increased net income by $23.8 million for the year ended December 31, 2013 or $0.75 per diluted share.
President and Chief Executive Officer Douglas D. Dirks commented on the annual results: "We continued to build scale in our business throughout 2013. Consistent with our plan, at year-end we had 84,056 policies with a policy count growth of 5.3 percent and an increase in average policy size of 9.1 percent in the last twelve months. In- force premiums grew 14.9 percent as our focus on pricing resulted in a net rate increase of 8.8 percent year over year. Our net income before the LPT increased $0.59 per diluted share compared to 2012 and our combined ratio before the LPT improved 5.5 percentage points. The improvement in our annual results is largely attributable to the growth, pricing and cost containment initiatives we have implemented in recent years as our underwriting expense ratio improved 5.3 percentage points year over year. Our indemnity claims frequency was relatively unchanged for the first three quarters of 2013, compared to the same periods of 2012, and our loss experience indicated downward trends in medical and indemnity costs per claim that were reflected in our current accident year loss estimates. Throughout the first three quarters of the year, we continued to see modest increases in frequency and severity in California that were offset by improving loss trends elsewhere."
Dirks commented on the quarterly results: "Our fourth quarter results reflect caution in providing for reserves related to our most recent accident year, 2013. Rather than continuing the decline in our loss provision rate which began in the first quarter of 2013, we raised the annual provision rate 3.4 percentage points since September 30, 2013 in response to adverse loss trends in the Los Angeles area. This increased our losses and LAE by $21.5 million and resulted in a current accident year loss provision rate of 77 percent which was flat relative to 2012. In addition to raising our provision rate for losses, we recognized modest unfavorable development of approximately $5 million for accident years 2009 through 2011, related to loss reserves in California."
Dirks continued: "In the fourth quarter, we noted increases in indemnity claim frequency and severity in our book of business for the current accident year, 2013. The major driver of these increases was attorney involvement in open claims in Southern California. For example, the number of our open indemnity claims that have legal representation in California increased by 14 percentage points from January 1 through December 31 in 2013. Approximately 8 points of that increase occurred in the last three months of 2013. Industry data from the California Workers' Compensation Institute suggests that the cost of litigated indemnity claims is more than seven times the cost of non-litigated indemnity claims."
Dirks discussed responses to California loss trends: "We have taken the following actions to address the more general loss trends in California and we believe these will also address what we saw in the fourth quarter of 2013.
-First, in response to general loss trends in California, we adjusted pricing throughout 2013. This pricing primarily consists of filed rates and schedule credits and debits. These adjustments are evident in the 12.9 percent year over year increase in our California net rate.
-Second, we have slowed policy count growth in California largely attributable to our business concentration in that state. Our year over year increase in policy count was just 2.6 percent in California compared with 9.2 percent in states other than California. At the same time, the percent of our total policies in hazard groups A through D has remained unchanged in California from 2012 to 2013.
-Third, we stood up two additional operating companies in California and filed territorial multipliers for loss costs which will allow greater pricing flexibility for us. In addition, our three subsidiaries in California now have approved pure premium rates effective June 1, the average of which is 7 percent above the current rates for Employers Compensation Insurance Company. These companies will begin quoting business later this month for policies effective on June 1.
Dirks concluded: "While we are cautious about the long-term loss trends in the Los Angeles area of Southern California, we are optimistic about the actions we have taken to address them. We anticipate that the positive trends we experienced throughout 2013 including premium growth, fixed expense containment and our focus on pricing will continue into 2014. In addition, as we announced in the third quarter, we are continuing to implement a comprehensive review of our operations in order to generate further reductions in our expense ratio, increase efficiencies and continue to improve our service to customers. The cautionary steps we have taken in the fourth quarter in response to Southern California loss trends should not mask the more positive results we achieved in the full year, as in 2013 we more than tripled our 2012 net income before the LPT and improved our combined ratio before the LPT by more than five percentage points."
The Board of Directors declared a first quarter 2014 dividend of six cents per share. The dividend is payable on March 19, to stockholders of record as of March 5.
EHI expects to file its Form 10-K for the year ended December 31, 2013, with the Securities and Exchange Commission ("SEC") on or about Thursday, February 20. The Form 10-K will be available without charge through the EDGAR system at the SEC's web site at sec.gov, and will also be posted on the Company's website, employers.com, through the "Investors" link.
The Company provides a list of portfolio securities in the Calendar of Events, Fourth Quarter "Investors" section of its web site at employers.com.
An investor presentation for the reporting period will be posted to the website.
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