10-Q: Employers Holdings Reports Underwriting Loss Amid Rising California Claims, Net Income Declines

Employers Holdings, Inc. reported a decline in net income and a significant underwriting loss for the second quarter and first half of 2025, primarily driven by increased losses and loss adjustment expenses, particularly from cumulative trauma claims in California.

Summary

• Net income for the three months ended June 30, 2025, decreased to $29.7 million from $31.7 million in the prior year period.
• Net income for the six months ended June 30, 2025, decreased to $42.5 million from $60.0 million in the prior year period.
• Gross premiums written decreased by 2.2% for the three months and 0.8% for the six months ended June 30, 2025, compared to the same periods in 2024.
• Net premiums earned increased by 5.6% for the three months and 2.3% for the six months ended June 30, 2025, compared to the same periods in 2024.
• Losses and loss adjustment expenses (LAE) increased significantly by 28.8% for the three months and 15.8% for the six months ended June 30, 2025, compared to the same periods in 2024.
• The combined ratio worsened to 105.6% for the three months and 103.9% for the six months ended June 30, 2025, compared to 94.2% and 97.9% respectively in 2024, indicating an underwriting loss.
• Underwriting income shifted to a loss of $(11.0) million for the three months and $(14.6) million for the six months ended June 30, 2025, from income of $10.8 million and $7.8 million respectively in 2024.
• Net investment income increased by 0.7% for the three months and 10.0% for the six months ended June 30, 2025, driven by returns from private equity limited partnerships and higher book yields on fixed maturity securities.
• Net realized and unrealized gains on investments were $20.9 million for the three months and $8.1 million for the six months ended June 30, 2025.
• The company repurchased 482,000 shares for $23.2 million during Q2 2025 and 888,101 shares for $43.4 million during H1 2025.
• Cash dividends declared per common share increased to $0.32 for Q2 2025 and $0.62 for H1 2025.
• Total in-force policies reached a record 134,421 at June 30, 2025.

Sentiment

Score: 4

Explanation: The company's core underwriting performance deteriorated significantly, marked by a higher combined ratio and an underwriting loss, primarily due to increased claims in California. While investment income was strong and capital returns to shareholders continued, the underlying operational challenges in the insurance segment are a major concern, leading to a substantial drop in net income. The strong liquidity position and continued share repurchases provide some stability, but the negative trend in core profitability is concerning.

Positives

• Net premiums earned increased by 5.6% for the three months and 2.3% for the six months ended June 30, 2025.
• Net investment income increased by 0.7% for the three months and 10.0% for the six months ended June 30, 2025, primarily due to returns from private equity limited partnerships and higher book yields.
• Net realized and unrealized gains on investments were strong at $20.9 million for the three months ended June 30, 2025.
• The company achieved a record number of policies in-force, reaching 134,421 at June 30, 2025.
• Cash dividends declared per common share increased to $0.32 for the quarter and $0.62 for the six months ended June 30, 2025.
• The company maintains a strong total capital position and adequate liquidity, not foreseeing a need to suspend dividends or forego repurchases.
• A new share repurchase program of up to $125.0 million was authorized through December 31, 2026.

Negatives

• Net income decreased by 6.3% for the three months and 29.2% for the six months ended June 30, 2025, compared to the same periods in 2024.
• Gross premiums written decreased by 2.2% for the three months and 0.8% for the six months ended June 30, 2025, primarily due to reductions in new business.
• Losses and loss adjustment expenses (LAE) increased significantly by 28.8% for the three months and 15.8% for the six months ended June 30, 2025.
• The combined ratio worsened to 105.6% for the three months and 103.9% for the six months ended June 30, 2025, indicating an underwriting loss.
• Underwriting income shifted to a loss of $(11.0) million for the three months and $(14.6) million for the six months ended June 30, 2025.
• The increase in losses and LAE was primarily due to a higher current accident year loss and LAE estimate, with unfavorable loss trends observed predominantly in California due to rapid increases in cumulative trauma (CT) claims.
• Prior accident year loss reserve development was unfavorable for the six months ended June 30, 2025 ($1.6 million), contrasting with favorable development in the prior year period ($9.2 million).
• Several insurance subsidiaries (EICN, ECIC, EPIC, EAC) cannot pay further dividends for the remainder of 2025 without prior regulatory approval due to dividend payments made earlier in the year.

Risks

• Credit Risk: Exposure to potential economic loss from adverse changes in the fair value of financial instruments, including fixed maturity securities, equity securities, other invested assets, cash and cash equivalents, and reinsurance recoverables.
• Interest Rate Risk: Fixed maturity securities are exposed to changes in fair value resulting from prevailing interest rates; a hypothetical 100 basis point rise in interest rates could lead to an estimated pre-tax decrease in fair value of $86.3 million (4.1%).
• Equity Price Risk: Potential losses in the fair value of equity securities due to adverse market price changes; a hypothetical 10% decrease in fair value of equity securities could result in a pre-tax impact of $(26.8) million.
• Inflation: Higher levels of inflation than anticipated could significantly impact financial statements and results, particularly affecting medical and hospital inflation rates for claims costs, and potentially operating and payroll expenses.
• Loss Reserve Uncertainty: The accuracy of financial reporting depends on estimates for unpaid losses and LAE, which are inherently uncertain and subject to change, potentially requiring increases in reserves that reduce earnings.
• Reinsurer Default: The company bears credit risk with respect to reinsurers, as it is required to pay losses even if a reinsurer fails to meet its obligations.
• Regulatory Restrictions on Dividends: State insurance laws and regulations restrict dividend payments from insurance subsidiaries to the holding company, impacting the holding company's liquidity.

Future Outlook

The company continues to invest in technology to automate business processes and develop data analytic capabilities to reduce operating costs and support future needs. It also pursues profitable growth by focusing on disciplined underwriting, claims management, leveraging medical provider networks, and diversifying risk exposure across geographic markets and economic sectors. The company believes its total capital position remains strong and liquidity will be sufficient for financing needs in the next 12 months and longer-term, not foreseeing a need to suspend dividends or forego repurchases.

Management Comments

• Our 2025 underwriting results reflect moderate increases in net premiums earned offset by higher losses and LAE.
• Our 2025 investment results benefited from strong net investment income and favorable net realized and unrealized gains.
• The declines in gross premiums written were driven primarily by reductions in new business. Nonetheless, we closed another quarter with a record number of policies in-force.
• The increase in our calendar year losses and LAE during the three and six months ended June 30, 2025, as compared to the same periods of 2024, was primarily due to a higher current accident year loss and LAE estimate as unfavorable loss trends have been observed, predominantly in California due to the rapid increase in cumulative trauma (CT) claims.
• The reduction in our underwriting expense ratio for the three and six months ended June 30, 2025 was driven by our disciplined focus on expense reduction.
• We believe that our total capital position remains strong and that the liquidity available to EHI and its subsidiaries remains adequate and will be sufficient for our financing needs in the next 12 months and in the longer-term period thereafter.
• We do not currently foresee a need to: (i) suspend dividends at either EHI or its insurance subsidiaries; (ii) forego repurchases of EHI's common stock; (iii) seek additional required capital; or (iv) seek any material non-investment asset sales, though we may decide to pursue those or other options if our financial circumstances change or it we deem it strategically advantageous to do so.

Industry Context

The company operates in a highly competitive U.S. workers' compensation insurance industry, competing with various carriers and state agencies. It targets small to mid-sized businesses, believing this market offers higher profitability and stronger persistency. The company's strategy emphasizes disciplined underwriting and claims management, leveraging technology, and diversifying risk. The observed unfavorable loss trends, particularly in California due to cumulative trauma claims, highlight specific challenges within the workers' compensation sector that could impact industry players.

Comparison to Industry Standards

• NA

Legal Proceedings

• The company is involved in pending and threatened litigation in the normal course of business, but management does not expect the ultimate liability to have a material effect on results of operations, liquidity, or financial position.

Stakeholder Impact

• Shareholders: Experienced decreased net income and EPS, but benefited from increased cash dividends per share and continued share repurchases. Potential for future share price volatility due to underwriting performance.
• Employees: No direct impact mentioned, but compensation-related expenses decreased, possibly indicating cost-cutting measures.
• Customers (Policyholders): Continued provision of workers' compensation insurance, with a focus on disciplined underwriting and claims management.
• Creditors: Strong capital position and adequate liquidity suggest continued ability to meet obligations.
• Reinsurers: The company bears credit risk with respect to reinsurers, and a new reinsurance program was entered into.

Next Steps

• Evaluate the impact of the recently enacted One Big Beautiful Bill Act ("OBBBA") on consolidated financial condition and results of operations.
• Continue to execute ongoing business initiatives, including achieving business process excellence, delivering self-service options, diversifying risk exposure, and broadening appetite expansion.
• The Board will continue to determine future dividend declarations based on financial position, capital requirements, and regulatory factors.
• Future share repurchases will be at the discretion of the Board, depending on financial position, capital requirements, and market conditions.
• The company will adopt ASU 2024-03 (Income Statement Expense Disaggregation Disclosures) when it becomes effective for fiscal years beginning after December 15, 2026.

Key Dates

Recommendation

While the company demonstrates strong liquidity, a commitment to shareholder returns through dividends and share repurchases, and growth in policies in-force, the core underwriting business shows significant deterioration. The substantial increase in losses and loss adjustment expenses, particularly from California cumulative trauma claims, led to an underwriting loss and a notable decline in net income. This indicates underlying operational challenges that could persist. A seasoned investor would likely hold, awaiting signs of improvement in underwriting profitability and claims management, as the current operational headwinds outweigh the positives from investment income and capital returns.

Keywords

Workers' Compensation Insurance, Commercial Property and Casualty, SEC Filing, 10-Q, Insurance Operations, Underwriting Results, Loss Adjustment Expenses, Combined Ratio, Net Investment Income, Share Repurchase, Dividends, California Claims, Cumulative Trauma Claims, Financial Performance, Risk Management, Liquidity, Capital Resources, Insurance Industry