Reno, Nev.-based Employers Holdings Inc. has reported financial results for the full-year and fourth quarter of 2006.
For 2006, consolidated 2006 net income increased 24.7 percent to $171.6 million from $137.6 million in 2005. Consolidated net income before the impact of the loss portfolio transfer agreement, a non-GAAP measure, increased 62.2 percent to $152.2 million from $93.8 million for the same periods.
According to the company, the three key factors that drove the increase in net income were:
1) The company had pre-tax favorable prior year loss reserve development of $107.1 million in 2006 compared with $78.1 million in 2005 (or $105.0 million in 2005 including a $26.9 million favorable development on direct reserves subject to the LPT).
2) Overall, losses and loss adjustment expenses decreased 38.7 percent from $211.7 million to $129.8 million. The majority of the decrease was due to a 10.9 percentage point downward reduction in the estimate for current accident year losses, to 65.2 percent of net earned premiums for the year ended 2006 from 76.1 percent of net earned premiums for the year ended 2005. The adjustment was made after the observation of several successive quarters of favorable loss developments in California due to the impact of regulatory reforms designed to control loss costs in that state.
3) Equity sales related to reallocation of the company’s investment portfolio in the fourth quarter resulted in a pre-tax realized gain of $49.2 million.
Total net premiums in earned declined 10.3 percent to $393 million in 2006 from $438.3 million in 2005 primarily due to rate decreases in California. The rate decreases were somewhat offset by an in-force policy count increase of 7.4 percent.
Net investment income increased 25.3 percent to $68.2 million in 2006 from $54.4 million in 2005. The increase was largely due to the reallocation of the company’s investment portfolio in the fourth quarter from equity securities to fixed income securities. Additionally, there was an increase in invested assets to $1.7 billion from $1.6 billion and a higher tax-equivalent investment yield of 5.29 percent at year end 2006 compared with 4.83 percent at year-end 2005. The increase in yield was largely due to changes in general market conditions.
Underwriting and other operating expense increased 25.6 percent to $87.8 million in 2006 from $69.9 million in 2005. This increase was largely driven by costs of $10 million in 2006 related to the company’s conversion from a mutual insurance company to a public stock company. Staffing increases related to becoming a public company accounted for $2.4 million of the increase in underwriting and other operating expense in 2006. Commission expense was slightly higher, at $48.4 million in 2006 compared to $46.9 million in 2005, resulting from increased competition.
For the fourth quarter of fiscal year 2006, consolidated net income was $55.1 million compared with fourth quarter net income of $74.5 million in 2005. Fourth quarter consolidated net income declined relative to the prior year due to a non-recurring, non-taxable LPT adjustment of $26.9 million that raised net income in the fourth quarter of 2005. Prior accident year reserve adjustments of $51.5 million in the fourth quarter of 2005 exceeded the $25.4 million of prior accident year reserve adjustments in the fourth quarter of 2006.
Consolidated net income before the impact of the LPT for the fourth quarter of 2006 increased 8.8 percent to $50.3 million from $46.3 million in the fourth quarter of 2005, primarily due to equity sales related to the reallocation of the company’s investment portfolio and favorable prior year reserve developments.
Net premiums earned declined 13.4 percent to $92.8 million in the fourth quarter of 2006 from $107.2 million in the fourth quarter of 2005. This decline was largely related to rate decreases in California.
Net investment income increased 24 percent to $18.5 million from $14.9 million in the fourth quarter of 2005.
Losses and LAE increased to $34 million in 2006 from $3.4 million in the fourth quarter of 2005 as prior accident year reserve releases in the fourth quarter of 2005 exceeded those in the fourth quarter of 2006. Losses and LAE in the fourth quarter of 2005 were net of $26.9 million in favorable adjustments to the LPT direct reserves. Losses and LAE in the fourth quarter of 2006 did not include an adjustment to the LPT direct reserves.
Underwriting and other operating expense increased 29.1 percent to $28.7 million in the fourth quarter of 2006 from $22.2 million in the fourth quarter of 2005. Expenses increased largely as a result of costs and staffing requirements related to the conversion to a publicly traded stock company.
The company’s combined ratio improved 7.3 percentage points to 67.7 percent in 2006 from 75 percent in 2005 related to higher reserve releases in 2006. The combined ratio before the impact of the LPT improved to 72.6 percent in 2006 from 84.9 percent in 2005.
For more details, listen to the company’s webcast at www.employers.com. The company is scheduled to host a conference call Friday, March 30, 2007 at 10:30 a.m. Pacific Daylight Time. The conference call replay number is 888- 286-8010 with a passcode of 87097323. International callers may dial 617-801-6888.
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