Executive Summary / Key Takeaways

• Employers Holdings, Inc. (NYSE: EIG) is a specialized workers' compensation insurer focused on small to mid-sized businesses in low-to-medium hazard industries, leveraging over a century of experience and a disciplined underwriting approach to achieve consistent profitability.
• Despite a slight dip in net premiums earned in Q1 2025, the company reported a record number of policies in force, driven by strong renewal retention and growth in new business from strategic initiatives like appetite expansion and digital partnerships.
• Financial results in Q1 2025 were impacted by higher loss estimates reflecting observed unfavorable trends and the competitive rate environment, partially offset by significant improvements in net investment income and reductions in underwriting expenses.
• EIG maintains a strong capital position, highlighted by a recent AM Best rating upgrade to A (Excellent), a 7% increase in the quarterly dividend to $0.32 per share, and a new $125 million share repurchase authorization, signaling confidence in future prospects and commitment to shareholder returns.
• While facing competitive pressures and specific loss trends like California cumulative trauma claims, EIG's strategic focus on expense management, targeted underwriting, and profitable appetite expansion, supported by ongoing technology investments, positions it to defend its niche and drive future value.

Setting the Scene: A Niche Player in Workers' Compensation

Employers Holdings, Inc. (EIG) operates as a focused player within the vast U.S. commercial property and casualty insurance market, specializing almost exclusively in workers' compensation coverage. With roots stretching back over a century, EIG has carved out a distinct niche, targeting small to mid-sized businesses operating in low-to-medium hazard industries. This strategic focus is not merely a matter of market segmentation; it is fundamental to the company's operational philosophy, emphasizing disciplined underwriting and claims management tailored to the specific risk profiles and needs of these businesses.

A significant historical event shaping EIG's financial landscape is the Loss Portfolio Transfer (LPT) Agreement assumed by its subsidiary, EICN, in 2000. This retroactive reinsurance agreement, covering claims prior to July 1, 1995, has resulted in a Deferred Reinsurance Gain on the balance sheet, which is amortized over time, impacting reported losses and loss adjustment expenses. While a legacy item, understanding the LPT is crucial for interpreting EIG's reported combined ratio, which the company often presents both including and excluding the LPT impact to provide clarity on ongoing underwriting performance.

EIG's strategic approach is built on several pillars designed to foster profitable growth without sacrificing long-term stability. These include cultivating strong relationships with a diverse network of traditional and specialty insurance agencies, developing alternative distribution channels (including a direct-to-customer digital platform, Cerity), leveraging medical provider networks to manage claim outcomes, and continuously refining its underwriting and pricing to match risk appropriately. The company explicitly states its preference for profitability over short-term revenue growth, a discipline it believes is key to navigating the cyclical nature of the insurance market.

Competitive Landscape: Navigating Giants and Niche Rivals

The U.S. workers' compensation market is highly competitive, characterized by a mix of large, diversified national carriers, smaller specialty insurers, state funds, and alternative risk transfer mechanisms like self-insurance. EIG competes directly with major players such as The Hartford (HIG), Travelers (TRV), Chubb (CB), and W. R. Berkley (WRB), all of whom offer workers' compensation as part of broader commercial insurance portfolios. While these larger competitors possess significant scale, vast distribution networks, and substantial financial resources, EIG differentiates itself through its specialized focus and tailored approach to the small business, low-to-medium hazard segment.

EIG's estimated 1-2% market share in the overall U.S. P&C market (primarily workers' comp) is modest compared to the larger shares held by its diversified rivals. However, within its specific niche, EIG aims for deeper penetration and higher customer loyalty. EIG's unique distribution channels, including strong ties with agents and trade groups, contribute to higher customer accessibility and loyalty, leading to robust retention rates, often cited in the 85-90% range, which can be 5-10% higher than broader market competitors. This focus allows EIG to potentially offer more tailored policies and service, which can translate into competitive pricing for its target market.

Operationally and technologically, EIG faces a gap compared to some larger rivals. While EIG has invested in a "cost-effective and scalable information technology infrastructure" to automate processes, enhance data analytics, and provide self-service options for agents and policyholders, larger competitors like TRV and CB have invested heavily in advanced AI and automation for claims processing and policy issuance, leading to potentially faster processing speeds and lower costs per transaction. EIG's technology strategy appears more focused on operational efficiency and enabling its distribution channels (e.g., API utilization for digital partnerships) rather than cutting-edge AI-driven claims automation seen at some larger firms. This can result in EIG having a higher operating cost per policy compared to its most efficient large-scale rivals, potentially pressuring margins if not offset by superior underwriting results or investment income.

Indirect competition comes from insurtechs like Lemonade, which offer highly automated, digital-first experiences, potentially appealing to a segment of EIG's target market with faster processing and lower costs, albeit often with less complex coverage options. EIG's Cerity platform represents its direct response to this digital challenge, aiming to provide a competitive online offering.

Barriers to entry in the insurance industry, particularly regulatory approvals and significant capital requirements, favor established players like EIG and its larger competitors by limiting new entrants. However, the ongoing competitive rate environment, driven partly by favorable industry loss cost trends filed by bureaus like NCCI, puts pressure on pricing across the board. EIG's ability to maintain underwriting profitability in this environment relies heavily on its disciplined risk selection and expense management, areas where its niche focus and recent operational improvements provide a competitive counterpoint to the scale advantages of larger rivals.

Financial Performance and Operational Discipline

EIG's financial performance reflects its strategic emphasis on underwriting profitability and efficient operations, complemented by a robust investment portfolio. For the three months ended March 31, 2025, EIG reported net income of $12.8 million, a decrease from $28.3 million in the prior-year period. This change was influenced by several factors.

Total revenues decreased to $202.6 million in Q1 2025 from $223.1 million in Q1 2024. Net premiums earned saw a slight decrease, falling to $183.0 million from $184.9 million. This was primarily attributed to lower new business and final audit premiums, which offset growth in renewal premiums benefiting from strong retention rates. Management noted that the moderation of employment and wage growth contributed to the decrease in final audit premiums and accruals. Despite the dip in earned premiums, EIG achieved a record number of policies in force at the end of Q1 2025, totaling 133,121, representing a 4% year-over-year growth rate.

Losses and loss adjustment expenses (LAE), the largest expense item, increased to $120.7 million in Q1 2025 from $116.5 million in Q1 2024. This resulted in a calendar year loss and LAE ratio of 66.0%, up from 63.0%. The increase was primarily driven by a higher current accident year loss and LAE estimate, which was raised to 66% for 2025 voluntary business, reflecting observed unfavorable loss trends and the competitive rate environment. Prior accident year development was unfavorable by $1.3 million in Q1 2025, compared to favorable development of $0.1 million in Q1 2024, further contributing to the higher loss ratio.

Offsetting some of the pressure from losses were reductions in other underwriting expenses. Commission expense decreased to $23.0 million (12.6% ratio) from $25.1 million (13.6% ratio), partly due to a $1.4 million release of commissions payable on non-performing policies. Underwriting expenses decreased to $42.9 million (23.4% ratio) from $46.2 million (25.0% ratio), primarily benefiting from a $2.1 million decrease in the CECL provision on premiums receivable and a $1.6 million decrease in compensation-related expenses. These expense reductions contributed to a lower underwriting expense ratio, a key focus area for management.

The combined ratio, a key measure of underwriting profitability, increased slightly to 102.0% in Q1 2025 from 101.6% in Q1 2024. Excluding the impact of the LPT Agreement, the combined ratio was 102.8% in Q1 2025 compared to 102.7% in Q1 2024. While above 100% in the first quarter, EIG has a strong track record, achieving an underwriting profit (combined ratio below 100%) for ten straight years through 2024, with a full-year 2024 combined ratio excluding LPT of 98.6%.

Net investment income provided a significant boost, increasing by nearly 20% to $32.1 million in Q1 2025 from $26.8 million in Q1 2024. This surge was primarily driven by strong returns from investments in private equity limited partnerships and higher book yields on the fixed maturity portfolio, which had a weighted average book yield of 4.5% at quarter end and an average credit quality of A. Net realized and unrealized investment results shifted from a $11.4 million gain in Q1 2024 to a $12.8 million loss in Q1 2025, primarily reflecting unrealized losses on equity and other investments consistent with broader market fluctuations.

Operational efficiency continues to be a focus. The Cerity integration plan, executed in Q4 2023, has yielded tangible cost savings, contributing to the notable reduction in the underwriting and general administrative expense ratio observed in recent quarters (22% in Q2 2024, 23.2% in Q3 2024, 23.2% in Q4 2024, and 23.4% in Q1 2025). Management remains "laser-focused" on driving further expense reductions.

Liquidity and Capital Management

EIG maintains a strong and adequate capital position to support its operations and strategic initiatives. As a holding company, EHI's liquidity is dependent on dividends from its insurance subsidiaries, which are subject to state regulations. In Q1 2025, EICN and ECIC paid dividends to EHI, and as a result, require regulatory approval for further dividends in 2025. The holding company held $68.0 million in cash and investments as of March 31, 2025.

The company has access to a $25.0 million unsecured revolving credit facility, expandable to $35.0 million, which remained undrawn as of March 31, 2025. This facility provides additional financial flexibility and is subject to covenants requiring a minimum consolidated net worth of $800.0 million and a maximum debt to total capitalization ratio of 35.0, with which EIG was in compliance.

Operating subsidiaries' liquidity is primarily derived from premium collections, investment income, and investment sales/maturities. They held $2,469.6 million in cash and investments at March 31, 2025, with significant immediate liquidity available from cash, publicly traded equities, and highly liquid fixed maturity securities. Access to collateralized advances and standby letters of credit through FHLB membership further enhances liquidity management. As of March 31, 2025, $170.0 million in FHLB letters of credit were used in lieu of securities on deposit in California, freeing up capital for potentially higher-yielding investments.

Cash flow from operations remains a primary source of funding. Net cash provided by operating activities was $14.6 million in Q1 2025, an improvement from $0.6 million in Q1 2024. Net cash provided by investing activities was $46.1 million in Q1 2025, a significant shift from $97.7 million used in Q1 2024, reflecting changes in investment purchases and sales activity. Net cash used in financing activities was $28.6 million in Q1 2025, primarily driven by dividend payments and share repurchases.

EIG is committed to returning capital to shareholders. In Q1 2025, the company returned $27.5 million through regular quarterly dividends ($7.5 million paid) and share repurchases ($20.2 million, or 406,101 shares). For the full year 2024, $72 million was returned. Demonstrating confidence in its financial strength, the Board declared a 7% increase in the quarterly dividend to $0.32 per share on April 30, 2025.

Additionally, a new share repurchase program authorizing up to $125.0 million in repurchases through December 31, 2026, was approved, replacing the recently exhausted prior program.

These actions, coupled with a recent AM Best upgrade of the insurance subsidiaries' financial strength rating to A (Excellent) in January 2025, underscore the company's solid financial footing.

Book value per share, including the deferred gain, increased 14% to $48.25 over the last twelve months ending Q1 2025, while adjusted book value per share increased 9% to $50.75, reflecting strong performance and accretive share repurchases.

Outlook and Key Risks

Management anticipates increasing the 2025 accident year loss and LAE ratio for voluntary business to 66%, up from 64% maintained in 2024. This adjustment is a proactive measure reflecting the ongoing competitive rate environment, observed pressure on recent accident years (2023 and 2024), and specific loss trends, notably a rise in cumulative trauma claims in California. While this increase is directionally consistent with broader industry trends, EIG's selected pick remains below the estimated industry average.

Crucially, management expects that continued progress in reducing the underwriting and general and administrative expense ratio throughout 2025 will "meaningfully mitigate" the impact of the higher loss ratio. This focus on expense control, building on savings from the Cerity integration, is a key lever for maintaining overall profitability.

On the top line, EIG aims to return to moderate new business growth levels while prioritizing profitability. The appetite expansion effort, which has successfully contributed to premium growth with favorable loss ratios, is being accelerated and is expected to be a significant driver of future growth. However, the moderation in employment and wage growth is anticipated to continue impacting audit premium pickups and accruals, potentially creating volatility in net written premiums.

Investment income is expected to remain strong, benefiting from higher portfolio yields and strategic investment management.

Key risks to the outlook include the inherent uncertainty in estimating loss reserves, which could require future adjustments if actual claim development deviates from current assumptions. The competitive pricing environment could intensify, making it challenging to achieve targeted rates while maintaining market share. Specific loss trends, such as the cumulative trauma claims in California, pose a risk, particularly given the unique legal environment in that state. While medical cost containment measures have been effective historically, potential increases in medical inflation, including specific fee schedule changes in states like Florida effective January 2025 (projected by NCCI to increase costs by 5.6%), could pressure loss costs, and EIG's ability to fully offset this in administered pricing states like Florida is limited to underwriting adjustments. Furthermore, broader economic conditions, including potential recessionary headwinds, could impact payrolls (affecting premiums) and claim frequency/severity.

Conclusion

Employers Holdings, Inc. is a well-established workers' compensation insurer demonstrating a clear commitment to disciplined underwriting, operational efficiency, and prudent capital management within its targeted small to mid-sized business niche. While the first quarter of 2025 saw a dip in net income driven by a necessary increase in the loss ratio to reflect current market and trend dynamics, the underlying operational narrative remains compelling. The company is actively addressing loss trends through targeted underwriting and pricing refinements, while simultaneously driving significant expense reductions and strategically expanding its appetite into profitable new segments.

EIG's strong balance sheet, underscored by a recent AM Best upgrade, provides a solid foundation. The increase in the quarterly dividend and the substantial new share repurchase authorization signal management's confidence in future earnings power and commitment to delivering shareholder value, particularly through accretive buybacks. Although challenges persist from a competitive market and specific loss trends, EIG's focused strategy, ongoing investment in efficiency-enhancing technology, and disciplined approach position it to navigate these headwinds. For investors, the story of EIG is one of a niche player leveraging its expertise and operational discipline to generate consistent underwriting profits over the long term, complemented by a strong investment portfolio and a shareholder-friendly capital return policy. Continued execution on expense reduction and profitable appetite expansion, alongside effective claims management in the face of evolving loss trends, will be critical factors to watch.