Declining Premiums And Employment Volatility Will Challenge Future Earnings Of Workers' Comp Insurers

Key Takeaways

• The company faces potential revenue growth challenges due to decelerating gross premiums and lower audit premiums impacting stability.
  
• Future earnings might be constrained due to limited pricing power and increased volatility in employment growth affecting key financial components.
  
• Employers Holdings' strong earnings growth, strategic market expansion, effective cost management, and shareholder-friendly practices indicate robust financial health and potential for future success.

Catalysts

Through its subsidiaries, operates in the commercial property and casualty insurance industry primarily in the United States.

• The company is experiencing a deceleration in gross premiums written, which decreased by 8% due to lower final audit premiums and endorsements, potentially impacting future revenue growth.
  
• There is an expectation of continued downward pressure on loss costs due to decreases in frequency and moderate changes in severity, which might limit pricing power and affect future earnings.
  
• The reduction in audit premiums led to adjustments in net written premium, indicating potential volatility in premium income, which can impact future revenue stability.
  
• The company is focusing on expanding its appetite by identifying new class codes for profitable growth; however, this ongoing search for new segments could face challenges if the market becomes saturated, affecting future revenue growth potential.
  
• Future net margins and earnings could be pressured by the expectation of increased volatility in employment growth, impacting premium audits and accruals, which are key components of their financial results.

Employers Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Employers Holdings's revenue will grow by 1.4% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 15.3% today to 8.0% in 3 years time.
• Analysts expect earnings to reach $73.8 million (and earnings per share of $3.18) by about December 2027, down from $135.9 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 20.7x on those 2027 earnings, up from 9.4x today. This future PE is greater than the current PE for the US Insurance industry at 12.9x.
• Analysts expect the number of shares outstanding to decline by 2.1% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.92%, as per the Simply Wall St company report.

Employers Holdings Future Earnings Per Share Growth

Risks

• Employers Holdings experienced a 124% increase in net income per share year-over-year, driven by higher earned premiums and strong net investment income, which suggests solid revenue and potential future earnings growth.
  
• The company achieved all-time highs in book value per share metrics partly due to operating results and a decrease in interest rates, reflecting healthy profitability and enhanced shareholder value.
  
• Ongoing initiatives to reduce underwriting and administrative expenses were effective, as evidenced by a decrease in the expense ratio. This effort suggests potential improvements in profit margins.
  
• Employers Holdings reported a year-to-date 7% increase in premiums from new growth initiatives, indicating successful expansion into new market segments and potential for future revenue gains.
  
• The company has been actively repurchasing shares and declared a regular quarterly dividend, actions that reflect confidence in its financial stability and may positively impact earnings per share.

Valuation

• The analysts have a consensus price target of $56.0 for Employers Holdings based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $927.4 million, earnings will come to $73.8 million, and it would be trading on a PE ratio of 20.7x, assuming you use a discount rate of 5.9%.
• Given the current share price of $51.48, the analyst's price target of $56.0 is 8.1% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.