Share Buybacks Will Support EPS Amid Shrinking Profit Margins

Key Takeaways

• Expansion into new risk segments and channels could drive profitable revenue growth and positively impact earnings.
  
• Focus on cost efficiency and strategic capital management is expected to enhance net margins and boost EPS.
  
• Competitive rate environment and wage-related pressures could challenge profit margins, reserve requirements, and profitability in the workers' compensation market.

Catalysts

Through its subsidiaries, provides workers' compensation insurance and services in the United States.

• Employers Holdings is focusing on expanding its appetite to new risk segments and alternative distribution channels, which is expected to drive further profitable revenue growth in the coming years. This expansion could positively impact revenue.
  
• The ongoing Cerity integration plan has led to reductions in underwriting and general administrative expenses, resulting in a lower expense ratio. This continued focus on cost efficiency is likely to improve net margins.
  
• The company has been strategically repurchasing its shares, returning $72 million to stockholders through share buybacks and dividends in 2024. This capital management strategy could enhance future earnings per share (EPS).
  
• Employers Holdings is experiencing strong investment performance with increasing yields from its portfolio, particularly after reallocating assets to higher-yield mortgage-backed securities. This is expected to bolster net investment income and ultimately, earnings.
  
• The company continues to benefit from a favorable actuarial reserve position and expects prudent claims management to support underwriting profitability. This strategy should positively affect both earnings and net margins moving forward.

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 13.5% today to 8.8% in 3 years time.
• Analysts expect earnings to reach $80.7 million (and earnings per share of $3.34) by about May 2028, down from $118.6 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 17.3x on those 2028 earnings, up from 10.1x today. This future PE is greater than the current PE for the US Insurance industry at 14.1x.
• Analysts expect the number of shares outstanding to decline by 3.89% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.21%, as per the Simply Wall St company report.

Employers Holdings Future Earnings Per Share Growth

Risks

• The ongoing competitive rate environment in the workers' compensation market could lead to pricing pressures, potentially impacting revenue and profit margins.
  
• Decreases in audit pickups and acceleration in employment and wages put pressure on net written premium, which may affect revenue growth prospects.
  
• Higher actuarial trend selections and expected increases in the accident year loss and LAE ratio could impact net margins by increasing reserve requirements and associated costs.
  
• Potential risks exist due to expansion into higher hazard groups and alternative distribution channels, which may affect underwriting effectiveness and loss ratio, thereby impacting profitability.
  
• Fluctuations in wage inflation and changes in trends for frequency and severity in claims could impact revenue through reduced premium growth and increased claims costs, affecting earnings.

Valuation

• The analysts have a consensus price target of $55.5 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 2028, revenues will be $918.1 million, earnings will come to $80.7 million, and it would be trading on a PE ratio of 17.3x, assuming you use a discount rate of 6.2%.
• Given the current share price of $49.23, the analyst price target of $55.5 is 11.3% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• 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.