Automation And Labor Shifts Will Undermine Workers Compensation

Key Takeaways

• Automation, AI, and gig economy trends are shrinking the demand for traditional workers' compensation, limiting premium growth and policy volumes.
  
• Geographic concentration and rising regulatory risks, especially in California, increase earnings volatility and may further impact margins amid adverse claims trends.
  
• Strong execution in core markets, disciplined cost control, and robust reserves position the company for long-term earnings stability, operational improvements, and flexible capital deployment.

Catalysts

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

• The accelerated adoption of automation and AI tools across client industries is expected to reduce overall labor needs, leading to lower payrolls and diminished demand for traditional workers' compensation policies; this will likely pressure top-line revenue growth for Employers Holdings moving forward.
  
• The ongoing expansion of gig work and non-traditional employment models continues to shrink the pool of full-time employees covered under standard workers' compensation, reducing Employers Holdings' addressable market and thereby lowering long-term premium growth and policy volume.
  
• Employers Holdings remains highly concentrated in specific states, particularly California (45% of the book), exposing the company to outsized regulatory and legal risks-such as the recent surge in cumulative trauma (CT) claims-creating heightened earnings and reserve volatility.
  
• Despite operational improvements, the company faces mounting medical cost inflation and claims frequency in key markets, and rate increases approved by regulators may be insufficient if adverse claims trends accelerate; this dynamic threatens to compress net margins and weaken future earnings.
  
• Advances in workplace safety, along with declining injury rates nationally (excluding the CT outlier in California), continue to reduce overall claim and premium volumes industry-wide, which is likely to limit Employers Holdings' future revenue and earnings growth after current one-off claim spikes normalize.

Employers Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Employers Holdings's revenue will decrease by 1.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 11.4% today to 4.7% in 3 years time.
• Analysts expect earnings to reach $40.3 million (and earnings per share of $2.12) by about September 2028, down from $101.1 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 26.0x on those 2028 earnings, up from 9.8x today. This future PE is greater than the current PE for the US Insurance industry at 14.3x.
• Analysts expect the number of shares outstanding to decline by 4.87% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.78%, as per the Simply Wall St company report.

Employers Holdings Future Earnings Per Share Growth

Risks

• The company continues to achieve growth in its core small business segment, with a record number of policies in force and a year-over-year growth rate of 4.6%, signaling ongoing top-line revenue strength that could support long-term share price appreciation.
  
• Employers Holdings has demonstrated disciplined expense management, as seen in reductions in both commission and underwriting expense ratios, and is actively investing in automation and artificial intelligence to drive operational efficiency, which could improve net margins over time.
  
• Despite current challenges in California, the company has a history of outperforming the industry in that state, and management expressed confidence in their ability to navigate the evolving risk environment through targeted underwriting actions and claim management, supporting earnings stability and resilience.
  
• Significant favorable loss reserve development from older accident years has provided a cushion to offset recent claim trends, indicating robust reserve strength and the potential for lower earnings volatility and sustained capital adequacy.
  
• The company maintains a strong capital position, as affirmed by A.M. Best, allowing for ongoing share repurchases and dividends, while also providing flexibility for investments in technology and potential accretive growth opportunities, thereby supporting future shareholder returns and book value growth.

Valuation

• The analysts have a consensus price target of $43.0 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 2028, revenues will be $855.9 million, earnings will come to $40.3 million, and it would be trading on a PE ratio of 26.0x, assuming you use a discount rate of 6.8%.
• Given the current share price of $42.04, the analyst price target of $43.0 is 2.2% 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.