Employers Holdings Leveraging The Reopening And Expansion Of The Economy

Employment and job growth are looking pretty good for the time being, and while the workers’ compensation insurance market is quite competitive, operating conditions look basically favorable for Employers Holdings (NYSE:EIG) right now. Premiums have been growing nicely, and while I do have some concerns that loss frequency will increase, I think management is generally conservative with underwriting.

The shares haven’t done all that much since my last write-up, and comparisons to other large underwriters like Hartford (HIG) and W. R. Berkley (WRB) are of limited value given very different business mixes, and likewise with Amerisafe (AMSF), which is also a pure workers’ comp underwriter, but focuses on higher-risk groups. I do still see fair value in the mid-$40’s on the basis of both near-term ROE (P/BV) and long-term core earnings growth, but that makes this a relatively middling prospect today.

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Employers Holdings Leveraging The Reopening And Expansion Of The Economy

Employers Holdings Leveraged To Improving Employment And Rates

 

As an underwriter of workers comp insurance for small employers, the pandemic has been particularly tough on Employers Holdings (NYSE:EIG). Lower employment levels sent demand plunging in 2020 and the situation hasn’t been helped by increased competition driving a multiyear decline in rates. Even with improved claims frequency, Employers is earning a lot less now than they used to before the pandemic.

I do believe Employers has seen the worst, but I don’t necessarily expect a V-shaped recovery given competition in the market and challenges to hiring in Employers’ core addressed markets. Longer term, though, I do think the company can get back to double-digit ROE and mid-single-digit long-term core growth, supporting a fair value in the mid-$40’s that is relatively attractive compared to today’s price.

 

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Employers Holdings Leveraged To Improving Employment And Rates

Employers Holdings A Well-Run Play On Small Business Growth Through Workers Comp

Focused and disciplined, Employers Holdings (EIG) isn’t likely to ever be a fiery growth stock, but then I think you could argue that aggressive growth in insurance doesn’t often work out so well. Instead, Employers has delivered consistent shareholder value growth since going public by staying focused on its core market opportunity of underwriting workers’ comp insurance for small businesses in industries with low-to-medium hazard risk.

I’m less than comfortable making a big leap into a pure workers’ comp play today, though. The industry has benefited from an extended period of lower losses due in part to the benefits of the ACA and rates have come under pressure in recent years as a result of lower losses and strong returns. Worsening loss trends are a threat, as is a slowdown in employment growth, and more insurers are trying to target the smaller business markets that Employers has targeted. While I do think the shares are modestly undervalued today, another dip toward $40 would certainly get my attention.

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Employers Holdings A Well-Run Play On Small Business Growth Through Workers Comp