Exhibit 99.1
Unaudited Pro Forma Combined Financial Statements
The unaudited pro forma combined financial statements set forth below are presented to reflect the pro forma effects of the following transactions as if they occurred on the dates indicated as discussed below:
(i) | The proposed merger (Proposed Merger) of AmCOMP Incorporated (AmCOMP) with a subsidiary of Employers Holdings, Inc. (Employers). The merger consideration for each outstanding share of AmCOMP’s common stock will be $12.50 in cash. In addition, all outstanding AmCOMP stock options will vest by virtue of the Proposed Merger and will be cancelled in consideration for a cash payment equal to the net amount of the excess, if any, of the merger consideration of $12.50 per share over the exercise price per share of the option. At December 31, 2007, AmCOMP had 15,290,181 common shares outstanding and an additional 851,847 stock options outstanding with an exercise price less than the $12.50 per share merger consideration. The total consideration for the shares and options is estimated to be $193.9 million. The actual outstanding shares to be acquired and options to be settled will be determined on the closing date, therefore the actual purchase consideration may be greater than or less than $193.9 million, depending on the actual number of shares outstanding and the number of options outstanding and their respective exercise prices. |
(ii) | The proposed private placement of $150.0 million of senior notes due 2018 (the Notes). Employers intends to use the proceeds from the sale of the Notes, together with available cash on hand, to fund the $193.9 million purchase price of AmCOMP and to pay an estimated $6.6 million of financing and merger-related costs. |
The unaudited pro forma combined statement of income for the year ended December 31, 2007 combines the historical audited consolidated statement of income of Employers with the historical audited consolidated statement of income of AmCOMP, each for the year ended December 31, 2007, and gives effect to the unaudited pro forma adjustments necessary to account for the Proposed Merger and the proposed private placement of Notes described above as if the Proposed Merger and proposed private placement of the Notes had occurred on January 1, 2007.
The unaudited pro forma combined balance sheet as of December 31, 2007 combines the historical audited consolidated balance sheet of Employers with the historical audited consolidated balance sheet of AmCOMP, each as of December 31, 2007, and gives effect to the unaudited pro forma adjustments necessary to account for the Proposed Merger and proposed private placement of the Notes described above as if the Proposed Merger and proposed private placement of the Notes had occurred on December 31, 2007.
The Proposed Merger will be accounted for under the purchase method of accounting in accordance with U.S. generally accepted accounting principles (GAAP). Accordingly, AmCOMP’s operating results following the closing of the transaction will be included in Employers' operating results.
The unaudited pro forma adjustments related to the Proposed Merger are based on preliminary purchase price allocations. Actual adjustments will be based on the final analyses of the fair values of assets acquired and liabilities assumed, including acquired in force policies, identifiable tangible and intangible assets, deferred tax assets and liabilities, and estimates of the useful lives of tangible and amortizable intangible assets, which will be completed after Employers obtains third-party appraisals, performs its own internal assessments and reviews all available data following completion of the Proposed Merger. Differences between preliminary and
final purchase price allocations could have a significant impact on the accompanying unaudited pro forma combined financial statements and Employers' future results of operations and financial position.
The unaudited pro forma combined financial statements are based on the historical financial statements of Employers and AmCOMP as of and for the year ended December 31, 2007. This information should be read in conjunction with, and is qualified in its entirety by, the consolidated financial statements and accompanying notes of (i) Employers included in Employers' Annual Report on Form 10-K for the year ended December 31, 2007 and (ii) AmCOMP included in AmCOMP's Annual Report on Form 10-K for the year ended December 31, 2007. The unaudited pro forma consolidated financial statements are presented for illustrative purposes only and are not necessarily indicative of the operating results that would have been achieved had the Proposed Merger and the proposed private placement of the Notes been completed as of January 1, 2007 or the results of operations that may be attained by Employers in the future.
EMPLOYERS HOLDINGS, INC. | ||||||||||||||||
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME | ||||||||||||||||
Year Ended December 31, 2007 | ||||||||||||||||
(in thousands, except per share data) | ||||||||||||||||
Historical Employers | Historical AmCOMP | Pro Forma Adjustments | Pro Forma Employers | |||||||||||||
Revenues | (Note 1) | (Note 2) | (Notes 3 and 4) | |||||||||||||
Net premiums earned | $ | 346,884 | $ | 229,349 | $ | 5,115 | (g) | $ | 581,348 | |||||||
Net investment income | 78,623 | 20,102 | — | 98,725 | ||||||||||||
Realized gains (losses) on investments, net | 180 | (473 | ) | — | (293 | |||||||||||
Other Income | 4,236 | 127 | — | 4,363 | ||||||||||||
Total Revenues | 429,923 | 249,105 | 5,115 | 684,143 | ||||||||||||
Expenses | ||||||||||||||||
Loss and loss adjustment expense | 143,302 | 126,562 | — | 269,864 | ||||||||||||
Commission expense | 44,336 | 23,378 | — | 67,714 | ||||||||||||
Underwriting and other operating expense | 91,399 | 65,150 | (1,814 | ) | (e) | |||||||||||
1,980 | (f) | |||||||||||||||
(770 | ) | (h) | 155,945 | |||||||||||||
Interest expense | — | 3,717 | 12,200 | (k) | ||||||||||||
(38 | ) | (d) | 15,879 | |||||||||||||
Total expenses | 279,037 | 218,807 | 11,558 | 509,402 | ||||||||||||
Net income before income taxes | 150,886 | 30,298 | (6,443 | ) | 174,741 | |||||||||||
Income taxes | 30,603 | 11,462 | (2,255 | ) | 39,810 | |||||||||||
Net income | $ | 120,283 | $ | 18,836 | $ | (4,188 | ) | $ | 134,931 | |||||||
Earnings per share of common stock:* | ||||||||||||||||
Basic | $ | 2.32 | $ | 1.20 | $ | 2.61 | ||||||||||
Diluted | $ | 2.32 | $ | 1.20 | $ | 2.61 | ||||||||||
Weighted average shares outstanding:* | ||||||||||||||||
Basic | 51,748 | 15,647 | (15,647 | ) | 51,748 | |||||||||||
Diluted | 51,757 | 15,656 | (15,656 | ) | 51,757 | |||||||||||
*Represents Employers' pro forma earnings per share for the full year, rather than the period after the initial public offering (IPO) occurring on February 5, 2007 and through December 31, 2007. | ||||||||||||||||
See accompanying notes to Unaudited Pro Forma Combined Financial Statements | ||||||||||||||||
EMPLOYERS HOLDINGS, INC. | ||||||||||||||||
UNAUDITED PRO FORMA COMBINED BALANCE SHEET | ||||||||||||||||
As of December 31, 2007 | ||||||||||||||||
(in thousands) | ||||||||||||||||
Historical Employers | Historical AmCOMP | Pro Forma Adjustments | Pro Forma Employers | |||||||||||||
Assets | ||||||||||||||||
Available for sale: | (Note 1) | (Note 2) | (Notes 3 and 4) | |||||||||||||
Fixed maturity investments, at fair value | $ | 1,618,903 | $ | 329,847 | $ | — | $ | 1,948,750 | ||||||||
Equity securities, at fair value | 107,377 | - | — | 107,377 | ||||||||||||
Held to maturity: | ||||||||||||||||
Fixed maturity investments, at amortized cost | — | 93,661 | 753 | (b) | 94,414 | |||||||||||
Total investments | 1,726,280 | 423,508 | 753 | 2,150,541 | ||||||||||||
Cash and cash equivalents | 149,703 | 30,691 | (195,727 | ) | ||||||||||||
(2,751 | ) | (a) | ||||||||||||||
148,000 | �� | (j) | 129,916 | |||||||||||||
Accrued investment income | 19,345 | 4,721 | — | 24,066 | ||||||||||||
Premium receivables, net | 36,402 | 90,295 | — | 126,697 | ||||||||||||
Reinsurance recoverable for: | ||||||||||||||||
Paid losses | 10,218 | 1,454 | — | 11,672 | ||||||||||||
Unpaid losses, net | 1,051,333 | 66,353 | — | 1,117,686 | ||||||||||||
Funds held or deposited with reinsureds | 95,884 | — | — | 95,884 | ||||||||||||
Deferred policy acquisition costs | 14,901 | 19,116 | — | 34,017 | ||||||||||||
Deferred income taxes, net | 59,730 | 19,889 | (181 | ) | (a) | |||||||||||
(3,653 | ) | (i) | 75,785 | |||||||||||||
Property and equipment, net | 14,133 | 3,352 | — | 17,485 | ||||||||||||
Goodwill, net | — | 1,260 | (1,260 | ) | (c) | |||||||||||
34,352 | 34,352 | |||||||||||||||
Other assets | 13,299 | 8,524 | (995 | ) | (d) | |||||||||||
2,000 | (j) | |||||||||||||||
15,250 | (f) | 38,078 | ||||||||||||||
Total assets | $ | 3,191,228 | $ | 669,163 | $ | (4,212 | ) | $ | 3,856,179 | |||||||
Liabilities and equity | ||||||||||||||||
Claims and policy liabilities: | ||||||||||||||||
Unpaid losses and loss adjustment expenses | $ | 2,269,710 | $ | 324,224 | $ | — | $ | 2,593,934 | ||||||||
Unearned premiums | 63,924 | 102,672 | — | 166,596 | ||||||||||||
Policyholders’ dividends accrued | 386 | 10,276 | — | 10,662 | ||||||||||||
Total claims and policy liabilities | 2,334,020 | 437,172 | — | 2,771,192 | ||||||||||||
Commission and premium taxes payable | 7,493 | 8,994 | — | 16,487 | ||||||||||||
Federal income taxes payable | 13,884 | 1,441 | (608 | ) | (a) | 14,717 | ||||||||||
Accounts payable and accrued expenses | 20,682 | 10,611 | 4,573 | (e) | 35,866 | |||||||||||
Deferred reinsurance gain – LPT agreement | 425,002 | — | — | 425,002 | ||||||||||||
Notes payable | — | 36,464 | 150,000 | (j) | 186,464 | |||||||||||
Other liabilities | 10,694 | 16,304 | — | 26,998 | ||||||||||||
Total liabilities | 2,811,775 | 510,986 | 153,965 | 3,476,726 | ||||||||||||
Stockholders’ equity | ||||||||||||||||
Common stock | 535 | 159 | (159 | ) | 535 | |||||||||||
Additional paid in capital | 302,862 | 75,392 | (75,392 | ) | 302,862 | |||||||||||
Retained earnings | 104,536 | 86,826 | (86,826 | ) | 104,536 | |||||||||||
Accumulated other comprehensive income | 46,520 | 1,392 | (1,392 | ) | 46,520 | |||||||||||
Treasury stock, at cost | (75,000 | ) | (5,592 | ) | 5,592 | (75,000 | ||||||||||
Total stockholders’ equity | 379,453 | 158,177 | (158,177 | ) | 379,453 | |||||||||||
Total liabilities and stockholders’ equity | $ | 3,191,228 | $ | 669,163 | $ | (4,212 | ) | $ | 3,856,179 | |||||||
See accompanying notes to Unaudited Pro Forma Combined Financial Statements |
1. | Historical Employers Financial Statements |
The historical Employers column represents the audited consolidated statement of income for the year ended December 31, 2007 and the audited consolidated balance sheet as of December 31, 2007 of Employers and have been derived from the audited consolidated financial statements of Employers included in its Annual Report on Form 10-K for the year ended December 31, 2007.
2. | Historical AmCOMP Financial Statements |
The historical AmCOMP column represents the audited consolidated statement of income for the year ended December 31, 2007 and the audited consolidated balance sheet as of December 31, 2007 of AmCOMP and have been derived from the audited consolidated financial statements of AmCOMP included in its Annual Report on Form 10-K for the year ended December 31, 2007. The following reclassifications have been made in the presentation of AmCOMP’s historical financial statements to conform to Employers' presentation:
Unaudited Pro Forma Combined Balance Sheet
· | Assumed reinsurance premiums receivable of $1.8 million were reclassified to premiums receivable. |
· | Prepaid reinsurance premiums of $1.2 million were reclassified to other assets. |
· | Income tax recoverable of $1.0 million was reclassified to other assets. |
· | Reinsurance payables of $0.6 million were reclassified to other liabilities. |
· | Commissions and premium taxes payable of $9.0 million and other liabilities of $11.3 million were reclassified from accounts payable and accrued expense to the respective line items. |
· | Capital lease obligation of $0.7 million was reclassified to other liabilities. |
Unaudited Pro Forma Combined Statement of Income
· | Underwriting and other operating expenses of $23.4 million were reclassified to commission expense. |
· | Dividends to policyholders of $11.3 million were reclassified to underwriting and other operating expenses. |
3. | Pro Forma Adjustments |
Preliminary Purchase Price Allocation
Under the purchase method of accounting, the total purchase price of $193.9 million, plus estimated merger-related costs of $4.6 million, is allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values. The purchase price was allocated using the information currently available, and Employers may adjust the preliminary purchase price allocation after obtaining more information regarding asset valuations, liabilities assumed and revisions of preliminary estimates. The purchase price allocation will be finalized in fiscal 2009.
The excess of the purchase price over the net of the amounts assigned to tangible and identifiable intangible assets acquired and liabilities assumed is recognized as goodwill. The following table summarizes the preliminary allocation of the estimated purchase price to the estimated fair value of assets acquired and liabilities assumed (in thousands except share and stock price information):
Cash to be paid to acquire 15,290,181 shares acquired at $12.50 | $ 191,127 | ||
Cash to settle outstanding stock options | 2,751 | ||
Estimated purchase price | 193,878 | ||
Estimated merger-related costs | 4,600 | ||
Adjusted purchase price | $ 198,478 | ||
Book value of assets acquired | $ 158,177 | ||
Adjustments to net book value of assets acquired and liabilities assumed: | |||
Tax benefit for vesting of stock options (a) | 427 | ||
Fair value adjustment on held to maturity securities (b) | 753 | ||
Elimination of goodwill, net (c) | (1,260) | ||
Elimination of debt issuance costs (d) | (995) | ||
Estimated severance and retention related liabilities (e) | (4,573) | ||
Identified intangible assets (f) | 15,250 | ||
Deferred tax impact on purchase adjustments (i) | (3,653) | ||
Adjusted book value | 164,126 | ||
Estimated incremental goodwill | $ 34,352 |
(a) | The pro forma adjustment to record the settlement of AmCOMP’s estimated 851,847 outstanding options with an exercise price less than the per share merger consideration, which will vest upon close of the Proposed Merger and are settled at the net amount of (A) the product of (i) the excess of the per share consideration over the exercise price per share of such option, multiplied by (ii) the number of AmCOMP shares subject to such option, less (B) any applicable withholdings for taxes. The cash consideration to be paid for the options is estimated to be $2.8 million and results in a net tax benefit of $0.4 million. |
(b) | The pro forma adjustment to the historical amortized cost value of AmCOMP’s held to maturity securities to value the securities at their fair value of $94.4 million. |
(c) | The pro forma adjustment to eliminate AmCOMP’s existing goodwill from the acquisition of its subsidiary, AmCOMP Preferred Insurance Company. |
(d) | The pro forma adjustment to eliminate AmCOMP’s $1.0 million in capitalized debt issuance costs, related to AmCOMP’s Notes Payable. The debt issuance costs were being amortized over a 30 year term. For the purposes of the pro forma combined income statement, the amount of amortization to be reversed is estimated to be $38 thousand for the year ended December 31, 2007. |
(e) | Certain of AmCOMP's senior executives are party to employment agreements providing for severance benefits and, in the case of two senior executive officers, retention payments that Employers anticipates will become payable in connection with completion of the Proposed Merger. The total liability assumed by Employers under these agreements in connection with the Proposed Merger is estimated to be $4.6 million. The expected cost savings in related salary and benefits for the pro forma combined statement of income is $1.8 million for the year ended December 31, 2007, and is a reduction to historical Underwriting and other operating expense. |
(f) | Identifiable intangible assets acquired are estimated to be $15.3 million. These assets include (in thousands except years): |
Intangible Assets | Estimated Fair Value | Estimated Life | Annual Amortization | |||||
Trade name | $ 750 | 1 Year | $ 750 | |||||
Insurance in force | 4,400 | 10 Years | 440 | |||||
Broker relationships | 2,300 | 10 Years | 230 | |||||
Non-compete agreements | 700 | 15 Months | 560 | |||||
State licenses | 7,100 | Indefinite | – | |||||
Total | $ 15,250 | $ 1,980 |
(g) | AmCOMP’s current excess reinsurance program differs from the reinsurance coverage maintained by Employers, most notably the lower retention on the first layer of coverage. AmCOMP’s losses are covered beginning above $2.0 million, whereas Employers maintains coverage above $5.0 million. It is expected that AmCOMP will be converted to Employers' reinsurance program, resulting in a lower reinsurance premium cost and a greater spread of the risk between the combined writings of Employers and AmCOMP. Based on AmCOMP’s and Employers' historical loss experience, it is not expected that the change in reinsurance coverage for AmCOMP will have a significant impact on losses and LAE incurred. |
(h) | With the acquisition of AmCOMP, Employers has identified synergies that will create continued savings. Included in these savings are the costs associated with AmCOMP's obligations as a public company, insurance costs and other overhead costs aggregating an annualized saving of $0.8 million. |
(i) | The deferred tax balance is adjusted for the tax impact, at the statutory rate of 35%, for any of the purchase adjustments that are deductible for tax purposes. Additionally, a deferred tax liability is established for the intangibles, which is recognized as the intangible balances are amortized into income. |
4. Proposed Private Placement of the Notes
In connection with the Proposed Merger, Employers proposes to issue senior unsecured Notes in a private placement. The following table summarizes the pro forma adjustments made to the December 31, 2007 pro forma combined balance sheet and year ended December 31, 2007 pro forma combined statement of income for the proposed private placement of the Notes (in thousands, except interest rate data):
Pro forma combined balance sheet adjustment (j): | ||
Principal amount of senior Notes | $ 150,000 | |
Estimated debt issuance costs | (2,000) | |
Assumed net cash proceeds | $ 148,000 | |
Pro forma combined statement of income adjustments: | ||
Estimated interest rate (j) | 8.0% | |
Annual interest expense (k) | $ 12,000 | |
Annual amortization of debt issuance costs (k) | 200 | |
Total pro forma impact for senior Notes | $ 12,200 |
(j) | The principal amount of senior Notes proposed to be offered is $150.0 million with a maturity of 10 years. For the purpose of these pro forma calculations, we have assumed an interest rate of |
8.0% per annum. The costs associated with the proposed private placement of the Notes are assumed to be 1%, or $1.5 million, plus $0.5 million in legal and accounting costs. The anticipated net cash proceeds of $148.0 million will be used as partial consideration to fund the purchase price of the acquisition of AmCOMP. | |
(k) | For the purposes of the pro forma presentation, interest expense of $12.0 million and amortization of debt issuance costs of $0.2 million have been adjusted in the pro forma combined statement of income for the year ended December 31, 2007. A 0.125% increase/decrease in the interest rate on the $150.0 million principal amount of senior Notes would result in an increase/decrease in interest expense of approximately $187,500 for the year ended December 31, 2007. |