Employers Holdings, Inc. - Quarter Report: 2019 March (Form 10-Q)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

R QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE

ACT OF 1934

For the Quarterly Period Ended March 31, 2019

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE

ACT OF 1934

For the transition period from ____ to ____

Commission file number: 001-33245

EMPLOYERS HOLDINGS, INC.

(Exact name of registrant as specified in its charter)



Nevada (State or other jurisdiction of incorporation or organization)		04-3850065 (I.R.S. Employer Identification Number)

10375 Professional Circle, Reno, Nevada 89521 (Address of principal executive offices and zip code)

(888) 682-6671

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes R No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes R No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “non-accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer R	Accelerated filer o	Non-accelerated filer o	Smaller reporting company o
			Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No R



Class		April 18, 2019
Common Stock, $0.01 par value per share		32,052,420 shares outstanding

TABLE OF CONTENTS



		Page No.
PART 1 – FINANCIAL INFORMATION

Item 1	Consolidated Financial Statements
	Consolidated Balance Sheets as of March 31, 2019 (Unaudited) and December 31, 2018	3
	Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2019 and 2018 (Unaudited)	5
	Consolidated Statements of Stockholders' Equity for the Three Months Ended March 31, 2019 and 2018 (Unaudited)	6
	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2019 and 2018 (Unaudited)	7
	Notes to Consolidated Financial Statements (Unaudited)	9
Item 2	Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations	21
Item 3	Quantitative and Qualitative Disclosures About Market Risk	31
Item 4	Controls and Procedures	31

	PART II – OTHER INFORMATION

Item 1	Legal Proceedings	32
Item 1A	Risk Factors	32
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	32
Item 3	Defaults Upon Senior Securities	32
Item 4	Mine Safety Disclosures	32
Item 5	Other Information	32
Item 6	Exhibits	33

Signatures		34

PART I – FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements



Employers Holdings, Inc. and Subsidiaries
Consolidated Balance Sheets
(in millions, except share data)
	As of		As of
	March 31, 2019		December 31, 2018
Assets	(unaudited)
Investments:
Fixed maturity securities at fair value (amortized cost $2,491.1 at March 31, 2019 and $2,513.7 at December 31, 2018)	$	2,521.0	$	2,496.4
Equity securities at fair value (cost $140.8 at March 31, 2019 and $131.9 at December 31, 2018)	230.0		199.9
Equity securities at cost	6.4		6.4
Short-term investments at fair value (amortized cost $25.0 at December 31, 2018)	—		25.0
Total investments	2,757.4		2,727.7
Cash and cash equivalents	92.3		101.4
Restricted cash and cash equivalents	2.5		0.6
Accrued investment income	18.2		18.0
Premiums receivable (less bad debt allowance of $5.7 at March 31, 2019 and $6.7 at December 31, 2018)	352.7		333.1
Reinsurance recoverable for:
Paid losses	6.7		6.7
Unpaid losses	498.7		504.4
Deferred policy acquisition costs	52.5		48.2
Deferred income taxes, net	12.9		26.9
Property and equipment, net	21.8		18.2
Operating lease right-of-use assets	16.8		—
Intangible assets, net	7.7		7.7
Goodwill	36.2		36.2
Contingent commission receivable—LPT Agreement	32.0		32.0
Cloud computing arrangements	25.1		26.0
Other assets	39.6		32.1
Total assets	$	3,973.1	$	3,919.2
Liabilities and stockholders’ equity
Unpaid losses and loss adjustment expenses	$	2,189.3	$	2,207.9
Unearned premiums	368.9		336.3
Commissions and premium taxes payable	53.8		57.3
Accounts payable and accrued expenses	24.6		37.1
Deferred reinsurance gain—LPT Agreement	147.1		149.6
Notes payable	20.0		20.0
Operating lease liability	19.0		—
Non-cancellable obligations	17.4		18.8
Other liabilities	61.3		74.0
Total liabilities	$	2,901.4	$	2,901.0
Commitments and contingencies



Employers Holdings, Inc. and Subsidiaries
Consolidated Balance Sheets
(in millions, except share data)
	As of			As of
	March 31, 2019			December 31, 2018
Stockholders’ equity:	(unaudited)
Common stock, $0.01 par value; 150,000,000 shares authorized; 57,144,530 and 56,975,675 shares issued and 32,263,810 and 32,765,792 shares outstanding at March 31, 2019 and December 31, 2018, respectively	$	0.6		$	0.6
Preferred stock, $0.01 par value; 25,000,000 shares authorized; none issued	—			—
Additional paid-in capital	388.1			388.8
Retained earnings	1,075.1			1,030.7
Accumulated other comprehensive income (loss), net of tax	23.6			(13.7		)
Treasury stock, at cost (24,880,720 shares at March 31, 2019 and 24,209,883 shares at December 31, 2018)	(415.7		)	(388.2		)
Total stockholders’ equity	1,071.7			1,018.2
Total liabilities and stockholders’ equity	$	3,973.1		$	3,919.2

See accompanying unaudited notes to the consolidated financial statements.



Employers Holdings, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
(in millions, except per share data)
	Three Months Ended
	March 31,
	2019			2018
Revenues	(unaudited)
Net premiums earned	$	174.8		$	176.6
Net investment income	21.8			19.4
Net realized and unrealized gains (losses) on investments	23.3			(8.0		)
Other income	0.4			—
Total revenues	220.3			188.0
Expenses
Losses and loss adjustment expenses	88.6			95.4
Commission expense	22.0			23.7
Underwriting and other operating expenses	47.5			39.2
Interest and financing expenses	0.4			0.3
Total expenses	158.5			158.6
Net income before income taxes	61.8			29.4
Income tax expense	10.0			3.8
Net income	$	51.8		$	25.6

Comprehensive income (loss)
Unrealized AFS investment gains (losses) arising during the period (net of tax (expense) benefit of $(10.0) and $9.6 for the three months ended March 31, 2019 and 2018, respectively)	$	37.8		$	(35.8	)
Reclassification adjustment for realized AFS investment (gains) losses in net income (net of tax (expense) benefit of $0.1 and $(0.1) for the three months ended March 31, 2019 and 2018, respectively)	(0.5		)	0.4
Other comprehensive income (loss), net of tax	37.3			(35.4		)
Total comprehensive income (loss)	$	89.1		$	(9.8	)

Net realized and unrealized gains (losses) on investments
Net realized and unrealized gains (losses) on investments before impairments	$	23.3		$	(6.0	)
Other than temporary impairment recognized in earnings	—			(2.0		)
Net realized and unrealized gains (losses) on investments	$	23.3		$	(8.0	)

Earnings per common share (Note 12):
Basic	$	1.60		$	0.78
Diluted	$	1.57		$	0.77
Cash dividends declared per common share and eligible RSUs and PSUs	$	0.22		$	0.20

See accompanying unaudited notes to the consolidated financial statements.



Employers Holdings, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
For the Three Months Ended March 31, 2019 and 2018
(Unaudited)

	Common Stock			Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss), Net			Treasury Stock at Cost			Total Stockholders' Equity
	Shares Issued	Amount		Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss), Net			Treasury Stock at Cost			Total Stockholders' Equity
	(in millions, except share data)
Balance, January 1, 2019	56,975,675	$	0.6	$	388.8		$	1,030.7		$	(13.7	)	$	(388.2	)	$	1,018.2
Stock-based obligations	—	—		2.4			—			—			—			2.4
Stock options exercised	1,300	—		0.1			—			—			—			0.1
Vesting of RSUs and PSUs, net of shares withheld to satisfy tax withholdings	167,555	—		(3.2		)	—			—			—			(3.2		)
Acquisition of common stock	—	—		—			—			—			(27.5		)	(27.5		)
Dividends declared	—	—		—			(7.4		)	—			—			(7.4		)
Net income for the period	—	—		—			51.8			—			—			51.8
Change in net unrealized gains on investments, net of taxes of $(9.9)	—	—		—			—			37.3			—			37.3
Balance, March 31, 2019	57,144,530	$	0.6	$	388.1		$	1,075.1		$	23.6		$	(415.7	)	$	1,071.7

Balance, January 1, 2018	56,695,174	$	0.6	$	381.2		$	842.2		$	107.4		$	(383.7	)	$	947.7
Stock-based obligations	—	—		2.1			—			—			—			2.1
Stock options exercised	275	—		—			—			—			—			—
Vesting of RSUs and PSUs, net of shares withheld to satisfy tax withholdings	154,045	—		(2.9		)	—			—			—			(2.9		)
Dividends declared	—	—		—			(6.6		)	—			—			(6.6		)
Net income for the period	—	—		—			25.6			—			—			25.6
Reclassification adjustment for adoption of ASU No. 2016-01	—	—		—			74.0			(74.0		)	—			—
Change in net unrealized losses on investments, net of taxes of $9.5	—	—		—			—			(35.4		)	—			(35.4		)
Balance, March 31, 2018	56,849,494	$	0.6	$	380.4		$	935.0		$	(2.0	)	$	(383.7	)	$	930.3

See accompanying unaudited notes to the consolidated financial statements.



Employers Holdings, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in millions)
	Three Months Ended
	March 31,
	2019			2018
Operating activities	(unaudited)
Net income	$	51.8		$	25.6
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	1.2			2.0
Stock-based compensation	2.4			2.1
Amortization of cloud computing arrangements	1.0			—
Amortization of premium on investments, net	1.9			2.4
Allowance for doubtful accounts	(1.0		)	—
Deferred income tax expense	4.0			11.7
Net realized and unrealized (gains) losses on investments	(23.3		)	8.0
Change in operating assets and liabilities:
Premiums receivable	(18.6		)	(23.3		)
Reinsurance recoverable on paid and unpaid losses	5.7			6.2
Cloud computing arrangements	(0.1		)	—
Operating lease right-of-use-assets	(16.8		)	—
Current federal income taxes	6.4			(8.0		)
Unpaid losses and loss adjustment expenses	(18.6		)	(8.0		)
Unearned premiums	32.6			33.6
Accounts payable, accrued expenses and other liabilities	(10.7		)	0.7
Deferred reinsurance gain—LPT Agreement	(2.5		)	(2.6		)
Operating lease liabilities	19.0			—
Non-cancellable obligations	(1.4		)	—
Other	(12.9		)	(4.2		)
Net cash provided by operating activities	20.1			46.2
Investing activities
Purchases of fixed maturity securities	(95.4		)	(231.9		)
Purchases of equity securities	(16.1		)	(6.8		)
Purchases of short-term investments	(0.1		)	(34.9		)
Proceeds from sale of fixed maturity securities	51.2			133.7
Proceeds from sale of equity securities	8.7			10.9
Proceeds from maturities and redemptions of fixed maturity securities	65.6			78.9
Proceeds from maturities of short-term investments	25.0			4.0
Net change in unsettled investment purchases and sales	(24.2		)	(4.7		)
Capital expenditures and other	(4.8		)	(2.9		)
Net cash provided by (used in) investing activities	9.9			(53.7		)
Financing activities
Acquisition of common stock	(26.6		)	—
Cash transactions related to stock-based compensation	(3.2		)	(2.9		)
Dividends paid to stockholders	(7.3		)	(6.6		)
Payments on capital leases	(0.1		)	(0.1		)
Net cash used in financing activities	(37.2		)	(9.6		)
Net decrease in cash, cash equivalents and restricted cash	(7.2		)	(17.1		)
Cash, cash equivalents and restricted cash at the beginning of the period	102.0			74.3
Cash, cash equivalents and restricted cash at the end of the period	$	94.8		$	57.2

The following table presents our cash, cash equivalents and restricted cash by category within the Consolidated Balance Sheets:



	As of		As of
	March 31, 2019		December 31, 2018
	(in millions)
Cash and cash equivalents	$	92.3	$	101.4
Restricted cash and cash equivalents supporting reinsurance obligations	2.5		0.6
Total cash, cash equivalents and restricted cash	$	94.8	$	102.0

See accompanying unaudited notes to the consolidated financial statements.

Employers Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

1. Basis of Presentation and Summary of Operations

Employers Holdings, Inc. (EHI) is a Nevada holding company. Through its wholly owned insurance subsidiaries, Employers Insurance Company of Nevada (EICN), Employers Compensation Insurance Company (ECIC), Employers Preferred Insurance Company (EPIC), and Employers Assurance Company (EAC), EHI is engaged in the commercial property and casualty insurance industry, specializing in workers' compensation products and services. Unless otherwise indicated, all references to the “Company” refer to EHI, together with its subsidiaries.

In 1999, the Nevada State Industrial Insurance System (the Fund) entered into a retroactive 100% quota share reinsurance agreement (the LPT Agreement) through a loss portfolio transfer transaction with third party reinsurers. The LPT Agreement commenced on June 30, 1999 and will remain in effect until all claims under the covered policies have closed, the LPT Agreement is commuted or terminated, upon the mutual agreement of the parties, or the reinsurers' aggregate maximum limit of liability is exhausted, whichever occurs first. The LPT Agreement does not provide for any additional termination terms. On January 1, 2000, EICN assumed all of the assets, liabilities and operations of the Fund, including the Fund's rights and obligations associated with the LPT Agreement (See Note 8).

The Company accounts for the LPT Agreement as retroactive reinsurance. Upon entry into the LPT Agreement, an initial deferred reinsurance gain (the Deferred Gain) was recorded as a liability on the Company’s Consolidated Balance Sheets. The Company is entitled to receive a contingent profit commission under the LPT Agreement. The contingent profit commission is estimated based on both actual paid results to date and projections of expected paid losses under the LPT Agreement and is recorded as an asset on the Company's Consolidated Balance Sheets.

The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities Exchange Act of 1934, as amended. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal, recurring adjustments) necessary for a fair presentation of the Company’s consolidated financial position and results of operations for the periods presented have been included. The results of operations for an interim period are not necessarily indicative of the results for an entire year. These financial statements have been prepared consistent with the accounting policies described in the Company’s Form 10-K for the year ended December 31, 2018 (Annual Report).

The Company operates as a single operating segment, workers' compensation insurance, through its wholly owned subsidiaries. The Company considers an operating segment to be any component of its business whose operating results are regularly reviewed by the Company’s chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance based on discrete financial information.

Use of Estimates

The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. As a result, actual results could differ from these estimates. The most significant areas that require management judgment are the estimate of unpaid losses and loss adjustment expenses (LAE), evaluation of reinsurance recoverables, recognition of premium revenue, recoverability of deferred income taxes, and valuation of investments.

Pending Acquisition

On August 11, 2017, the Company entered into a stock purchase agreement (Purchase Agreement), as amended on October 25, 2018, with Partner Reinsurance Company of the U.S. (PRUS) with respect to the acquisition (Acquisition) of all of the outstanding shares of capital stock of PartnerRe Insurance Company of New York (PRNY). The purchase price is equal to the sum of: (i) the amount of statutory capital and surplus of PRNY at closing (which is currently estimated to be approximately $40.0 million); and (ii) $5.8 million. The Company expects to fund the Acquisition with cash on hand.

Pursuant to the Purchase Agreement, all liabilities and obligations of PRNY existing as of the closing date, whether known or unknown, will be indemnified by PRUS. In addition, PartnerRe Ltd., the parent company of PRUS, has provided the Company with a Guaranty that unconditionally, absolutely and irrevocably guarantees the full and prompt payment and performance by PRUS of all of its obligations, liabilities, and indemnities under the Purchase Agreement and the transactions contemplated thereby.

The Company will not be acquiring any employees or ongoing business operations pursuant to the Acquisition. The Acquisition is subject to certain closing conditions, including, among other things, approval from the Department of Financial Services of the State of New York.

2. New Accounting Standards

Recently Issued Accounting Standards

In March, 2019, the FASB issued ASU Number 2019-01, Leases Topics (842) Codification Improvements. The amendments in this update increase transparency and comparability for the recognition of leases and disclosures about leasing transactions. This update provides additional clarity on determining the value of the underlying asset by lessors that are not manufacturers or dealers. This update further clarifies the presentation of the statement of cash flows related to lessors that are depository and lending institutions within the scope of Topic 942. Additionally, this update provides guidance on transition disclosures related to leases. This update becomes effective for fiscal years beginning after December 15, 2019 for determining the value of the underlying asset and statement of cash flows presentation; however, the transition disclosure requirement became effective with the adoption of ASU Number 2016-02, Leases (Topic 842). The Company does not expect that this update will have a material impact on its consolidated financial condition and results of operations.

In August 2018, the FASB issued ASU Number 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. This update removes the disclosure requirements for the amounts of and the reasons for transfers between Level 1 and Level 2 and disclosure of the policy for timing of transfers between levels. This update also removes disclosure requirements for the valuation processes for Level 3 fair value measurements. Additionally, this update adds disclosure requirements for the changes in unrealized gains and losses for recurring Level 3 fair value measurements and quantitative information for certain unobservable inputs in Level 3 fair value measurements. This update becomes effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company does not expect that this update will have a material impact on its consolidated financial condition and results of operations.

In January 2017, the FASB issued ASU Number 2017-04, Intangibles-Goodwill and Other (Topic 350). This update simplifies the measurement of goodwill by eliminating the performance of Step 2 in the goodwill impairment testing. This update allows the testing to be performed by comparing the fair value of a reporting unit with its carrying amount and recognizing an impairment charge when the carrying amount exceeds fair value. Additionally, this update eliminates the requirements of any reporting unit with a zero or negative carrying value to perform Step 2, but requires disclosure of the amount of goodwill allocated to a reporting unit with zero or negative carrying amount of net assets. This update becomes effective for fiscal years beginning after December 15, 2019. The Company does not expect that this update will have a material impact on its consolidated financial condition and results of operations.

In June 2016, the FASB issued ASU Number 2016-13, Financial Instruments - Credit Losses (Topic 326). This update replaces the incurred loss impairment methodology for recognizing credit losses on financial instruments with a methodology that reflects an entity's current estimate of all expected credit losses. This update requires financial assets measured at amortized cost to be presented net of an allowance for credit losses. Additionally, this update requires credit losses on available-for-sale fixed maturity securities to be presented as an allowance rather than as a write-down, allowing an entity to also record reversals of credit losses in current period net income. This update becomes effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Additionally, in December 2018, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments - Credit Losses. This update provides clarification on the effective and transition dates and the exclusion of operating lease receivables from Topic 326. The Company is currently evaluating the impact that the adoption of these updates will have on its consolidated financial condition and results of operations.

Recently Adopted Accounting Standards

In July 2018, the FASB issued ASU Number 2018-09, Codification Improvements. This update provides clarification, corrects errors in and makes minor improvements to the Codification within various ASC topics. Many of the amendments in this update have transition guidance with effective dates for annual periods beginning after December 15, 2018 and some amendments in this update do not require transition guidance and became effective upon issuance of this update. The Company has adopted these amendments and has determined that there was no impact to its consolidated financial condition and results of operations.

In July 2018, the FASB issued ASU Number 2018-11, Leases (Topic 842): Targeted Improvements. This update provides entities with an additional and optional transition method to adopt ASU Number 2016-02 with a cumulative-effect adjustment in the period of adoption. This update also provides guidance for a practical expedient that permits lessors to not separate non-lease components from the associated lease components. Additionally, in July 2018, the FASB issued ASU Number 2018-10, Codification Improvements to Topic 842, Leases. This update provides additional guidance on the new lease model with improvements in numerous aspects of the guidance in ASC 842 including, but not limited to, implicit rates, reassessment of lease classification, terms and purchase options, investment tax credits, and various other transition guidance. In December 2018, the FASB issued

ASU 2018-20, Leases (Topic 842): Narrow-Scope Improvements for Lessors. This update provides amendments to various lease topics including sales taxes collected from lessees, certain lessor costs paid to third parties, and variable payments for contracts with lease and non-lease components. The Company adopted these updates concurrently with ASU Number 2016-02. See Note 5 regarding the impact of adopting this standard on the Company's Consolidated Financial Statements.

In February 2016, the FASB issued ASU Number 2016-02, Leases (Topic 842). This update provides guidance on a new lease model that includes the recognition of assets and liabilities arising from lease transactions on the balance sheet. Additionally, the update provides clarity on the definition of a lease and the distinction between finance and operating leases. Furthermore, the update requires certain qualitative and quantitative disclosures pertaining to the amounts recorded in the financial statements. This update became effective for annual reporting periods, including interim periods within those annual periods, beginning after December 15, 2018 and early adoption is permitted. As a result of the implementation of this standard the Company recognized an Operating lease right-of-use asset of $16.8 million and $19.0 million of Lease liabilities on its Consolidated Balance Sheet at March 31, 2019. See Note 5 for additional detail regarding the adoption of this standard.

3. Fair Value of Financial Instruments

The carrying value and the estimated fair value of the Company’s financial instruments at fair value were as follows:



	March 31, 2019				December 31, 2018
	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
	(in millions)
Financial assets
Total investments at fair value	$	2,751.0	$	2,751.0	$	2,721.3	$	2,721.3
Cash and cash equivalents	92.3		92.3		101.4		101.4
Restricted cash and cash equivalents	2.5		2.5		0.6		0.6
Financial liabilities
Notes payable	$	20.0	$	25.6	$	20.0	$	23.5

Assets and liabilities recorded at fair value on the Company's Consolidated Balance Sheets are categorized based upon the levels of judgment associated with the inputs used to measure their fair value. Level inputs are defined as follows:


•	Level 1 - Inputs are unadjusted quoted market prices for identical assets or liabilities in active markets at the measurement date.


•	Level 2 - Inputs other than Level 1 prices that are observable for similar assets or liabilities through corroboration with market data at the measurement date.


•	Level 3 - Inputs that are unobservable that reflect management's best estimate of what willing market participants would use in pricing the assets or liabilities at the measurement date.

The Company uses third party pricing services to assist it with its investment accounting function. The ultimate pricing source varies depending on the investment security and pricing service used, but investment securities valued on the basis of observable inputs (Levels 1 and 2) are generally assigned values on the basis of actual transactions. Securities valued on the basis of pricing models with significant unobservable inputs or non-binding broker quotes are classified as Level 3. The Company performs quarterly analyses on the prices it receives from third parties to determine whether the prices are reasonable estimates of fair value, including confirming the fair values of these securities through observable market prices using an alternative pricing source, as it is ultimately management’s responsibility to ensure that the fair values reflected in the Company’s consolidated financial statements are appropriate. If differences are noted in these analyses, the Company may obtain additional information from other pricing services to validate the quoted price.

The Company bases all of its estimates of fair value for assets on the bid prices, when available, as they represent what a third-party market participant would be willing to pay in an arm's length transaction.

For securities not actively traded, third party pricing services may use quoted market prices of similar instruments or discounted cash flow analyses, incorporating inputs that are currently observable in the markets for similar securities. Inputs that are often used in the valuation methodologies include, but are not limited to, broker quotes, benchmark yields, credit spreads, default rates, and prepayment speed assumptions. There were no material adjustments made to the prices obtained from third party pricing services as of March 31, 2019 and December 31, 2018.

These methods of valuation only produce an estimate of fair value if there is objectively verifiable information to produce a valuation. When objectively verifiable information is not available, the Company produces an estimate of fair value using some of the same methodologies, making assumptions for market-based inputs that are unavailable.

The Company's estimates of fair value for its notes payable are based on a combination of the variable interest rates for notes with similar durations to discount the projection of future payments on notes payable. The fair value measurements for notes payable have been determined to be Level 2 at each of the periods presented.

Each of the Company's insurance operating subsidiaries is a member of the FHLB of San Francisco. Members are required to purchase stock in the FHLB in addition to maintaining collateral deposits that back any funds advanced. The Company's investment in FHLB stock is recorded at cost, which approximates fair value, as purchases and sales of these securities are at par value with the issuer. FHLB stock is considered a restricted security and is periodically evaluated by the Company for impairment based on the ultimate recovery of par value.

The following table presents the Company's investments at fair value and the corresponding fair value measurements.



	March 31, 2019						December 31, 2018
	Level 1		Level 2		Level 3		Level 1		Level 2		Level 3
	(in millions)
Fixed maturity securities:
U.S. Treasuries	$	—	$	108.0	$	—	$	—	$	106.4	$	—
U.S. Agencies	—		9.9		—		—		11.4		—
States and municipalities	—		519.5		—		—		528.0		—
Corporate securities	—		1,086.0		—		—		1,090.4		—
Residential mortgage-backed securities	—		461.8		—		—		451.5		—
Commercial mortgage-backed securities	—		99.5		—		—		94.3		—
Asset-backed securities	—		60.9		—		—		64.5		—
Other securities	—		175.4		—		—		149.9		—
Total fixed maturity securities	$	—	$	2,521.0	$	—	$	—	$	2,496.4	$	—
Equity securities at fair value:
Industrial and miscellaneous	$	151.3	$	—	$	—	$	174.8	$	—	$	—
Other	78.7		—		—		25.1		—		—
Total equity securities at fair value	230.0		—		—		199.9		—		—
Short-term investments	—		—		—		—		25.0		—
Total investments at fair value	$	230.0	$	2,521.0	$	—	$	199.9	$	2,521.4	$	—

Certain cash equivalents, principally money market securities, are measured at fair value using the net asset value (NAV) per share. The following table presents cash equivalents at NAV and total cash and cash equivalents carried at fair value on the Company's Consolidated Balance Sheets.



	March 31, 2019		December 31, 2018
	(in millions)
Cash and cash equivalents at fair value	$	23.5	$	43.9
Cash equivalents measured at NAV, which approximates fair value	68.8		57.5
Total cash and cash equivalents	$	92.3	$	101.4

The following table provides a reconciliation of the beginning and ending balances of investments that are recorded at fair value and are measured using Level 3 inputs for the three months ended March 31, 2019 and 2018.



	Three Months Ended
	March 31, 2019		March 31, 2018
Level 3 Securities:	(in millions)
Beginning balance, January 1	$	—	$	4.7
Transfers out of Level 3 ⁽¹⁾	—		(4.7		)
Purchases and sales, net	—		—
Ending balance, March 31	$	—	$	—


(1)	The transfer during the three months ended March 31, 2018 was the result of adoption of ASU 2016-01, which specified that FHLB stock shall be carried at cost and is no longer measured at fair value.

4. Investments

The Company's investments in fixed maturity securities and short-term investments are classified as available-for-sale (AFS) and are reported at fair value with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders' equity, net of deferred taxes, in Accumulated other comprehensive income (loss) (AOCI) on the Company’s Consolidated Balance Sheets. Changes in the fair value of the Company's investments in equity securities are included in Net realized and unrealized gains (losses) on investments on the Company's Consolidated Statements of Comprehensive Income. The Company's investment in FHLB stock is presented within Equity securities at cost on the Company's Consolidated Balance Sheets. Other securities within fixed maturity securities consist of bank loans, which are classified as AFS and are reported at fair value.

The cost or amortized cost, gross unrealized gains, gross unrealized losses, and estimated fair value of the Company’s AFS investments were as follows:



	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(in millions)
At March 31, 2019
Fixed maturity securities
U.S. Treasuries	$	107.5	$	1.1	$	(0.6	)	$	108.0
U.S. Agencies	9.8		0.1		—			9.9
States and municipalities	497.7		21.9		(0.1		)	519.5
Corporate securities	1,075.3		14.5		(3.8		)	1,086.0
Residential mortgage-backed securities	463.8		2.9		(4.9		)	461.8
Commercial mortgage-backed securities	99.7		0.5		(0.7		)	99.5
Asset-backed securities	60.7		0.4		(0.2		)	60.9
Other securities	176.6		0.4		(1.6		)	175.4
Total fixed maturity securities	2,491.1		41.8		(11.9		)	2,521.0
Total AFS investments	$	2,491.1	$	41.8	$	(11.9	)	$	2,521.0



At December 31, 2018
Fixed maturity securities
U.S. Treasuries	$	106.7	$	0.9	$	(1.2	)	$	106.4
U.S. Agencies	11.3		0.1		—			11.4
States and municipalities	513.4		15.3		(0.7		)	528.0
Corporate securities	1,106.2		5.8		(21.6		)	1,090.4
Residential mortgage-backed securities	459.1		2.2		(9.8		)	451.5
Commercial mortgage-backed securities	96.7		0.1		(2.5		)	94.3
Asset-backed securities	64.7		0.2		(0.4		)	64.5
Other securities	155.6		—		(5.7		)	149.9
Total fixed maturity securities	2,513.7		24.6		(41.9		)	2,496.4
Short-term investments	25.0		—		—			25.0
Total AFS investments	$	2,538.7	$	24.6	$	(41.9	)	$	2,521.4

The cost and estimated fair value of the Company’s equity securities recorded at fair value at March 31, 2019 and December 31, 2018 were as follows:



	Cost		Estimated Fair Value
	(in millions)
At March 31, 2019
Equity securities at fair value
Industrial and miscellaneous	$	123.5	$	202.6
Other	17.3		27.4
Total equity securities at fair value	$	140.8	$	230.0



	Cost		Estimated Fair Value
	(in millions)
At December 31, 2018
Equity securities at fair value
Industrial and miscellaneous	$	114.6	$	174.8
Other	17.3		25.1
Total equity securities at fair value	$	131.9	$	199.9

The amortized cost and estimated fair value of the Company's fixed maturity securities at March 31, 2019, by contractual maturity, are shown below. Expected maturities differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.



	Amortized Cost		Estimated Fair Value
	(in millions)
Due in one year or less	$	142.3	$	142.7
Due after one year through five years	850.4		861.0
Due after five years through ten years	779.3		794.9
Due after ten years	94.9		100.2
Mortgage and asset-backed securities	624.2		622.2
Total	$	2,491.1	$	2,521.0

The following is a summary of AFS investments that have been in a continuous unrealized loss position for less than 12 months and those that have been in a continuous unrealized loss position for 12 months or greater as of March 31, 2019 and December 31, 2018.



	March 31, 2019						December 31, 2018
	Estimated Fair Value		Gross Unrealized Losses			Number of Issues	Estimated Fair Value		Gross Unrealized Losses			Number of Issues
	(in millions, except number of issues data)
Less than 12 months:
Fixed maturity securities
U.S. Treasuries	$	—	$	—		—	$	12.2	$	(0.1	)	7
States and municipalities	9.9		(0.1		)	3	70.1		(0.7		)	21
Corporate securities	70.9		(0.1		)	26	624.4		(13.4		)	205
Residential mortgage-backed securities	19.9		(0.1		)	6	156.9		(2.5		)	59
Commercial mortgage-backed securities	18.8		(0.1		)	5	30.9		(0.5		)	13
Asset-backed securities	9.6		(0.1		)	5	25.1		(0.2		)	18
Other securities	133.9		(1.6		)	228	137.1		(5.7		)	215
Total less than 12 months	$	263.0	$	(2.1	)	273	$	1,056.7	$	(23.1	)	538

12 months or greater:
Fixed maturity securities
U.S. Treasuries	$	67.1	$	(0.6	)	23	$	72.7	$	(1.1	)	25
Corporate securities	317.9		(3.7		)	95	193.7		(8.2		)	69
Residential mortgage-backed securities	257.2		(4.8		)	89	199.8		(7.3		)	72
Commercial mortgage-backed securities	44.0		(0.6		)	19	55.0		(2.0		)	22
Asset-backed securities	16.3		(0.1		)	16	16.5		(0.2		)	17
Total 12 months or greater	$	702.5	$	(9.8	)	242	$	537.7	$	(18.8	)	205

There were no other-than-temporary impairments on fixed maturity securities recognized during three months ended March 31, 2019. The Company recognized impairments on fixed maturity securities of $2.0 million (consisting of fifty-seven securities) during the three months ended March 31, 2018 as a result of the Company's intent to sell these securities. The Company determined that the remaining unrealized losses on fixed maturity securities for the three months ended March 31, 2018 were primarily the result of changes in prevailing interest rates and not the credit quality of the issuers. The fixed maturity securities whose total fair value was less than amortized cost were not determined to be other-than-temporarily impaired given the lack of severity and duration of the impairment, the credit quality of the issuers, the Company’s intent to not sell the securities, and a determination

that it is not more likely than not that the Company will be required to sell the securities at an amount less than their amortized cost.

Realized gains and losses on investments include the gain or loss on a security at the time of sale compared to its original or adjusted cost (equity securities) or amortized cost (fixed maturity securities). Realized losses on fixed maturity securities are also recognized when securities are written down as a result of an other-than-temporary impairment.

Net realized gains (losses) on investments and the change in unrealized gains on the Company's investments recorded at fair value are determined on a specific-identification basis and were as follows:



	Gross Realized Gains		Gross Realized Losses			Change in Net Unrealized Gains (Losses)		Changes in Fair Value Reflected in Earnings		Changes in Fair Value Reflected in AOCI, before tax
			(in millions)
Three Months Ended March 31, 2019
Fixed maturity securities	$	1.0	$	(0.4	)	$	47.2	$	0.6	$	47.2
Equity securities	1.6		(0.1		)	21.2		22.7		—
Total investments	$	2.6	$	(0.5	)	$	68.4	$	23.3	$	47.2



Three Months Ended March 31, 2018
Fixed maturity securities	$	1.8	$	(2.3	)	$	(44.9	)	$	(0.5	)	$	(44.9	)
Equity securities	5.6		(0.2		)	(12.9		)	(7.5		)	—
Total investments	$	7.4	$	(2.5	)	$	(57.8	)	$	(8.0	)	$	(44.9	)

Net investment income was as follows:



	Three Months Ended
	March 31,
	2019			2018
	(in millions)
Fixed maturity securities	$	20.4		$	18.5
Equity securities	1.9			1.6
Cash equivalents and restricted cash	0.5			0.2
Gross investment income	22.8			20.3
Investment expenses	(1.0		)	(0.9		)
Net investment income	$	21.8		$	19.4

The Company is required by various state laws and regulations to hold securities or letters of credit in depository accounts with certain states in which it does business. These laws and regulations govern not only the amount but also the types of securities that are eligible for deposit. As of March 31, 2019 and December 31, 2018, securities having a fair value of $925.5 million and $867.7 million, respectively, were on deposit. Additionally, standby letters of credit from the FHLB were in place in lieu of $260.0 million of securities on deposit as of March 31, 2019 (See Note 9).

Certain reinsurance contracts require the Company's funds to be held in trust for the benefit of the ceding reinsurer to secure the outstanding liabilities assumed by the Company. The fair value of fixed maturity securities and restricted cash and cash equivalents held in trust for the benefit of ceding reinsurers at March 31, 2019 and December 31, 2018 was $13.7 million and $23.2 million, respectively.

5. Property and Equipment

Property and equipment consists of the following:



	As of March 31,			As of December 31,
	2019			2018
	(in millions)
Furniture and equipment	$	2.3		$	3.3
Leasehold improvements	4.7			3.2
Computers and software	65.0			61.9
Automobiles	1.1			1.1
Property and equipment, gross	73.1			69.5
Accumulated depreciation	(51.3		)	(51.3		)
Property and equipment, net	$	21.8		$	18.2

Depreciation expenses related to property and equipment for the three months ended March 31, 2019 was $1.1 million, and for the year ended December 31, 2018 was $6.1 million. Internally developed software costs of $0.8 million and $2.9 million were capitalized during the three months ended March 31, 2019 and the year ended December 31, 2018, respectively.

Cloud Computing Arrangements

The Company's capitalized costs associated with cloud computing arrangements totaled $25.1 million and $26.0 million, which was comprised of service contract fees and implementation costs associated with hosting arrangements on the Company's Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018, respectively. Total amortization for hosting arrangements for the three months ended March 31, 2019 and the year ended December 31, 2018 was $1.0 million and $0.8 million, respectively.

Leases

The Company determines if an arrangement is a lease at the inception of the transaction. Operating leases for offices are presented as a right-of-use asset (ROU asset) and lease liability on the Company's Consolidated Balance Sheets. Financing leases for automobiles are included in property and equipment and other liabilities on the Company's Consolidated Balance Sheets. The Company elected the practical expedients provided in ASU Number 2018-11, Leases (Topic 842): Targeted Improvements and ASU Number 2016-02, Leases (Topic 842), allowing the Company to apply provisions of the new guidance at the date of adoption without adjusting comparative periods presented.

ROU assets represent the right to use an underlying asset for the lease term and the lease liability represents the obligation to make lease payments arising from the lease transaction. Operating lease ROU assets and liabilities are recognized at the commencement date based on the present value of the lease payments over the lease term. The Company uses incremental borrowing rates to determine the present value of lease payments. The ROU assets also include lease payments less any lease incentives within a lease agreement. The Company's lease terms may include options to extend or terminate a lease. Lease expense for lease payments is recognized on a straight-line basis over the lease term. The Company's operating leases have remaining terms of 1 year to 8 years, which have options to extend up to 10 years with no termination provision. The Company's finance leases have an option to terminate after 1 year.

Components of lease expense were as follows:



	Three Months Ended
	March 31, 2019
	(in millions)
Operating lease expense	$	1.3
Finance lease expense	0.1
Total lease expense	$	1.4

As of March 31, 2019, the weighted average remaining lease term for operating leases was 6.3 years and for finance leases was 3.1 years. The weighted average discount rate was 3.3% and 3.7% for operating and finance leases, respectively.

Maturities of lease liabilities were as follows:



	As of March 31, 2019
	Operating Leases			Finance Leases
	(in millions)
2019	$	3.9		$	0.2
2020	4.4			0.3
2021	2.9			0.2
2022	1.9			—
2023	1.8			—
Thereafter	6.2			—
Total lease payments	21.1			0.7
Less: inputed interest	(2.1		)	—
Total	$	19.0		$	0.7

Supplemental balance sheet information related to leases was as follows:



	As of March 31, 2019
	(in millions)
Operating leases:
Operating lease right-of-use asset	$	16.8
Operating lease liability	19.0
Finance leases:
Property and equipment, gross	1.1
Accumulated depreciation	(0.4		)
Property and equipment, net	0.7
Other liabilities	$	0.7

Supplemental cash flow information related to leases was as follows:



	Three Months Ended
	March 31, 2019
	(in millions)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	1.3
Financing cash flows from finance leases	0.1

6. Income Taxes

Income tax expense for interim periods is measured using an estimated effective tax rate for the annual period. The Company's effective tax rate was 16.2% and 12.9% for the three months ended March 31, 2019 and 2018, respectively. Tax-advantaged investment income, Deferred Gain amortization, and certain other adjustments reduced the Company's effective income tax rate below the U.S. statutory rate of 21%.

7. Liability for Unpaid Losses and Loss Adjustment Expenses

The following table represents a reconciliation of changes in the liability for unpaid losses and LAE.



	Three Months Ended
	March 31,
	2019			2018
	(in millions)
Unpaid losses and LAE at beginning of period	$	2,207.9		$	2,266.1
Less reinsurance recoverable, excluding bad debt allowance, on unpaid losses and LAE	504.4			537.0
Net unpaid losses and LAE at beginning of period	1,703.5			1,729.1
Losses and LAE, net of reinsurance, incurred during the period related to:
Current period	113.3			110.4
Prior periods	(22.2		)	(12.4		)
Total net losses and LAE incurred during the period	91.1			98.0
Paid losses and LAE, net of reinsurance, related to:
Current period	7.4			5.9
Prior periods	96.6			94.2
Total net paid losses and LAE during the period	104.0			100.1
Ending unpaid losses and LAE, net of reinsurance	1,690.6			1,727.0
Reinsurance recoverable, excluding bad debt allowance, on unpaid losses and LAE	498.7			531.1
Unpaid losses and LAE at end of period	$	2,189.3		$	2,258.1

Total net losses and LAE included in the above table exclude amortization of the deferred reinsurance gain—LPT Agreement, LPT Reserve Adjustments, and LPT Contingent Commission Adjustments, which totaled $2.5 million and $2.6 million for the three months ended March 31, 2019 and 2018, respectively (See Note 8).

The change in incurred losses and LAE attributable to prior periods for the three months ended March 31, 2019 included $22.0 million of favorable development on the Company's voluntary risk business and $0.2 million of favorable development on the Company's assigned risk business. The change in incurred losses and LAE attributable to prior periods for the three months ended March 31, 2018 included $12.0 million of favorable development on the Company's voluntary risk business and $0.4 million of favorable development on the Company's assigned risk business. The favorable prior accident year loss development on voluntary business during the three months ended March 31, 2019 and 2018 was the result of the Company's determination that adjustments were necessary to reflect observed favorable paid loss trends, which have been impacted by cost savings associated with accelerated claims settlement activity that began in 2014 and continued in 2019.

8. LPT Agreement

The Company is party to the LPT Agreement under which $1.5 billion in liabilities for losses and LAE related to claims incurred by the Fund prior to July 1, 1995 were reinsured for consideration of $775.0 million. The LPT Agreement provides coverage up to $2.0 billion. The Company records its estimate of contingent profit commission in the accompanying Consolidated Balance Sheets as Contingent commission receivable–LPT Agreement and a corresponding liability is recorded in the accompanying Consolidated Balance Sheets in Deferred reinsurance gain–LPT Agreement. The Deferred Gain is being amortized using the recovery method. Amortization is determined by the proportion of actual reinsurance recoveries to total estimated recoveries over the life of the LPT Agreement, except for the contingent profit commission, which is amortized through June 30, 2024, the date through which the Company is entitled to receive a contingent profit commission under the LPT Agreement. The amortization is recorded in losses and LAE incurred in the accompanying consolidated statements of comprehensive income. Any adjustments to the Deferred Gain are recorded in losses and LAE incurred in the accompanying consolidated statements of comprehensive income.

The Company amortized $2.5 million and $2.6 million for the three months ended March 31, 2019 and 2018, respectively. The remaining Deferred Gain was $147.1 million and $149.6 million as of March 31, 2019 and December 31, 2018, respectively. The estimated remaining liabilities subject to the LPT Agreement were $402.3 million and $408.2 million as of March 31, 2019 and December 31, 2018, respectively. Losses and LAE paid with respect to the LPT Agreement totaled $779.6 million and $773.7 million from inception through March 31, 2019 and December 31, 2018, respectively.

9. Notes Payable and Other Financing Arrangements

Notes payable is comprised of the following:



	March 31, 2019		December 31, 2018
	(in millions)
Dekania Surplus Note, due April 29, 2034	$	10.0	$	10.0
Alesco Surplus Note, due December 15, 2034	10.0		10.0
Total	$	20.0	$	20.0

EPIC has a $10.0 million surplus note to Dekania CDO II, Ltd. (Dekania) issued as part of a pooled transaction. The note matures in 2034 and became callable at par by the Company in 2009. The terms of the note provide for quarterly interest payments at a rate 425 basis points in excess of the 90-day LIBOR. Both the payment of interest and repayment of the principal under this note and the surplus note described in the following paragraph are subject to the prior approval of the Florida Department of Financial Services.

EPIC has a $10.0 million surplus note to Alesco Preferred Funding V, LTD issued as part of a pooled transaction. The note matures in 2034 and became callable at par by the Company in 2009. The terms of the note provide for quarterly interest payments at a rate 405 basis points in excess of the 90-day LIBOR.

Other financing arrangements is comprised of the following:

Each of the Company's insurance subsidiaries is a member of the FHLB. Membership allows the insurance subsidiaries access to collateralized advances, which may be used to support and enhance liquidity management. The amount of advances that may be taken is dependent on statutory admitted assets on a per company basis. Currently, none of the Company's insurance subsidiaries has advances outstanding under the FHLB facility.

FHLB membership also allows the Company's insurance subsidiaries access to standby letters of credit. On March 9, 2018, ECIC, EPIC, and EAC entered into standby Letter of Credit Reimbursement Agreements (Letter of Credit Agreements) with the FHLB. On March 1, 2019 FHLB and ECIC, EPIC, and EAC each amended their Letter of Credit Agreements to increase their respective credit amounts. The Letter of Credit Agreements are between the FHLB and each of EAC, in the amount of $60.0 million, ECIC, in the amount of $90.0 million, and EPIC, in the amount of $110.0 million. The amended Letter of Credit Agreements will expire on March 31, 2020; however, the Letter of Credit Agreements will remain evergreen with automatic one-year extensions unless the FHLB notifies the beneficiary at least 60 days prior to the then applicable expiration date of its election not to renew. The Letter of Credit Agreements may only be used to satisfy, in whole or in part, insurance deposit requirements with the State of California and are fully secured with eligible collateral at all times. The Letter of Credit Agreements are subject to annual maintenance charges and a fee of 15 basis points on issued amounts. As of March 31, 2019, letters of credit totaling $260.0 million were issued in lieu of securities on deposit with the State of California under these Letter of Credit Agreements.

As of March 31, 2019, investment securities having a fair value of $353.9 million were pledged to the FHLB by the Company's insurance subsidiaries in support of the collateralized advance facility and the Letter of Credit Agreements.

10. Accumulated Other Comprehensive Income

Accumulated other comprehensive income is comprised of unrealized gains (losses) on investments classified as AFS, net of deferred tax expense. Beginning in 2018, with the adoption of ASU No. 2016-01, the Company's investments in equity securities at fair value are no longer considered to be AFS and are reported at fair value with unrealized gains and losses included in Net realized and unrealized gains (losses) on investments on the Company's Consolidated Statements of Comprehensive Income. Prior to 2018, investments in equity securities at fair value were classified as AFS and changes in fair value were excluded from earnings and reported in accumulated other comprehensive income. The following table summarizes the components of accumulated other comprehensive income (loss):



	March 31, 2019			December 31, 2018
	(in millions)
Net unrealized gains (losses) on investments, before taxes	$	29.9		$	(17.3	)
Deferred tax (expense) benefit on net unrealized gains (losses)	(6.3		)	3.6
Total accumulated other comprehensive income (loss)	$	23.6		$	(13.7	)

11. Stock-Based Compensation

The Company awarded restricted stock units (RSUs) and performance share units (PSUs) to certain employees of the Company as follows:



	Number Awarded	Weighted Average Fair Value on Date of Grant		Aggregate Fair Value on Date of Grant
				(in millions)
March 2019
RSUs⁽¹⁾	72,060	$	40.54	$	2.9
PSUs⁽²⁾	95,940	40.54		3.9


(1)	The RSUs awarded in March 2019 were awarded to certain employees of the Company and vest 25% on March 15, 2020, and each of the subsequent three anniversaries of that date. The RSUs are subject to accelerated vesting in certain circumstances, including but not limited to: death, disability, retirement, or in connection with a change of control of the Company.


(2)	The PSUs awarded in March 2019 were awarded to certain employees of the Company and have a performance period of two years followed by an additional one year vesting period. The PSU awards are subject to certain performance goals with payouts that range from 0% to 200% of the target awards. The value shown in the table represents the aggregate number of PSUs awarded at the target level.

Employees who were awarded RSUs and PSUs are entitled to receive dividend equivalents for eligible awards, payable in cash, when the underlying award vests and becomes payable. If the underlying award does not vest or is forfeited, any dividend equivalents with respect to the underlying award will also fail to become payable and will be forfeited.

Stock options exercised totaled 1,300 for the three months ended March 31, 2019, 275 for the three months ended March 31, 2018, and 57,091 for the year ended December 31, 2018.

As of March 31, 2019, the Company had 186,208 options, 246,683 RSUs, and 273,948 PSUs (based on target number awarded) outstanding.

12. Earnings Per Share

Basic earnings per share is computed by dividing net income by the weighted average number of shares outstanding for the period. Diluted earnings per share reflects the potential dilutive impact of all common stock equivalents on earnings per share. Diluted earnings per share includes shares that are assumed to be issued under the “treasury stock method,” which reflects the potential dilution that would occur if outstanding RSUs and PSUs had vested and options were to be exercised.

Commencing in 2017, certain stock-based compensation awards are eligible to receive dividend equivalents on awards that fully vest or become payable. The dividend equivalents are reflected in the Company's net income; therefore, these awards are not considered participating securities for the purposes of determining earnings per share.

The following table presents the net income and the weighted average number of shares outstanding used in the earnings per common share calculations.



	Three Months Ended
	March 31,
	2019		2018
	(in millions, except share data)
Net income—basic and diluted	$	51.8	$	25.6
Weighted average number of shares outstanding—basic	32,442,287		32,830,481
Effect of dilutive securities:
PSUs	346,624		304,047
Stock options	80,138		100,914
RSUs	85,030		84,978
Dilutive potential shares	511,792		489,939
Weighted average number of shares outstanding—diluted	32,954,079		33,320,420

13. Subsequent Events

On April 12, 2019, the Florida Office of Insurance Regulation approved EPIC's request to pay off the Dekania surplus note (See Note 9). Subsequently, on April 15, 2019, EPIC formally called this note and notified the trustee of its intent to pay off the outstanding principal, plus accrued and unpaid interest, in the amount of $10.2 million, effective May 15, 2019.

Item 2. Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations

You should read the following discussion and analysis in conjunction with our consolidated financial statements and the related notes thereto included in Item 1 of Part I. Unless otherwise indicated, all references to “we,” “us,” “our,” “the Company,” or similar terms refer to EHI, together with its subsidiaries. The information contained in this quarterly report is not a complete description of our business or the risks associated with an investment in our common stock. We urge you to carefully review and consider the various disclosures made by us in this quarterly report and in our other reports filed with the Securities and Exchange Commission (SEC), including our Annual Report.

The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements if accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those discussed. You should not place undue reliance on these statements, which speak only as of the date of this report. Forward-looking statements include those related to our expected financial position, business, financing plans, litigation, future premiums, revenues, earnings, pricing, investments, business relationships, strategic initiatives, expected losses, accident year loss estimates, loss experience, loss reserves, acquisitions, competition, the impact of changes in interest rates, rate increases with respect to our business, and the insurance industry in general. Statements including words such as “expect,” “intend,” “plan,” “believe,” “estimate,” “may,” “anticipate,” “will,” or similar statements of a future or forward-looking nature identify forward-looking statements.

We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by law. All forward-looking statements address matters that involve risks and uncertainties that could cause actual results to differ materially from historical or anticipated results, depending on a number of factors. These risks and uncertainties include, but are not limited to, those described in our Annual Report and other documents that we have filed with the SEC.

Overview

We are a Nevada holding company. Through our insurance subsidiaries, we provide workers’ compensation insurance coverage to select, small businesses in low to medium hazard industries. Workers’ compensation insurance is provided under a statutory system wherein most employers are required to provide coverage for their employees’ medical, disability, vocational rehabilitation, and/or death benefit costs for work-related injuries or illnesses. We provide workers’ compensation insurance in 45 states and the District of Columbia, with a concentration in California, where over one-half of our business is generated. Our revenues are primarily comprised of net premiums earned, net investment income, and net realized and unrealized gains on investments.

We target small businesses, as we believe that this market is traditionally characterized by fewer competitors, more attractive pricing, and stronger persistency when compared to the U.S. workers’ compensation insurance industry in general. We believe we are able to price our policies at levels that are competitive and profitable over the long-term given our expertise in underwriting this market segment. Our underwriting approach is to consistently underwrite small business accounts at appropriate and competitive prices without sacrificing long-term profitability and stability for short-term top-line revenue growth.

Our strategy is to pursue profitable growth opportunities across market cycles and maximize total investment returns within the constraints of prudent portfolio management. We pursue profitable growth opportunities by focusing on disciplined underwriting and claims management, utilizing medical provider networks designed to produce superior medical and indemnity outcomes, establishing and maintaining strong, long-term relationships with independent insurance agencies, development and implementation of new technologies designed to transform the way small businesses and insurance agents utilize digital capabilities, and developing important alternative distribution channels. We continue to execute a number of ongoing business initiatives, including: focusing on internal and customer-facing business process excellence; accelerating the settlement of open claims; diversifying our risk exposure across geographic markets; utilizing a multi-company pricing platform; and utilizing territory-specific pricing. Additionally, we continue to execute our plan of aggressive development and implementation of new technologies and capabilities that we believe will fundamentally transform and enhance the digital experience of our customers, including: (i) continued investments in new technology, data analytics, and process improvement capabilities focused on improving the agent experience and enhancing agent efficiency; and (ii) the launch of Cerity, a subsidiary separate from our other insurance businesses, which offers digital, direct-to-customer workers’ compensation insurance solutions.

The insurance industry is highly competitive, and there is significant competition in the national workers' compensation industry that is based on price and quality of services. We compete with other specialty workers' compensation carriers, state agencies, multi-line insurance companies, professional employer organizations, self-insurance funds, and state insurance pools.

Pricing on our renewals showed an overall price decrease of 11.6% for the three months ended March 31, 2019, versus the rate level in effect on such business a year earlier. We believe that we can continue to write attractive business due to favorable loss costs and frequency trends and the success of our accelerated claims initiatives, despite the competitive market conditions we currently face. Given the strength of our balance sheet and the execution of our underwriting, claims, and investment strategies, we believe that we are well positioned for the current market cycle.

On August 11, 2017, we entered into a Purchase Agreement, as amended on October 25, 2018, with PRUS with respect to the Acquisition of all of the outstanding shares of capital stock of PRNY. The purchase price is equal to the sum of: (i) the amount of statutory capital and surplus of PRNY at closing (which is currently estimated to be approximately $40.0 million); and (ii) $5.8 million. We expect to fund the Acquisition with cash on hand.

Pursuant to the Purchase Agreement, all liabilities and obligations of PRNY existing as of the closing date, whether known or unknown, will be indemnified by PRUS. In addition, PartnerRe Ltd., the parent company of PRUS, has provided us with a Guaranty that unconditionally, absolutely, and irrevocably guarantees the full and prompt payment and performance by PRUS of all of its obligations, liabilities, and indemnities under the Purchase Agreement and the transactions contemplated thereby.

We will not be acquiring any employees or ongoing business operations pursuant to the Acquisition. The Acquisition is subject to certain closing conditions, including, among other things, approval from the Department of Financial Services of the State of New York.

Results of Operations

A primary measure of our performance is our ability to increase Adjusted stockholders' equity over the long-term. We believe that this measure is important to our investors, analysts, and other interested parties who benefit from having an objective and consistent basis for comparison with other companies within our industry. The following table shows a reconciliation of our Stockholders' equity on a GAAP basis to our Adjusted stockholders' equity.



	March 31, 2019		December 31, 2018
	(in millions)
GAAP stockholders' equity	$	1,071.7	$	1,018.2
Deferred reinsurance gain–LPT Agreement	147.1		149.6
Less: Accumulated other comprehensive income (loss), net	23.6		(13.7		)
Adjusted stockholders' equity⁽¹⁾	$	1,195.2	$	1,181.5


(1)	Adjusted stockholders' equity is a non-GAAP measure consisting of total GAAP stockholders' equity plus the Deferred Gain, less Accumulated other comprehensive income (loss), net.

Our net income was $51.8 million and $25.6 million for the three months ended March 31, 2019 and 2018, respectively, and our underwriting income was $16.7 million and $18.3 million for the for the same periods, respectively. Underwriting income or loss is determined by deducting losses and LAE, commission expense, and underwriting and other operating expenses from net premiums earned.

Our results of operations during the three months ended March 31, 2019 were impacted by: (i) favorable prior accident year loss development of $22.2 million, which decreased our losses and LAE by the same amount; and (ii) $21.2 million in net unrealized gains on equity securities during the period. Collectively, these items increased our pre-tax net income by $43.4 million during the first quarter of 2019.

Our results of operations during the three months ended March 31, 2018 were impacted by: (i) favorable prior accident year loss development of $12.4 million, which decreased our losses and LAE by the same amount; and (ii) $12.9 million in net unrealized losses on equity securities during the period. Collectively, these items decreased our net income by $0.5 million during the first quarter of 2018.

The components of net income are set forth in the following table:



	Three Months Ended
	March 31,
	2019		2018
	(in millions)
Gross premiums written	$	210.0	$	211.6
Net premiums written	$	208.7	$	210.1

Net premiums earned	$	174.8	$	176.6
Net investment income	21.8		19.4
Net realized and unrealized gains on investments	23.3		(8.0		)
Other income	0.4		—
Total revenues	220.3		188.0

Losses and LAE	88.6		95.4
Commission expense	22.0		23.7
Underwriting and other operating expenses	47.5		39.2
Interest and financing expenses	0.4		0.3
Total expenses	158.5		158.6
Income tax expense	10.0		3.8
Net income	$	51.8	$	25.6
Less amortization of the Deferred Gain related to losses	$	2.0	$	2.1
Less amortization of the Deferred Gain related to contingent commission	0.5		0.5
Net income before impact of the LPT Agreement⁽¹⁾	$	49.3	$	23.0

(1)

We define net income before impact of the LPT Agreement as net income before the impact of: (a) amortization of the Deferred Gain; (b) adjustments to the LPT Agreement ceded reserves; and (c) adjustments to the Contingent commission receivable–LPT Agreement. The Deferred Gain reflects the unamortized gain from the LPT Agreement. Under GAAP, this gain is deferred and is being amortized using the recovery method in which amortization is determined by the proportion of actual reinsurance recoveries to total estimated recoveries over the life of the LPT Agreement, except for the contingent profit commission, which is amortized through June 30, 2024. The amortization is reflected in losses and LAE. We periodically reevaluate the remaining direct reserves subject to the LPT Agreement and the expected losses and LAE subject to the contingent profit commission under the LPT Agreement. Our reevaluation results in corresponding adjustments, if needed, to reserves, ceded reserves, contingent commission receivable, and the Deferred Gain, with the net effect being an increase or decrease to our net income. Net income before impact of the LPT Agreement is not a measurement of financial performance under GAAP, but rather reflects a difference in accounting treatment between statutory and GAAP, and should not be considered in isolation or as an alternative to net income before income taxes or net income, or any other measure of performance derived in accordance with GAAP.

We present net income before impact of the LPT Agreement because we believe that it is an important supplemental measure of our ongoing operating performance to be used by analysts, investors, and other interested parties in evaluating us. The LPT Agreement was a non-recurring transaction under which the Deferred Gain does not affect our ongoing operations, and, consequently, we believe this presentation is useful in providing a meaningful understanding of our operating performance. In addition, we believe this non-GAAP measure, as we have defined it, is helpful to our management in identifying trends in our performance because the LPT Agreement has limited significance on our current and ongoing operations.

Gross Premiums Written

Gross premiums written were $210.0 million and $211.6 million for the three months ended March 31, 2019 and 2018, respectively. The year-over-year decrease was primarily due to a decrease in final audit premiums.

Net Premiums Written

Net premiums written were $208.7 million and $210.1 million for the three months ended March 31, 2019 and 2018, respectively, which included $1.3 million and $1.5 million of reinsurance premiums ceded for the same periods, respectively.

Net Premiums Earned

Net premiums earned were $174.8 million and $176.6 million for the three months ended March 31, 2019 and 2018, respectively. Net premiums earned are primarily a function of the amount and timing of net premiums previously written.

The following table shows the percentage change in our in-force premiums, policy count, average policy size, and payroll exposure (upon which our premiums are based) overall, for California, where 52% of our premiums were generated, and for all other states, excluding California:



	As of March 31, 2019
	Year-to-Date Change						Year-Over-Year Change
	Overall		California		All Other States		Overall		California		All Other States
In-force premiums	1.2	%	(0.9	)%	3.7	%	4.7	%	(0.2	)%	10.6	%
In-force policy count	2.6		2.3		2.8		8.3		6.3		10.1
Average in-force policy size	(1.3	)	(3.2	)	0.9		(3.4	)	(6.1	)	0.4
In-force payroll exposure	6.6		5.8		7.2		22.0		24.4		20.6

The following table shows our in-force premiums and number of policies in-force for each state with at least five percent of our in-force premiums and all other states combined for the periods presented:



	March 31, 2019			December 31, 2018			March 31, 2018			December 31, 2017
State	In-force Premiums		Policies In-force	In-force Premiums		Policies In-force	In-force Premiums		Policies In-force	In-force Premiums		Policies In-force
	(dollars in millions)
California	$	353.9	42,973	$	357.1	41,988	$	354.6	40,436	$	349.4	40,573
Florida	40.8		5,753	41.0		5,833	42.0		5,653	41.8		5,625
Other (43 states and D.C.)	279.7		45,138	268.1		43,677	247.9		40,550	235.7		39,296
Total	$	674.4	93,864	$	666.2	91,498	$	644.5	86,639	$	626.9	85,494

Our alternative distribution channels that utilize partnerships and alliances generated $160.1 million and $150.8 million, or 23.7% and 23.4%, of our in-force premiums as of March 31, 2019 and 2018, respectively. We believe that the bundling of products and services through these relationships contributes to higher retention rates than business generated by our independent agents. These relationships also allow us to access new customers that we may not have access to through our independent agent distribution channel. We continue to actively seek new partnerships and alliances.

Net Investment Income and Net Realized and Unrealized Gains on Investments

We invest in fixed maturity securities, equity securities, short-term investments, and cash equivalents. Net investment income includes interest and dividends earned on our invested assets and amortization of premiums and discounts on our fixed maturity securities, less bank service charges and custodial and portfolio management fees. We have established a high quality/short duration bias in our investment portfolio.

Net investment income increased 12.4% for the three months ended March 31, 2019 compared to the same period of 2018. The average pre-tax book yield on invested assets increased to 3.4% as of March 31, 2019, up from 3.1% as of March 31, 2018. Average invested assets was up slightly year-over-year.

Realized and certain unrealized gains and losses on our investments are reported separately from our net investment income. Realized gains and losses on investments include the gain or loss on a security at the time of sale compared to its original or adjusted cost (equity securities) or amortized cost (fixed maturity securities). Realized losses are also recognized when securities are written down as a result of an other-than-temporary impairment. Changes in fair value of equity securities are also included in Net realized and unrealized gains on investments on our Consolidated Statements of Comprehensive Income.

Net realized and unrealized gains (losses) on investments were $23.3 million and $(8.0) million for the three months ended March 31, 2019 and 2018, respectively. The net realized and unrealized gains on investments for the three months ended March 31, 2019 included $21.2 million of unrealized gains on equity securities and $2.1 million of net realized gains on investments. The net realized and unrealized losses on investments for the three months ended March 31, 2018 included $12.9 million of unrealized losses on equity securities, partially offset by $4.9 million of net realized gains on investments. The unrealized gains or losses on equity securities for the three months ended March 31, 2019 and 2018 were primarily the result of volatility in equity markets during those periods. Realized gains were primarily related to the sale of fixed maturity and equity securities, resulting from a rebalancing of our investment portfolio. Net realized and unrealized gains on investments included $2.0 million of other-than-temporary impairments for the three months ended March 31, 2018. There were no other-than-temporary impairments on investments for the three months ended March 31, 2019.

Additional information regarding our Investments is set forth under “—Liquidity and Capital Resources—Investments.”

Losses and LAE, Commission Expenses, and Underwriting and Other Operating Expenses

The combined ratio, a key measurement of underwriting profitability, is the sum of the loss and LAE ratio, the commission expense ratio, and the underwriting and other operating expenses ratio. A combined ratio below 100% indicates that an insurance company is generating an underwriting profit, and conversely, a combined ratio above 100% indicates that an insurance company is generating an underwriting loss.

The following table presents our calendar year combined ratios.



	Three Months Ended
	March 31,
	2019		2018
Loss and LAE ratio	50.7	%	54.0	%
Underwriting and other operating expenses ratio	27.1		22.2
Commission expense ratio	12.6		13.4
Combined ratio	90.4	%	89.6	%

We include all of the operating expenses of our holding company in the calculation of our combined ratio, which added approximately two percentage points to that ratio for each of the three months ended March 31, 2019 and 2018, respectively.

Loss and LAE Ratio

Losses and LAE represents our largest expense item and includes claim payments made, amortization of the Deferred Gain, estimates for future claim payments and changes in those estimates for current and prior periods, and costs associated with investigating, defending, and adjusting claims. The quality of our financial reporting depends in large part on accurately predicting our losses and LAE, which are inherently uncertain as they are estimates of the ultimate cost of individual claims based on actuarial estimation techniques.

Our indemnity claims frequency (the number of claims expressed as a percentage of payroll) increased year-over-year; however, through March 31, 2019, we saw a slight downward movement in medical and indemnity costs per claim that is reflected in our current accident year loss estimate. We believe our current accident year loss estimate is adequate; however, ultimate losses will not be known with any certainty for many years.

Our loss and LAE ratio decreased 3.3 percentage points, or 6.2%, for the three months ended March 31, 2019, compared to the same period of 2018. The decrease in our loss and LAE ratio was primarily attributable to increased favorable prior accident year loss development that totaled $22.2 million during the three months ended March 31, 2019, which included $22.0 favorable development on our voluntary business and $0.2 million favorable development on our assigned risk business. For the three months ended March 31, 2018, we had $12.4 million of favorable development, which included $12.0 million of favorable development on our voluntary business and $0.4 million of favorable development on our assigned risk business. Favorable prior accident year loss development in both periods was primarily the result of observed favorable loss cost trends, primarily for the 2014 through 2017 accident years, which have been impacted by our internal initiatives to reduce loss costs, including the accelerated claims settlement activity that began in 2014 and have continued into 2019.

Our current accident year loss and LAE ratio was 64.8% and 62.5% for the three months ended March 31, 2019 and 2018, respectively. This change includes an increase of 2.0 percentage points in the current accident year loss ratio on our voluntary business, while our assigned risk business added an additional 0.3 percentage points to our current accident year loss ratio for the three months ended March 31, 2019. The year-over-year increase on our voluntary business was primarily due to the impact of increased competitive pressures and price decreases across most of our markets; however, our current accident year loss and LAE ratio continues to reflect the impact of key business initiatives, including: an emphasis on the accelerated settlement of open claims; diversifying our risk exposure across geographic markets; and leveraging data-driven strategies to target, underwrite, and price profitable classes of business across all of our markets.

Excluding the impact from the LPT, losses and LAE would have been $91.1 million and $98.0 million, or 52.1% and 55.5% of net premiums earned, for the three months ended March 31, 2019 and 2018, respectively.

The table below reflects prior accident year loss and LAE reserve adjustments and the impact of the LPT on net income before income taxes.



	Three Months Ended
	March 31,
	2019		2018
	(in millions)
Prior accident year favorable loss development, net	$	22.2	$	12.4
Amortization of the Deferred Gain related to losses	$	2.0	$	2.1
Amortization of the Deferred Gain related to contingent commission	0.5		0.5
Total impact of the LPT on losses and LAE	2.5		2.6
Total losses and LAE reserve adjustments	$	24.7	$	15.0

Underwriting and Other Operating Expenses Ratio

Underwriting and other operating expenses are those costs that we incur to underwrite and maintain the insurance policies we issue, excluding commission. These expenses include premium taxes and certain other general expenses that vary with, and are primarily related to, producing new or renewal business. Other underwriting expenses include policyholder dividends, changes in estimates of future write-offs of premiums receivable, general administrative expenses such as salaries and benefits, rent, office supplies, depreciation, and all other operating expenses not otherwise classified separately. Policy acquisition costs are variable based on premiums earned. Other operating expenses are more fixed in nature and become a smaller percentage of net premiums earned as premiums increase.

Our underwriting and other operating expenses ratio increased 4.9 percentage points, or 22.3%, for the three months ended March 31, 2019, compared to the same period of 2018. During the three months ended March 31, 2019, our compensation-related expenses increased $2.3 million, our professional fees increased $1.7 million, and our premium taxes and assessments increased $0.9 million compared to the same period of 2018. These increases were largely the result of our aggressive development and implementation of new digital technologies and capabilities. Additionally, our bad debt expense was up $1.7 million year-over-year, primarily related to higher than anticipated recoveries during the first quarter of 2018.

Commission Expense Ratio

Commission expenses include direct commissions to our agents and brokers, including our partnerships and alliances, for the premiums that they produce for us, as well as incentive payments, other marketing costs, and fees.

Our commission expense ratio decreased 0.8 percentage points, or 6.2%, for the three months ended March 31, 2019, compared to the same period of 2018. The decrease in the commission expense ratio was primarily the result of a decrease in projected 2019 agency incentive commissions.

Income Tax Expense

Income tax expense was $10.0 million and $3.8 million for the three months ended March 31, 2019 and 2018, respectively, representing an effective tax rate of 16.2% and 12.9% for the same periods, respectively. Tax-advantaged investment income, Deferred Gain amortization, and certain other adjustments reduced our effective income tax rate below the U.S. statutory rate of 21%.

Liquidity and Capital Resources

Holding Company Liquidity

We are a holding company and our ability to fund our operations is contingent upon existing capital and the ability of our subsidiaries to pay dividends up to the holding company. Payment of dividends by our insurance subsidiaries is restricted by state insurance laws and regulations, including laws establishing minimum solvency and liquidity thresholds. We require cash to pay stockholder dividends, repurchase common stock, make interest and principal payments on any outstanding debt obligations, provide additional surplus to our insurance subsidiaries, and fund our operating expenses.

Our insurance subsidiaries' ability to pay dividends to their parent is based on reported capital, surplus, and dividends paid within the prior 12 months. The maximum dividend that may be paid in 2019 by EPIC without prior regulatory approval is $19.0 million. During the first quarter of 2019, EICN made a $19.7 million cash dividend payment to its parent company. As a result of that payment, EICN's dividend capacity is limited to $0.1 million without prior regulatory approval for the remainder of 2019. ECIC can pay $8.8 million of dividends through September 5, 2019, and $57.2 million thereafter, without prior regulatory approval, and EAC can pay $0.9 million of dividends through May 18, 2019, and $19.8 million thereafter, without prior regulatory approval.

Total cash and investments at the holding company was $124.1 million at March 31, 2019, consisting of $46.9 million of cash and cash equivalents, $25.9 million of unaffiliated fixed maturity securities, and $51.3 million of equity securities. We do not currently have a revolving credit facility because we believe that the holding company's cash needs for the foreseeable future will be met with its cash and investments on hand, as well as dividends available from our insurance subsidiaries.

Operating Subsidiaries' Liquidity

The primary sources of cash for our operating subsidiaries, which include our insurance and other operating subsidiaries, are premium collections, investment income, sales and maturities of investments, and reinsurance recoveries. The primary uses of cash by our operating subsidiaries are payments of losses and LAE, commission expenses, underwriting and other operating expenses, ceded reinsurance, investment purchases and dividends paid to their parent.

Total cash and investments held by our operating subsidiaries was $2,728.1 million at March 31, 2019, consisting of $47.9 million of cash and cash equivalents, $2,495.1 million of fixed maturity securities, and $185.1 million of equity securities. Sources of immediate and unencumbered liquidity at our operating subsidiaries as of March 31, 2019 consisted of $45.7 million of cash and cash equivalents, $178.8 million of publicly traded equity securities whose proceeds are available within three business days, and $1,017.5 million of highly liquid fixed maturity securities whose proceeds are available within three business days. We believe that our subsidiaries' liquidity needs over the next 24 months will be met with cash from operations, investment income, and maturing investments.

Each of our insurance subsidiaries is a member of the FHLB. Membership allows our insurance subsidiaries access to collateralized advances, which may be used to support and enhance liquidity management. The amount of advances that may be taken is dependent on statutory admitted assets on a per company basis. Currently, none of our insurance subsidiaries has advances outstanding under the FHLB facility.

FHLB membership also allows our insurance subsidiaries access to Letter of Credit Agreements and on March 9, 2018, ECIC, EPIC, and EAC entered into Letter of Credit Agreements with the FHLB. On March 1, 2019 FHLB and ECIC, EPIC, and EAC each amended their Letter of Credit Agreements to increase their respective credit amounts. The Letter of Credit Agreements are between the FHLB and each of EAC, in the amount of $60.0 million, ECIC, in the amount of $90.0 million, and EPIC, in the amount of $110.0 million. The amended Letter of Credit Agreements became effective March 1, 2019 and expire March 31, 2020. The Letter of Credit Agreements may only be used to satisfy, in whole or in part, insurance deposit requirements with the State of California and are fully secured with eligible collateral at all times (See Note 9).

We purchase reinsurance to protect us against the costs of severe claims and catastrophic events. On July 1, 2018, we entered into a new reinsurance program that is effective through June 30, 2019. The reinsurance program consists of one treaty covering excess of loss and catastrophic loss events in four layers of coverage. Our reinsurance coverage is $190.0 million in excess of our $10.0 million retention on a per occurrence basis, subject to certain exclusions. We believe that our reinsurance program meets our needs and that we are sufficiently capitalized.

Various state laws and regulations require us to hold investment securities or letters of credit on deposit with certain states in which we do business. These laws and regulations govern both the amount and types of investment securities that are eligible for deposit. Securities having a fair value of $925.5 million and $867.7 million were on deposit at March 31, 2019 and December 31, 2018, respectively. Additionally, standby letters of credit from the FHLB have been issued in lieu of $260.0 million of securities on deposit at March 31, 2019.

Certain reinsurance contracts require company funds to be held in trust for the benefit of the ceding reinsurer to secure the outstanding liabilities we assumed. The fair value of fixed maturity securities held in trust for the benefit of our ceding reinsurers was $13.7 million and $23.2 million at March 31, 2019 and December 31, 2018, respectively.

Sources of Liquidity

We monitor the cash flows of each of our subsidiaries individually, as well as collectively as a consolidated group. We use trend and variance analyses to project future cash needs, making adjustments to our forecasts as appropriate.

The table below shows our net cash flows for the three months ended:



	March 31,
	2019			2018
	(in millions)
Cash, cash equivalents, and restricted cash provided by (used in):
Operating activities	$	20.1		$	46.2
Investing activities	9.9			(53.7		)
Financing activities	(37.2		)	(9.6		)
Decrease in cash, cash equivalents, and restricted cash	$	(7.2	)	$	(17.1	)

For additional information regarding our cash flows, see Item 1, Consolidated Statements of Cash Flows.

Operating Activities

Net cash provided by operating activities for the three months ended March 31, 2019 included net premiums received of $188.8 million, and investment income received of $23.5 million. These operating cash inflows were partially offset by net claims payments of $103.9 million, underwriting and other operating expenses paid of $63.9 million, and commissions paid of $24.7 million.

Net cash provided by operating activities for the three months ended March 31, 2018 included net premiums received of $186.9 million, and investment income received of $22.5 million. These operating cash inflows were partially offset by net claims payments of $99.8 million, underwriting and other operating expenses paid of $39.4 million, and commissions paid of $23.8 million.

Investing Activities

Net cash provided by investing activities for the three months ended March 31, 2019 was primarily related to sales, maturities, and redemptions of investments whose proceeds were used to fund claims payments, underwriting and other operating expenses, stockholder dividend payments, and share repurchases, partially offset by the investment of premiums received and the reinvestment of funds from sales, maturities, redemptions, and interest income.

Net cash used in investing activities for the three months ended March 31, 2018 was primarily related to the investment of premiums received and the reinvestment of funds from sales, maturities, redemptions, and interest income. These investing cash outflows were partially offset by investment sales whose proceeds were used to fund claims payments, underwriting and other operating expenses, and stockholder dividend payments.

Financing Activities

Net cash used in financing activities for the three months ended March 31, 2019 was primarily related to share repurchases and stockholder dividend payments.

Net cash used in financing activities for the three months ended March 31, 2018 was primarily related to stockholder dividend payments.

Dividends

Stockholder dividends paid were $7.3 million and $6.6 million for the three months ended March 31, 2019 and 2018, respectively. On April 24, 2019, the Board of Directors declared a $0.22 dividend per share and eligible RSU and PSU, payable May 22, 2019, to stockholders of record on May 8, 2019.

Share Repurchases

On February 21, 2018, the Board of Directors authorized a share repurchase program for repurchases of up to $50.0 million of our common stock from February 26, 2018 through February 26, 2020 (the 2018 Program). On April 24, 2019, the Board of Directors authorized a $50 million expansion of the 2018 Program, to $100 million, and extended the repurchase authority pursuant to the 2018 Program through June 30, 2020. The 2018 Program provides that shares may be purchased at prevailing market prices through a variety of methods, including open market or private transactions, in accordance with applicable laws and regulations and as determined by management. The timing and actual number of shares that may be repurchased will depend on a variety of factors, including the share price, corporate and regulatory requirements, and other market and economic conditions. Repurchases under the 2018 Program may be commenced, modified, or suspended from time to time without prior notice, and the program may be suspended or discontinued at any time. Through March 31, 2019, we repurchased a total of 783,365 shares of common stock under the 2018 Program at an average price of $40.90 per share, including commissions, for a total cost of $32.0 million.

Capital Resources

As of March 31, 2019, the capital resources available to us consisted of: (i) $1,071.7 million of stockholders’ equity; (ii) the $147.1 million Deferred Gain; and (iii) $20.0 million in surplus notes maturing in 2034.

Contractual Obligations and Commitments

The following table identifies our long-term debt and contractual obligations as of March 31, 2019.



	Payment Due By Period
	Total		Less Than 1-Year		1-3 Years		4-5 Years		More Than 5 Years
	(in millions)
Operating leases	$	21.2	$	5.1	$	6.7	$	3.6	$	5.8
Non-cancellable contracts	17.4		5.3		6.7		5.4		—
Notes payable⁽¹⁾	41.3		1.4		2.7		2.7		34.5
Capital leases	0.8		0.3		0.5		—		—
Unpaid losses and LAE reserves ⁽²⁾⁽³⁾	2,189.3		380.9		476.8		284.9		1,046.7
Unfunded investments	50.0		50.0		—		—		—
Total contractual obligations	$	2,320.0	$	443.0	$	493.4	$	296.6	$	1,087.0


(1)	Notes payable includes payments for the principal and estimated interest expense on our surplus notes outstanding based on LIBOR plus a margin. The interest rates used ranged from 6.7% to 6.9%.

On April 12, 2019, the Florida Office of Insurance Regulation approved EPIC's request to pay off the Dekania surplus note (See Note 9 to the Notes to Consolidated Financial Statements for additional information related to this surplus note). Subsequently, on April 15, 2019, EPIC formally called this note and notified the trustee of its intent to pay off the outstanding principal, plus accrued and unpaid interest, in the amount of $10.2 million, effective May 15, 2019.

(2)

Estimated losses and LAE reserve payment patterns have been computed based on historical information. Our calculation of loss and LAE reserve payments by period is subject to the same uncertainties associated with determining the level of reserves and to the additional uncertainties arising from the difficulty of predicting when claims (including claims that have not yet been reported to us) will be paid. Actual payments of losses and LAE by period will vary, perhaps materially, from the above table to the extent that current estimates of losses and LAE reserves vary from actual ultimate claims amounts due to variations between expected and actual payout patterns.


(3)	The unpaid losses and LAE reserves are presented gross of reinsurance recoverables for unpaid losses, which were as follows for each of the periods presented above:



	Recoveries Due By Period
	Total			Less Than 1-Year			1-3 Years			4-5 Years			More Than 5 Years
	(in millions)
Reinsurance recoverables on unpaid losses and LAE	$	(498.7	)	$	(27.1	)	$	(51.4	)	$	(48.8	)	$	(371.4	)

Investments

Our investment portfolio is structured to support our need for: (i) optimizing our risk-adjusted total return; (ii) providing adequate liquidity; (iii) facilitating financial strength and stability; and (iv) ensuring regulatory and legal compliance.

As of March 31, 2019, the total amortized cost of our investments recorded at fair value was $2,631.9 million and its fair value was $2,751.0 million. These investments provide a steady source of income, which may fluctuate with changes in interest rates and our current investment strategies.

We also have a $6.4 million investment in FHLB stock which we record at cost. We receive periodic dividends from the FHLB for this investment, when declared, which can vary from period to period.

As of March 31, 2019, our investment portfolio consisted of 92% fixed maturity securities. We strive to limit interest rate risk associated with fixed maturity investments by managing the duration of these securities. Our fixed maturity securities (excluding cash and cash equivalents) had a duration of 3.9 at March 31, 2019. To minimize interest rate risk, our portfolio is weighted toward short-term and intermediate-term bonds; however, our investment strategy balances consideration of duration, yield, and credit risk. Our investment guidelines require that the minimum weighted average quality of our fixed maturity securities portfolio be "A+," using ratings assigned by Standard & Poor's (S&P). Our fixed maturity securities portfolio had a weighted average quality of "AA-" as of March 31, 2019, with 49.8% of the portfolio rated "AA" or better, based on market value. Other securities within fixed maturity securities consist of bank loans, which are classified as AFS and are reported at fair value.

We also have a portfolio of equity securities. We strive to limit the exposure to equity price risk associated with equity securities by diversifying our holdings across several industry sectors. Equity securities represented 8% of our investment portfolio at March 31, 2019.

We believe that our current asset allocation meets our strategy to preserve capital for claims and policy liabilities and to provide sufficient capital resources to support and grow our ongoing insurance operations.

The following table shows the estimated fair value, the percentage of the fair value to total invested assets at fair value, the average book yield, and the average tax equivalent yield (each based on the book value of each category of invested assets) as of March 31, 2019.



Category	Estimated Fair Value		Percentage of Total		Book Yield		Tax Equivalent Yield ⁽¹⁾
	(in millions, except percentages)
U.S. Treasuries	$	108.0	3.9	%	2.2	%	2.2	%
U.S. Agencies	9.9		0.4		4.7		4.7
States and municipalities	519.5		18.9		3.3		3.9
Corporate securities	1,086.0		39.4		3.3		3.3
Residential mortgage-backed securities	461.8		16.8		3.2		3.2
Commercial mortgage-backed securities	99.5		3.6		3.0		3.0
Asset-backed securities	60.9		2.2		3.4		3.4
Other securities	175.4		6.4		5.3		5.3
Equity securities	230.0		8.4		4.8		5.1
Total investments at fair value	$	2,751.0	100.0	%
Weighted average yield					3.4	%	3.6	%

(1) Computed using a statutory income tax rate of 21%

The following table shows the percentage of total estimated fair value of our fixed maturity securities as of March 31, 2019 by credit rating category, using the lower of ratings assigned by Moody's Investors Service or S&P.



Rating	Percentage of Total Estimated Fair Value
“AAA”	7.5	%
“AA”	42.3
“A”	32.2
“BBB”	11.2
Below investment grade	6.8
Total	100.0	%

Investments that we currently own could be subject to default by the issuer or could suffer declines in fair value that become other-than-temporary. We regularly assess individual securities as part of our ongoing portfolio management, including the identification of other-than-temporary declines in fair value. Our other-than-temporary impairment assessment includes reviewing the extent and duration of declines in fair value of investments below amortized cost, historical and projected financial performance and near-term prospects of the issuer, the outlook for industry sectors, credit rating, and macro-economic changes. We also make a determination as to whether it is not more likely than not that we will be required to sell the security before its fair value recovers to above cost, or maturity.

We believe that we have appropriately identified the declines in the fair values of our unrealized losses for the three months ended March 31, 2019. We recognized no impairments on fixed maturity securities during the three months ended March 31, 2019. We determined that the unrealized losses on fixed maturity securities were primarily the result of prevailing interest rates and not the credit quality of the issuers. The fixed maturity securities whose fair value was less than amortized cost were not determined to be other-than-temporarily impaired given the severity and duration of the impairment, the credit quality of the issuers, our intent to not sell the securities, and a determination that it is not more likely than not that we will be required to sell the securities at an amount less than its amortized cost.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

Critical Accounting Policies

The unaudited interim consolidated financial statements included in this quarterly report include amounts based on the use of estimates and judgments of management for those transactions that are not yet complete. We believe that the estimates and judgments that were most critical to the preparation of the consolidated financial statements involved the following: (a) reserves for losses and LAE; (b) reinsurance recoverables; (c) recognition of premium income; (d) deferred income taxes; and (e) valuation of investments. These estimates and judgments require the use of assumptions about matters that are highly uncertain and therefore

are subject to change as facts and circumstances develop. Our accounting policies are discussed under "Critical Accounting Policies" in Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk is the risk of potential economic loss principally arising from adverse changes in the fair value of financial instruments. The major components of market risk affecting us are credit risk, interest rate risk, and equity price risk, and are described in detail in our Annual Report on Form 10-K. We have not experienced any material changes in market risk since December 31, 2018.

The primary market risk exposure to our investment portfolio, which consists primarily of fixed maturity securities, is interest rate risk. We have the ability to hold fixed maturity securities to maturity and we strive to limit interest rate risk by managing duration. As of March 31, 2019, our fixed maturity securities portfolio had a duration of 3.9. We continually monitor the impact of interest rate changes on our investment portfolio and liquidity obligations. Changes to our market risk, if any, since December 31, 2018 are reflected in Management’s Discussion and Analysis of Financial Condition and Results of Operations and the financial statements contained in this Form 10-Q.

Item 4. Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act)) as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

There have not been any changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

From time-to-time, the Company is involved in pending and threatened litigation in the normal course of business in which claims for monetary damages are asserted. In the opinion of management, the ultimate liability, if any, arising from such pending or threatened litigation is not expected to have a material effect on our results of operations, liquidity, or financial position.

Item 1A. Risk Factors

We have disclosed in our Annual Report the most significant risk factors that can impact year-to-year comparisons and that may affect the future performance of the Company’s business. On a quarterly basis, we review these disclosures and update the risk factors, as appropriate. As of the date of this report, there have been no material changes to the risk factors contained in our Annual Report.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following table provides information with respect to the Company's repurchases of its common stock during the first quarter of 2019:



Period	Total Number of Shares Purchased	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Program	Approximate Dollar Value of Shares that May Yet be Purchased Under the Program
					(in millions)
January 1 – January 31, 2019	50,772	$	41.69	50,772	$	43.3
February 1 – February 28, 2019	—	—		—	43.3
March 1 – March 31, 2019	620,065	40.83		620,065	18.0
Total	670,837	$	40.90	670,837

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

Incorporated by Reference Herein

Exhibit

No.

Description of Exhibit

Included

Herewith

Form

File No.

Exhibit

Filing Date

10.1

Confirmation of Amendment No. 1 To Irrevocable Letter of Credit No. 2018-08 between EAC and FHLB SF, dated March 1, 2019

10.2

Confirmation of Amendment No. 1 To Irrevocable Letter of Credit No. 2018-09 between ECIC and FHLB SF, dated March 1, 2019

10.3

Confirmation of Amendment No. 1 To Irrevocable Letter of Credit No. 2018-10 between EPIC and FHLB SF, dated March 1, 2019

31.1

Certification of Douglas D. Dirks Pursuant to Section 302

31.2

Certification of Michael S. Paquette Pursuant to Section 302

32.1

Certification of Douglas D. Dirks Pursuant to Section 906

32.2

Certification of Michael S. Paquette Pursuant to Section 906

101.INS

XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded with the Inline XBRL document.

101.SCH

XBRL Taxonomy Extension Schema Document

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

XBRL Taxonomy Extension Label Linkbase Document

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document

—————

*Represents management contracts and compensatory plans or arrangements.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

EMPLOYERS HOLDINGS, INC.



Date:	April 25, 2019	/s/ Michael S. Paquette
		Michael S. Paquette
		Executive Vice President and Chief Financial Officer
		Employers Holdings, Inc.
		(Principal Financial and Accounting Officer)