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Employers Holdings, Inc. - Quarter Report: 2020 September (Form 10-Q)


UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q

☑  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended September 30, 2020

OR

☐ 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)
Nevada04-3850065
(State or other jurisdiction
of incorporation or organization)		(I.R.S. Employer
Identification Number)
10375 Professional Circle
Reno,Nevada89521
(Address of principal executive offices and zip code)
(888) 682-6671
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $0.01 par value per shareEIGNew York Stock Exchange

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 ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☑ No ☐
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,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer☑Accelerated filer☐Non-accelerated filer☐Smaller reporting company☐
Emerging growth company☐
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. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
As of October 15, 2020, there were 29,021,111 shares of the registrant's common stock outstanding.


TABLE OF CONTENTS
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PART I – FINANCIAL INFORMATION
Item 1.  Consolidated Financial Statements
Employers Holdings, Inc. and Subsidiaries
Consolidated Balance Sheets
(in millions, except share data)
As ofAs of
September 30,
2020		December 31,
2019
Assets(unaudited)
Investments:  
Fixed maturity securities at fair value (amortized cost $2,301.6 at September 30, 2020 and $2,403.3 at December 31, 2019, net of CECL allowance of $1.2 at September 30, 2020)
$2,442.6 $2,485.9 
Equity securities at fair value (cost $110.8 at September 30, 2020 and $155.6 at December 31, 2019)
188.7 256.7 
Equity securities at cost
6.7 6.7 
Other invested assets (cost $33.0 at September 30, 2020 and $28.4 at December 31, 2019)
32.8 29.1 
Short-term investments at fair value (amortized cost $45.4 at September 30, 2020)
45.8 — 
Total investments2,716.6 2,778.4 
Cash and cash equivalents237.3 154.9 
Restricted cash and cash equivalents0.3 0.3 
Accrued investment income17.2 16.4 
Premiums receivable (less CECL allowance of $10.4 at September 30, 2020 and less bad debt allowance of $4.6 at December 31, 2019)
251.6 285.7 
Reinsurance recoverable for:
Paid losses 7.7 7.2 
Unpaid losses (less CECL allowance of $0.4 at September 30, 2020)
513.3 532.5 
Deferred policy acquisition costs46.6 47.9 
Property and equipment, net20.2 21.9 
Operating lease right-of-use assets18.6 15.9 
Intangible assets, net13.6 13.6 
Goodwill36.2 36.2 
Contingent commission receivable—LPT Agreement13.2 13.2 
Cloud computing arrangements43.0 33.6 
Other assets49.7 46.4 
Total assets$3,985.1 $4,004.1 
Liabilities and stockholders’ equity  
Claims and policy liabilities:  
Unpaid losses and loss adjustment expenses$2,141.4 $2,192.8 
Unearned premiums325.6 337.1 
Commissions and premium taxes payable45.5 48.6 
Accounts payable and accrued expenses23.2 29.8 
Deferred reinsurance gain—LPT Agreement129.7 137.1 
FHLB advances35.0 — 
Operating lease liability20.9 17.8 
Non-cancellable obligations22.9 23.0 
Other liabilities73.5 52.1 
Total liabilities$2,817.7 $2,838.3 
Commitments and contingencies
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Employers Holdings, Inc. and Subsidiaries
Consolidated Balance Sheets
(in millions, except share data)
As ofAs of
September 30,
2020		December 31,
2019
Stockholders’ equity:(unaudited) 
Common stock, $0.01 par value; 150,000,000 shares authorized; 57,389,615 and 57,184,370 shares issued and 29,069,753 and 31,355,378 shares outstanding at September 30, 2020 and December 31, 2019, respectively
$0.6 $0.6 
Preferred stock, $0.01 par value; 25,000,000 shares authorized; none issued— — 
Additional paid-in capital401.6 396.4 
Retained earnings1,191.4 1,158.8 
Accumulated other comprehensive income, net of tax111.7 65.3 
Treasury stock, at cost (28,319,862 shares at September 30, 2020 and 25,828,992 shares at December 31, 2019)
(537.9)(455.3)
Total stockholders’ equity1,167.4 1,165.8 
Total liabilities and stockholders’ equity$3,985.1 $4,004.1 
See accompanying unaudited notes to the consolidated financial statements.
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Employers Holdings, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
(in millions, except per share data)
Three Months EndedNine Months Ended
 September 30,September 30,
 2020201920202019
Revenues(unaudited)(unaudited)
Net premiums earned$144.4 $175.8 $463.8 $526.1 
Net investment income18.5 22.3 58.3 65.5 
Net realized and unrealized gains (losses) on investments19.1 2.6 (2.3)33.3 
Other income (loss)(0.1)0.3 0.5 0.6 
Total revenues181.9 201.0 520.3 625.5 
Expenses  
Losses and loss adjustment expenses77.1 92.9 254.5 268.2 
Commission expense19.4 21.9 59.9 67.7 
Underwriting and general and administrative expenses46.4 45.3 137.9 136.6 
Interest and financing expenses— — — 0.6 
Other expenses0.7 — 0.7 — 
Total expenses143.6 160.1 453.0 473.1 
Net income before income taxes38.3 40.9 67.3 152.4 
Income tax expense7.2 8.1 11.5 27.0 
Net income$31.1 $32.8 $55.8 $125.4 
Comprehensive income
Unrealized AFS investment gains arising during the period (net of tax expense of $(2.2) and $(4.3) for the three months ended September 30, 2020 and 2019, respectively, and $(12.9) and $(22.3) for the nine months ended September 30, 2020 and 2019, respectively)
$8.0 $16.4 $48.2 $84.1 
Reclassification adjustment for realized AFS investment gains in net income (net of tax expense of $0.4 and $0.4 for the three months ended September 30, 2020 and 2019, respectively, and $0.5 and $0.6 for the nine months ended September 30, 2020 and 2019, respectively)
(1.3)(1.6)(1.8)(2.3)
Other comprehensive income, net of tax6.7 14.8 46.4 81.8 
Total comprehensive income$37.8 $47.6 $102.2 $207.2 
Net realized and unrealized gains (losses) on investments
Net realized and unrealized gains (losses) on investments before impairments$19.1 $2.6 $(2.3)$33.3 
Net realized and unrealized gains (losses) on investments$19.1 $2.6 $(2.3)$33.3 
Earnings per common share (Note 13):
Basic$1.06 $1.03 $1.85 $3.90 
Diluted$1.05 $1.01 $1.83 $3.85 
Cash dividends declared per common share, RSUs and PSUs$0.25 $0.22 $0.75 $0.66 
See accompanying unaudited notes to the consolidated financial statements.
5

Employers Holdings, Inc. and Subsidiaries
Consolidated Statements of Stockholders’ Equity
For the Three Months Ended September 30, 2020 and 2019
(Unaudited)
Common StockAdditional Paid-In CapitalRetained EarningsAccumulated Other Comprehensive Income, NetTreasury Stock at CostTotal Stockholders’ Equity
Shares IssuedAmount
(in millions, except share data)
Balance, July 1, 202057,388,515 $0.6 $399.2 $1,167.8 $105.0 $(528.6)$1,144.0 
Stock-based obligations— — 2.4 — — — 2.4 
Stock options exercised1,100 — — — — — — 
Acquisition of common stock — — — — — (9.3)(9.3)
Dividends declared— — — (7.5)— — (7.5)
Net income for the period— — — 31.1 — — 31.1 
Change in net unrealized gains on investments, net of taxes of $(1.8)— — — — 6.7 — 6.7 
Balance, September 30, 202057,389,615 $0.6 $401.6 $1,191.4 $111.7 $(537.9)$1,167.4 
Balance, July 1, 201957,157,926 $0.6 $389.8 $1,108.7 $53.3 $(430.9)$1,121.5 
Stock-based obligations— — 2.7 — — — 2.7 
Stock options exercised20,394 — 0.5 — — — 0.5 
Acquisition of common stock— — — — — (4.7)(4.7)
Dividends declared— — — (7.2)— — (7.2)
Net income for the period— — — 32.8 — — 32.8 
Change in net unrealized gains on investments, net of taxes of $(3.9)— — — — 14.8 — 14.8 
Balance, September 30, 201957,178,320 $0.6 $393.0 $1,134.3 $68.1 $(435.6)$1,160.4 
See accompanying unaudited notes to the consolidated financial statements.
6

Employers Holdings, Inc. and Subsidiaries
Consolidated Statements of Stockholders’ Equity
For the Nine Months Ended September 30, 2020 and 2019
(Unaudited)
Common StockAdditional Paid-In CapitalRetained EarningsAccumulated Other Comprehensive Income (Loss), NetTreasury Stock at CostTotal Stockholders’ Equity
Shares IssuedAmount
(in millions, except share data)
Balance, January 1, 202057,184,370 $0.6 $396.4 $1,158.8 $65.3 $(455.3)$1,165.8 
Stock-based obligations— — 7.0 — — — 7.0 
Stock options exercised39,600 — 0.9 — — — 0.9 
Vesting of RSUs and PSUs, net of shares withheld to satisfy tax withholdings165,645 — (2.7)— — — (2.7)
Acquisition of common stock — — — — (82.6)(82.6)
Dividends declared— — — (23.3)— — (23.3)
Net income for the period— — — 55.8 — — 55.8 
Change in net unrealized gains on investments, net of taxes of $(12.4)— — — — 46.4 — 46.4 
Balance, September 30, 202057,389,615 $0.6 $401.6 $1,191.4 $111.7 $(537.9)$1,167.4 
Balance, January 1, 201956,975,675 $0.6 $388.8 $1,030.7 $(13.7)$(388.2)$1,018.2 
Stock-based obligations— — 6.8 — — — 6.8 
Stock options exercised25,580 — 0.6 — — — 0.6 
Vesting of RSUs and PSUs, net of shares withheld to satisfy tax withholdings177,065 — (3.2)— — — (3.2)
Acquisition of common stock— — — — — (47.4)(47.4)
Dividends declared— — — (21.8)— — (21.8)
Net income for the period— — — 125.4 — — 125.4 
Change in net unrealized gains on investments, net of taxes of $(21.7)— — — — 81.8 — 81.8 
Balance, September 30, 201957,178,320 $0.6 $393.0 $1,134.3 $68.1 $(435.6)$1,160.4 

See accompanying unaudited notes to the consolidated financial statements.
7

Employers Holdings, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in millions)
 Nine Months Ended
 September 30,
 20202019
Operating activities(unaudited)
Net income$55.8 $125.4 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization6.3 6.5 
Stock-based compensation6.9 6.8 
Amortization of cloud computing arrangements5.8 3.8 
Amortization of premium on investments, net7.7 7.1 
Allowance for expected credit losses6.2 (1.0)
Deferred income tax expense(12.4)5.1 
Net realized and unrealized losses (gains) on investments2.3 (33.3)
Abandonment of operating leases0.7 — 
Change in operating assets and liabilities:  
Premiums receivable28.3 19.4 
Reinsurance recoverable on paid and unpaid losses18.2 25.9 
Cloud computing arrangements(15.2)(8.2)
Operating lease right-of-use-assets(3.4)(15.0)
Current federal income taxes9.9 (5.8)
Unpaid losses and loss adjustment expenses(51.4)(58.9)
Unearned premiums(11.5)24.0 
Accounts payable, accrued expenses and other liabilities0.6 (12.0)
Deferred reinsurance gain—LPT Agreement(7.4)(10.2)
Contingent commission receivable—LPT Agreement— 18.8 
Operating lease liabilities3.1 17.1 
Non-cancellable obligations(0.1)1.6 
Other(2.8)(4.5)
Net cash provided by operating activities47.6 112.6 
Investing activities  
Purchases of fixed maturity securities(462.7)(250.1)
Purchases of equity securities(177.5)(219.7)
Purchases of short-term investments(135.6)— 
Purchases of other invested assets(4.6)(24.9)
Proceeds from sale of fixed maturity securities314.7 147.3 
Proceeds from sale of equity securities241.7 166.8 
Proceeds from maturities and redemptions of fixed maturity securities243.3 226.6 
Proceeds from maturities of short-term investments91.2 25.0 
Net change in unsettled investment purchases and sales1.0 (24.3)
Capital expenditures and other(4.5)(12.4)
Purchase of Cerity Insurance Company, net of cash and cash equivalents acquired— (15.9)
Net cash provided by investing activities107.0 18.4 
Financing activities  
Acquisition of common stock(81.9)(47.8)
Cash transactions related to stock-based compensation(1.8)(2.6)
Dividends paid to stockholders(23.3)(21.8)
Proceeds from FHLB advance35.0 — 
Redemption of notes payable— (20.0)
Payments on capital leases(0.2)(0.2)
Net cash used in financing activities(72.2)(92.4)
Net increase in cash, cash equivalents and restricted cash82.4 38.6 
Cash, cash equivalents and restricted cash at the beginning of the period155.2 102.0 
Cash, cash equivalents and restricted cash at the end of the period$237.6 $140.6 
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The following table presents our cash, cash equivalents and restricted cash by category within the Consolidated Balance Sheets:
As ofAs of
September 30,
2020		December 31,
2019
(in millions)
Cash and cash equivalents$237.3 $154.9 
Restricted cash and cash equivalents supporting reinsurance obligations0.3 0.3 
Total cash, cash equivalents and restricted cash$237.6 $155.2 
 
See accompanying unaudited notes to the consolidated financial statements.
9

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), Employers Assurance Company (EAC), and Cerity Insurance Company (CIC), 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 9).
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 United States (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, 2019 (Annual Report).
The Company operates through two reportable segments: Employers and Cerity. Each of the segments represents a separate and distinct underwriting platform through which the Company conducts insurance business. This presentation allows the reader, as well as the Company's chief operating decision makers, to objectively analyze the business originated through each of the Company's underwriting platforms. Prior to December 31, 2019, the Company operated under a single reportable segment. All periods prior to December 31, 2019 have been conformed to the current presentation. Detailed financial information about the Company's operating segments is presented in Note 14.
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.
Reclassifications
Certain prior period information has been reclassified to conform to the current period presentation.
2. New Accounting Standards
Recently Issued Accounting Standards
In March 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2020-04, Reference Rate Reform (Topic 848). This update provides optional transition guidance to ease the potential accounting burden associated with transitioning away from the London Interbank Offered Rate (LIBOR), with optional expedients and exceptions related to the application of US GAAP to contracts, hedging relationships and other transactions affected by reference rate reform. Companies can apply this ASU immediately, but early adoption is only available through December 31, 2022 when the
10

ASU becomes effective. The Company is evaluating the impact of LIBOR on its existing contracts and investments, but does not expect that this update will have a material impact on its consolidated financial condition or results of operations.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740). This update simplifies the accounting for income taxes within Accounting Standards Codification (ASC) Topic 740 by removing certain exceptions and clarifying existing guidance. This update becomes effective for fiscal years, and interim periods within those fiscal years beginning after December 15, 2020. The Company has determined that the impact of this new standard will not be material to its consolidated financial condition and results of operations.
Recently Adopted Accounting Standards
In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. The amendments in this update represent changes to clarify, correct errors in, or improve the codification within various ASC topics. The Company adopted the updates related to Topic 815 when it adopted ASU 2016-13. The Company determined that the impact of these improvements was not material to its consolidated financial condition and results of operations.
In August 2018, the FASB issued ASU 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. Additionally, in March 2020, the FASB issued ASU 2020-03, Codification Improvements to Financial Instruments. This update provided clarification and eliminated inconsistencies on a variety of topics within the codification. The Company adopted the applicable standards and there was no impact on its consolidated financial condition and results of operations.
In January 2017, the FASB issued ASU 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. The Company adopted this standard and there was no impact on its consolidated financial condition and results of operations.
In June 2016, the FASB issued ASU 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 (including receivables and reinsurance recoverables) 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 is effective for fiscal years beginning after December 15, 2019, 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. In May 2019, the FASB issued ASU 2019-05, Financial Instruments - Credit Losses (Topic 326): Targeted Transition Relief. This update adds optional transition relief for entities to elect the fair value option for certain financial assets previously measured at amortized cost basis to increase comparability of similar financial assets. In December 2019, the FASB issued ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments - Credit Losses which provides clarification on certain aspects of the guidance in ASC 326 including purchased credit-deteriorated financial assets, transition relief for troubled debt restructurings, disclosure relief for accrued interest receivables and allows a practical expedient for financial assets secured by collateral maintenance provisions. The Company adopted these standards on January 1, 2020 and did not make any opening balance sheet adjustments due to the immaterial amounts. See Note 5 regarding the impact of this adoption on the Company's consolidated financial condition and results of operations.
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3. Valuation of Financial Instruments
Financial Instruments Carried at Fair Value
The carrying value and the estimated fair value of the Company’s financial instruments at fair value were as follows:
September 30, 2020December 31, 2019
 Carrying ValueEstimated Fair ValueCarrying ValueEstimated Fair Value
 (in millions)
Financial assets  
Total investments at fair value$2,677.1 $2,677.1 $2,742.6 $2,742.6 
Cash and cash equivalents237.3 237.3 154.9 154.9 
Restricted cash and cash equivalents0.3 0.3 0.3 0.3 
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 September 30, 2020 and December 31, 2019.
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.
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The following table presents the Company’s investments at fair value and the corresponding fair value measurements.
September 30, 2020December 31, 2019
Level 1Level 2Level 3Level 1Level 2Level 3
(in millions)
Fixed maturity securities:
U.S. Treasuries$— $82.9 $— $— $85.6 $— 
U.S. Agencies— 3.1 — — 2.9 — 
States and municipalities— 478.7 — — 484.5 — 
Corporate securities— 1,029.9 — — 1,079.0 — 
Residential mortgage-backed securities
— 462.8 — — 480.4 — 
Commercial mortgage-backed securities
— 107.2 — — 110.6 — 
Asset-backed securities— 33.0 — — 61.2 — 
Collateralized loan obligations— 82.9 — — — — 
Other securities
— 162.1 — — 181.7 — 
Total fixed maturity securities$— $2,442.6 $— $— $2,485.9 $— 
Equity securities at fair value:
Industrial and miscellaneous$163.7 $— $— $216.4 $— $— 
Other25.0 — — 40.3 — — 
Total equity securities at fair value$188.7 $— $— $256.7 $— $— 
Short-term investments$4.0 $41.8 $— $— $— $— 
Total investments at fair value$192.7 $2,484.4 $— $256.7 $2,485.9 $— 
Financial Instruments Carried at Cost
EICN, ECIC, EPIC, and EAC are members of the Federal Home Loan Bank of San Francisco (FHLB). 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 Company also has investments in convertible preferred shares of real estate investment trusts which are carried at cost and approximate fair value.
Financial Instruments Carried at Net Asset Value (NAV)
The Company has investments in private equity limited partnership interests that are included in Other invested assets on the Company’s Consolidated Balance Sheets. These investments do not have readily determinable fair values and are carried at NAV and therefore are excluded from the fair value hierarchy. The Company initially estimates the value of these investments using the transaction price. In subsequent periods, the Company measures these investments using NAV per share provided quarterly by the general partner, based on financial statements that are audited annually. These investments are generally not redeemable by the investees and cannot be sold without approval of the general partner. These investments have a fund term of 10 to 12 years, subject to two or three one year extensions at the general partner’s discretion. The Company will receive distributions of proceeds from dividends and interest from fund investments, as well as from the disposition of a fund investment, or portion thereof. The Company expects these distributions from time-to-time during the full course of the fund term. As of September 30, 2020, the Company had unfunded commitments to these private equity limited partnerships totaling $67.4 million.
Additionally, certain cash equivalents, principally money market securities, are measured using NAV, which approximates fair value.
The following table presents cash and investments carried at NAV on the Company’s Consolidated Balance Sheets.
September 30, 2020December 31, 2019
(in millions)
Cash equivalents carried at NAV$58.5 $14.4 
Other invested assets carried at NAV12.8 9.1 
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4. Investments
The amortized cost, gross unrealized gains, gross unrealized losses, and estimated fair value of the Company’s available-for-sale (AFS) investments were as follows:
Amortized
Cost		Gross
Unrealized
Gains 		Gross
Unrealized
Losses 		Estimated
Fair Value
(in millions)
At September 30, 2020
Fixed maturity securities
U.S. Treasuries$78.2 $4.7 $— $82.9 
U.S. Agencies2.8 0.3 — 3.1 
States and municipalities445.2 33.5 — 478.7 
Corporate securities949.6 81.8 (1.5)1,029.9 
Residential mortgage-backed securities445.5 17.6 (0.3)462.8 
Commercial mortgage-backed securities99.3 8.1 (0.2)107.2 
Asset-backed securities32.9 0.7 (0.6)33.0 
Collateralized loan obligations84.4 — (1.5)82.9 
Other securities163.7 0.7 (2.3)162.1 
Total fixed maturity securities$2,301.6 147.4 (6.4)$2,442.6 
Short-term investments45.4 0.4 — 45.8 
Total AFS investments$2,347.0 $147.8 $(6.4)$2,488.4 
At December 31, 2019
Fixed maturity securities
U.S. Treasuries$83.7 $1.9 $— $85.6 
U.S. Agencies2.8 0.1 — 2.9 
States and municipalities458.2 26.3 — 484.5 
Corporate securities1,038.6 40.4 — 1,079.0 
Residential mortgage-backed securities471.7 9.4 (0.7)480.4 
Commercial mortgage-backed securities107.4 3.2 — 110.6 
Asset-backed securities60.4 0.9 (0.1)61.2 
Other securities180.5 1.6 (0.4)181.7 
Total AFS investments$2,403.3 83.8 (1.2)$2,485.9 
The cost and estimated fair value of the Company’s equity securities recorded at fair value at September 30, 2020 and December 31, 2019 were as follows:
CostEstimated Fair Value
(in millions)
At September 30, 2020
Equity securities at fair value
Industrial and miscellaneous$92.3 $163.7 
Other18.5 25.0 
Total equity securities at fair value$110.8 $188.7 
At December 31, 2019
Equity securities at fair value
Industrial and miscellaneous$129.1 $216.4 
Other26.5 40.3 
Total equity securities at fair value$155.6 $256.7 
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The Company had Other invested assets totaling $32.8 million and $29.1 million at September 30, 2020 and December 31, 2019, respectively. These investments consisted of: (i) private equity limited partnerships that totaled $12.8 million and $9.1 million (initial cost of $13.0 million and $8.4 million) at September 30, 2020 and December 31, 2019, respectively, which are carried at NAV based on information provided by the general partner; and (ii) convertible preferred shares of real estate investment trusts that totaled $20.0 million at each of September 30, 2020 and December 31, 2019, which are carried at cost and approximate fair value. These investments are non-redeemable until conversion and are periodically evaluated by the Company for impairment based on the ultimate recovery of the investment. Changes in the value of these investments are recorded through net realized and unrealized gains and losses on the Company’s Consolidated Statements of Comprehensive Income.
The amortized cost and estimated fair value of the Company’s fixed maturity securities at September 30, 2020, 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 CostEstimated Fair Value
(in millions)
Due in one year or less$120.7 $122.8 
Due after one year through five years692.9 735.6 
Due after five years through ten years737.8 804.7 
Due after ten years88.1 93.6 
Mortgage and asset-backed securities662.1 685.9 
Total$2,301.6 $2,442.6 
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 September 30, 2020 and December 31, 2019.
September 30, 2020December 31, 2019
Estimated Fair ValueGross
Unrealized
Losses 		Number of IssuesEstimated Fair ValueGross
Unrealized
Losses 		Number of Issues
(in millions, except number of issues data)
Less than 12 months:
Fixed maturity securities
Corporate securities$41.2 $(1.5)33 $— $— — 
Residential mortgage-backed securities
57.4 (0.3)12 56.9 (0.2)29 
Commercial mortgage-backed securities
5.7 (0.2)8 — — — 
Asset-backed securities7.3 (0.6)7 10.1 (0.1)6 
Collateralized loan obligations82.9 (1.5)20 — — — 
Other securities
113.4 (2.3)233 15.2 (0.3)64 
Total less than 12 months$307.9 $(6.4)313 $82.2 $(0.6)99 
12 months or greater:
Fixed maturity securities
Residential mortgage-backed securities
$— $— — $40.0 $(0.5)19 
Other securities— — — 5.9 (0.1)19 
Total 12 months or greater$— $— — $45.9 $(0.6)38 
The Company recorded an allowance for expected credit losses on available-for-sale debt securities of $1.2 million during the nine months ended September 30, 2020 (See Note 5). There were no other-than-temporary impairments on fixed maturity securities recognized during the nine months ended September 30, 2019. Those fixed maturity securities whose total fair value was less than amortized cost at September 30, 2020, were those in which the Company had no intent, need or requirement to sell 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 or for changes in the expected credit loss allowance.
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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 GainsGross Realized LossesNet Change in CECL AllowanceChange in Net Unrealized Gains (Losses) Changes in Fair Value Reflected in EarningsChanges in Fair Value Reflected in AOCI, before tax
(in millions)
Three Months Ended September 30, 2020
Fixed maturity securities$2.4 $(0.7)$— $8.5 $1.7 $8.5 
Equity securities16.9 (3.0)— 3.7 17.6 — 
Other invested assets— — — (0.2)(0.2)— 
Short-term investments— — — — — — 
Total investments$19.3 $(3.7)$— $12.0 $19.1 $8.5 
Nine Months Ended September 30, 2020
Fixed maturity securities$7.1 $(3.6)$(1.2)$58.4 $2.3 $58.4 
Equity securities41.3 (21.8)— (23.2)(3.7)— 
Other invested assets— — — (0.9)(0.9)— 
Short-term investments— — — 0.4 — 0.4 
Total investments$48.4 $(25.4)$(1.2)$34.7 $(2.3)$58.8 
Three Months Ended September 30, 2019
Fixed maturity securities$2.3 $(0.3)$— $18.7 $2.0 $18.7 
Equity securities14.0 (3.0)— (10.3)0.7 — 
Other invested assets— — — (0.2)(0.2)— 
Cash equivalents0.1 — — — 0.1 — 
Total investments$16.4 $(3.3)$— $8.2 $2.6 $18.7 
Nine Months Ended September 30, 2019
Fixed maturity securities$3.9 $(1.0)$— $103.5 $2.9 $103.5 
Equity securities16.7 (3.9)— 17.7 30.5 — 
Other invested assets— — — (0.2)(0.2)— 
Cash equivalents0.1 — — — 0.1 — 
Total investments$20.7 $(4.9)$— $121.0 $33.3 $103.5 
Proceeds from the sales of fixed maturity securities were $64.9 million and $314.7 million for the three and nine months ended September 30, 2020, respectively, compared to $52.9 million and $147.3 million for the three and nine months ended September 30, 2019, respectively.
Net investment income was as follows:
Three Months EndedNine Months Ended
September 30,September 30,
 2020201920202019
 (in millions)
Fixed maturity securities$17.6 $20.2 $55.6 $60.8 
Equity securities1.1 2.4 3.5 6.1 
Other invested assets0.7 0.4 2.0 0.5 
Short-term investments0.6 — 1.0 — 
Cash equivalents and restricted cash0.1 0.5 0.5 1.5 
Gross investment income20.1 23.5 62.6 68.9 
Investment expenses(1.6)(1.2)(4.3)(3.4)
Net investment income$18.5 $22.3 $58.3 $65.5 
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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 September 30, 2020 and December 31, 2019, securities having a fair value of $772.9 million and $844.9 million, respectively, were on deposit. Additionally, standby letters of credit from the FHLB were in place in lieu of $275.0 million and $260.0 million of securities on deposit as of September 30, 2020 and December 31, 2019, respectively (See Note 10).
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 September 30, 2020 and December 31, 2019 was $3.3 million and $2.9 million, respectively.
5. Current Expected Credit Losses
The Company adopted ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) in the first quarter of 2020, which replaced the incurred loss methodology with an expected loss methodology known as the current expected loss methodology (CECL). The measurement of CECL is applicable to financial assets measured at amortized cost, which includes held-to-maturity securities, trade receivables, lease receivables, reinsurance recoverables, financial guarantee contracts, loan commitments, and financial assets with evidence of credit deterioration. Additionally, Topic 326 made changes to the accounting for AFS debt securities. This change requires credit losses to be presented as an allowance rather than as a write-down on AFS debt securities that the Company does not intend to sell or believes that it is more likely than not that it will be required to sell.
Premiums Receivable
Premiums receivable balances are all due within one year or less. The Company currently determines the allowance for premiums receivable based on an internal aging schedule using collectability and historical payment patterns, as well as current and expected future market conditions to determine the appropriateness of the allowance. Historical payment patterns provide the basis for the estimation along with similar risk characteristics and the Company's business strategy, which have not changed significantly over time. However, current and future market conditions have deteriorated as compared with the economic conditions included in the historical information. Specifically, unemployment and the temporary closures of small businesses have increased rapidly as of September 30, 2020, and the Company expects this trend to continue. Based on our past experience with generally similar conditions, the Company adjusted the historical payment patterns and aging schedule to reflect the differences in our current conditions and future forecasted changes. Changes in the allowance for credit losses are recorded through general and administrative expenses.
The table below shows the changes in the allowance for expected credit losses on premiums receivable.
Three Months EndedNine Months Ended
September 30,September 30,
20202020
(in millions)
Beginning balance of the allowance for expected credit losses on premiums receivable$8.1 $4.6 
Current period provision for expected credit losses3.9 12.2 
Write-offs charged against the allowance(1.6)(6.4)
Ending balance of the allowance for expected credit losses on premiums receivable$10.4 $10.4 
Reinsurance Recoverable
In assessing an allowance for reinsurance assets, which includes reinsurance recoverables and contingent commission receivables, the Company considers historical information, financial strength of reinsurers, collateralization amounts and ratings to determine the appropriateness of the allowance. Historically, the Company has not experienced a credit loss from reinsurance transactions. In assessing future default, the Company evaluated the CECL allowance under the ratings based method using the A.M. Best Average Cumulative Net Impairment Rates. Reinsurer ratings are also assessed through this process. Changes in the allowance for credit losses are recorded through general and administrative expenses.
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The table below shows the changes in the allowance for expected credit losses on reinsurance recoverables.
Three Months EndedNine Months Ended
September 30,September 30,
20202020
(in millions)
Beginning balance of the allowance for expected credit losses on reinsurance recoverables$0.4 $— 
Current period provision for expected credit losses— 0.4 
Ending balance of the allowance for expected credit losses on reinsurance recoverables$0.4 $0.4 
Investments
The Company assesses all AFS debt securities in an unrealized loss position for expected credit losses. The Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell, the security before recovery of its amortized cost basis. If either of the criteria is met, the security's amortized cost basis is written down to its fair value. For AFS debt securities that do not meet either criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. Any impairment that has not been recorded through an allowance for credit losses is recognized in Accumulated other comprehensive income on the Company's Consolidated Balance Sheets. Changes in the allowance for credit losses are recorded through realized capital losses.
As of September 30, 2020, the Company established an aggregate allowance for credit losses in the amount of $1.2 million. For the Company’s investments in fixed-income debt securities, the allowance for credit losses was determined by: (i) observing the credit characteristics of those debt securities that may have demonstrated a credit loss as of that date and by comparing the present value of cash flows expected to be collected to its amortized cost basis; and (ii) observing the credit characteristics of those debt securities that are expected to demonstrate a credit loss in the future by comparing the present value of cash flows expected to be collected to its amortized cost basis. The expected present value of cash flows are calculated using scenario based credit loss models derived from the discounted cash flows under the Comprehensive Capital Analysis Review (CCAR) framework, which is adopted by the Federal Reserve.
As of September 30, 2020, the Company did not intend to sell any of its AFS debt securities in which its amortized cost exceeded its fair value.
Accrued interest receivable on AFS debt securities totaled $17.2 million at September 30, 2020 and is excluded from the estimate of credit losses based on historically timely payments.
The table below shows the changes in the allowance for expected credit losses on available-for-sale securities.
Three Months EndedNine Months Ended
September 30,September 30,
20202020
(in millions)
Beginning balance of the allowance for expected credit losses on AFS securities$1.2 $— 
Current period provision for expected credit losses0.3 3.6 
Reductions in allowance from disposals(0.3)(2.4)
Ending balance of the allowance for expected credit losses on AFS securities$1.2 $1.2 
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6. Property and Equipment
Property and equipment consists of the following:
As of September 30,As of December 31,
20202019
(in millions)
Furniture and equipment$3.1 $2.5 
Leasehold improvements5.3 6.0 
Computers and software58.1 60.3 
Automobiles1.1 1.1 
Property and equipment, gross67.6 69.9 
Accumulated depreciation(47.4)(48.0)
Property and equipment, net$20.2 $21.9 
Depreciation expenses related to property and equipment for the three and nine months ended September 30, 2020 were $1.9 million and $6.3 million, respectively, and $9.0 million for the year ended December 31, 2019. Internally developed software costs of $0.7 million and $2.3 million were capitalized during the three and nine months ended September 30, 2020, respectively, and $3.2 million in internally developed software costs were capitalized during the year ended December 31, 2019.
Cloud Computing Arrangements
The Company’s capitalized costs associated with cloud computing arrangements totaled $43.0 million and $33.6 million, which were comprised of service contract fees and implementation costs associated with hosting arrangements on the Company’s Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019, respectively. Total amortization for hosting arrangements was $2.4 million and $5.8 million for the three and nine months ended September 30, 2020, respectively, and $5.3 million for the year ended December 31, 2019, 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.
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 collateralized 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, with options to extend up to 10 years with no termination provision. The Company’s finance leases have an option to terminate after 1 year.
Due to the evolving nature of the Company's business impacted by the COVID-19 pandemic and the continuation of work-from-home status, the Company made the decision to reduce its real estate footprint in order to achieve operating efficiencies. As a result, during the third quarter of 2020, the Company recorded charges of $0.7 million related to the abandonment of operating leases, which is recognized in Other expenses in the Company's Consolidated Statements of Comprehensive Income.
Components of lease expense were as follows:
Three Months EndedNine Months Ended
September 30,September 30,
2020201920202019
(in millions)
Operating lease expense$1.4 $1.3 $3.8 $3.8 
Finance lease expense0.1 0.1 0.2 0.2 
Total lease expense$1.5 $1.4 $4.0 $4.0 
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As of September 30, 2020, the weighted average remaining lease term for operating leases was 6.2 years and for finance leases was 3.1 years. The weighted average discount rate was 2.8% and 3.7% for operating and finance leases, respectively.
Maturities of lease liabilities were as follows:
As of September 30, 2020
Operating LeasesFinance Leases
(in millions)
2020$1.1 $0.1 
20214.2 0.2 
20223.3 0.2 
20233.2 — 
20243.2 — 
Thereafter7.4 — 
Total lease payments22.4 0.5 
Less: imputed interest(1.5)— 
Total$20.9 $0.5 
Supplemental balance sheet information related to leases was as follows:
As of September 30,As of December 31,
20202019
(in millions)
Operating leases:
Operating lease right-of-use asset$18.6 $15.9 
Operating lease liability20.9 17.8 
Finance leases:
Property and equipment, gross1.1 1.1 
Accumulated depreciation(0.7)(0.5)
Property and equipment, net0.4 0.6 
Other liabilities$0.5 $0.6 
Supplemental cash flow information related to leases was as follows:
Nine Months Ended
September 30,
20202019
(in millions)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows used for operating leases$3.8 $3.8 
Financing cash flows used for finance leases0.2 0.2 
7. Income Taxes
The Company’s effective tax rates were 18.8% and 17.1% for the three and nine months ended September 30, 2020, respectively, compared to 19.8% and 17.7% for the corresponding periods of 2019. The lower effective tax rates for the three and nine month periods ended September 30, 2020, versus those of the corresponding 2019 periods, were primarily due to having a higher proportion of tax-advantaged income to total pre-tax income in the current periods.
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8. 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 EndedNine Months Ended
 September 30,September 30,
 2020201920202019
 (in millions)
Unpaid losses and LAE at beginning of period$2,170.7 $2,161.8 $2,192.8 $2,207.9 
Less reinsurance recoverable, excluding CECL allowance, on unpaid losses and LAE
523.6 484.2 532.5 504.4 
Net unpaid losses and LAE at beginning of period1,647.1 1,677.6 1,660.3 1,703.5 
Losses and LAE, net of reinsurance, incurred during the period related to:
  
Current period94.4 115.4 303.8 344.8 
Prior periods(14.8)(20.2)(41.9)(66.1)
Total net losses and LAE incurred during the period79.6 95.2 261.9 278.7 
Paid losses and LAE, net of reinsurance, related to:  
Current period26.7 32.9 50.7 63.5 
Prior periods72.3 69.7 243.8 248.5 
Total net paid losses and LAE during the period99.0 102.6 294.5 312.0 
Ending unpaid losses and LAE, net of reinsurance1,627.7 1,670.2 1,627.7 1,670.2 
Reinsurance recoverable, excluding CECL allowance, on unpaid losses and LAE
513.7 527.1 513.7 527.1 
Unpaid losses and LAE at end of period$2,141.4 $2,197.3 $2,141.4 $2,197.3 
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 $2.3 million for the three months ended September 30, 2020 and 2019, respectively, and $7.4 million and $10.5 million for the nine months ended September 30, 2020 and 2019, respectively (See Note 9).
The change in incurred losses and LAE attributable to prior periods for the three and nine months ended September 30, 2020 included $15.0 million and $41.5 million of favorable development on the Company’s voluntary risk business, respectively, and $0.2 million of unfavorable development and $0.4 million of favorable development on the Company’s assigned risk business for the same periods. The change in incurred losses and LAE attributable to prior periods for the three and nine months ended September 30, 2019 included $20.0 million and $66.0 million of favorable development on the Company’s voluntary risk business, respectively, and $0.2 million and $0.1 million of favorable development on the Company’s assigned risk business for the same periods. The favorable prior accident year loss development on voluntary business during the three and nine months ended September 30, 2020 was the result of observed favorable loss cost trends across most accident years; however, the Company believes that the current economic conditions resulting from the COVID-19 pandemic have introduced significant risk of a prolonged recession, which could impact future development trends, including the increased risk of cumulative trauma claims and latent claim reporting, particularly for the more recent prior accident years. The favorable prior accident year loss development on voluntary business during the three and nine months ended September 30, 2019 was the result of observed favorable loss cost trends, which have been impacted by the Company's internal initiatives to reduce loss costs, including the accelerated claims settlement activity that began in 2014 and continued into 2019.
9. 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
21

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 $2.3 million of the Deferred Gain for the three months ended September 30, 2020 and 2019, respectively, and $7.4 million and $8.5 million for the nine months ended September 30, 2020 and 2019, respectively. Additionally, the Company recognized favorable development in the estimated reserves ceded under the LPT Agreement of $5.3 million, that reduced the Deferred Gain by $1.8 million for the nine months ended September 30, 2019 due to favorable LPT Reserve Adjustments, and by $0.2 million for the three and nine months ended September 30, 2019 due to favorable LPT Contingent Commission Adjustments. The remaining Deferred Gain was $129.7 million and $137.1 million as of September 30, 2020 and December 31, 2019, respectively. The estimated remaining liabilities subject to the LPT Agreement were $362.7 million and $380.4 million as of September 30, 2020 and December 31, 2019, respectively. Losses and LAE paid with respect to the LPT Agreement totaled $813.9 million and $796.2 million from inception through September 30, 2020 and December 31, 2019, respectively.
10. Financing Arrangements
EICN, ECIC, EPIC, and EAC are members 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.
During the second quarter of 2020, the FHLB announced its Zero Interest Recovery Advance program (the FHLB Advance Program). The FHLB Advance Program is a zero percent interest, six-month or one-year credit product that members can use to provide immediate relief to property owners, businesses, and other customers struggling with the financial impacts of the COVID-19 pandemic. Each member was allocated up to $10 million in advances under the FHLB Advance Program.
On May 11, 2020, the Company's insurance subsidiaries received a total of $35.0 million of advances under the Advance Program. The advances were secured by collateral previously pledged to the FHLB by the Company’s insurance subsidiaries in support of their existing collateralized advance facility, which has been reduced by the amount of these outstanding advances. The advances are required to be repaid to the FHLB on November 12, 2020 in the amount of $15.0 million and on May 11, 2021 in the amount of $20.0 million.
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, the FHLB and ECIC amended its Letter of Credit Agreement to increase its credit amount and on March 2, 2020, the FHLB and EAC and EPIC 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 $80.0 million, and EPIC, in the amount of $125.0 million. On April 20, 2020, the FHLB and ECIC, amended its Letter of Credit Agreement to decrease its credit amount to $70.0 million. The amended Letter of Credit Agreements will expire March 31, 2021, and 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 September 30, 2020 and December 31, 2019, letters of credit totaling $275.0 million and $260.0 million, respectively, were issued in lieu of securities on deposit with the State of California under these Letter of Credit Agreements.
As of September 30, 2020 and December 31, 2019, investment securities having a fair value of $398.0 million and $326.8 million, respectively, were pledged to the FHLB by the Company’s insurance subsidiaries in support of the collateralized advance facility and the Letter of Credit Agreements.
11. Accumulated Other Comprehensive Income
Accumulated other comprehensive income is comprised of unrealized gains on investments classified as AFS, net of deferred tax expense. The following table summarizes the components of accumulated other comprehensive income:
September 30, 2020December 31, 2019
(in millions)
Net unrealized gains on investments, before taxes$141.4 $82.6 
Deferred tax expense on net unrealized gains(29.7)(17.3)
Total accumulated other comprehensive income$111.7 $65.3 
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12. Stock-Based Compensation
The Company awarded restricted stock units (RSUs) and performance share units (PSUs) to certain employees and non-employee Directors of the Company as follows:
Number AwardedWeighted Average Fair Value on Date of GrantAggregate Fair Value on Date of Grant
(in millions)
March 2020
RSUs(1)
77,560 $37.81 $2.9 
PSUs(2)
105,180 37.81 4.0 
May 2020
RSUs(3)
20,592 $29.59 $0.6 
(1)The RSUs awarded in March 2020 were awarded to certain employees of the Company and vest 25% on March 15, 2021, 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 2020 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.
(3)The RSUs awarded in May 2020 were awarded to non-employee Directors of the Company and vest in full on May 28, 2021.
Employees who were awarded RSUs and PSUs are entitled to receive dividend equivalents, 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 39,600 for the nine months ended September 30, 2020, 25,580 for the nine months ended September 30, 2019, and 31,630 for the year ended December 31, 2019.
As of September 30, 2020, the Company had 114,416 options, 266,740 RSUs, and 275,961 PSUs (based on target number awarded) outstanding.
13. 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.
RSUs and PSUs are entitled 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 EndedNine Months Ended
 September 30,September 30,
 2020201920202019
 (in millions, except share data)
Net income—basic and diluted$31.1 $32.8 $55.8 $125.4 
Weighted average number of shares outstanding—basic29,337,426 31,946,851 30,241,148 32,168,826 
Effect of dilutive securities:
PSUs195,860 255,663 224,126 278,641 
Stock options27,490 80,889 39,184 79,954 
RSUs7,630 34,614 28,452 60,034 
Dilutive potential shares230,980 371,166 291,762 418,629 
Weighted average number of shares outstanding—diluted29,568,406 32,318,017 30,532,910 32,587,455 
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Diluted earnings per share excludes outstanding options and other common stock equivalents in periods where the inclusion of such options and common stock equivalents would be anti-dilutive. The following table presents options, PSUs, and RSUs that were excluded from diluted earnings per share.
Three Months EndedNine Months Ended
 September 30,September 30,
 2020201920202019
Options, PSUs, and RSUs excluded under the treasury method, as the potential proceeds on settlement or exercise was greater than the value of shares acquired153,620 — 107,337 — 
14. Segment Reporting
The Company has recently made changes to its corporate structure, mainly involving the launch and further development of a new digital insurance platform offered under the Cerity brand name (Cerity). As of December 31, 2019, the Company has determined that it has two reportable segments: Employers and Cerity. Each of these segments represents a separate and distinct underwriting platform through which the Company conducts insurance business. The nature and composition of each reportable segment and its Corporate and Other activities are as follows:
The Employers segment is defined as traditional business offered through the EMPLOYERS brand name (Employers) through its agents, including business originated from the Company's strategic partnerships and alliances.
The Cerity segment is defined as business offered under the Cerity brand name, which includes the Company's direct-to-customer business.
Corporate and Other activities consist of those holding company expenses that are not considered to be underwriting in nature, the financial impact of the LPT agreement, and legacy business assumed and ceded by CIC. These expenses are not considered to be part of a reportable segment and are not otherwise allocated to a reportable segment.
The Company has determined that it is not practicable to report identifiable assets by segment since certain assets are used interchangeably among the segments.
Prior to December 31, 2019, the Company operated under a single reportable segment. All periods prior to December 31, 2019 presented herein have been conformed to the current presentation.
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The following table summarizes the Company's written premium and components of net income before income taxes by reportable segment.
EmployersCerityCorporate and OtherTotal
(in millions)
Three Months Ended September 30, 2020
Gross premiums written$131.2 $0.1 $— $131.3 
Net premiums written129.5 0.1 — 129.6 
Net premiums earned144.4 — — 144.4 
Net investment income17.5 0.8 0.2 18.5 
Net realized and unrealized gains (losses) on investments19.2 (0.1)— 19.1 
Other income (loss)(0.1)— — (0.1)
Total revenues181.0 0.7 0.2 181.9 
Losses and loss adjustment expenses79.5 0.1 (2.5)77.1 
Commission expense19.4 — — 19.4 
Underwriting and general and administrative expenses38.6 3.8 4.0 46.4 
Other expenses0.7 — — 0.7 
Total expenses138.2 3.9 1.5 143.6 
Net income (loss) before income taxes$42.8 $(3.2)$(1.3)$38.3 
Three Months Ended September 30, 2019
Gross premiums written$166.4 $0.1 $— $166.5 
Net premiums written165.1 0.1 — 165.2 
Net premiums earned175.8 — — 175.8 
Net investment income21.4 0.2 0.7 22.3 
Net realized and unrealized gains (losses) on investments2.6 0.1 (0.1)2.6 
Other income0.3 — — 0.3 
Total revenues200.1 0.3 0.6 201.0 
Losses and loss adjustment expenses95.2 — (2.3)92.9 
Commission expense21.9 — — 21.9 
Underwriting and general and administrative expenses36.2 4.1 5.0 45.3 
Total expenses153.3 4.1 2.7 160.1 
Net income (loss) before income taxes$46.8 $(3.8)$(2.1)$40.9 
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EmployersCerityCorporate and OtherTotal
(in millions)
Nine Months Ended September 30, 2020
Gross premiums written$456.1 $0.1 $— $456.2 
Net premiums written451.9 0.1 — 452.0 
Net premiums earned463.7 0.1 — 463.8 
Net investment income54.9 2.5 0.9 58.3 
Net realized and unrealized gains (losses) on investments0.1 (0.5)(1.9)(2.3)
Other income0.5 — — 0.5 
Total revenues519.2 2.1 (1.0)520.3 
Losses and loss adjustment expenses261.8 0.1 (7.4)254.5 
Commission expense59.9 — — 59.9 
Underwriting and general and administrative expenses116.2 11.9 9.8 137.9 
Other expenses0.7 — — 0.7 
Total expenses438.6 12.0 2.4 453.0 
Net income (loss) before income taxes$80.6 $(9.9)$(3.4)$67.3 
Nine Months Ended September 30, 2019
Gross premiums written$553.0 $0.1 $— $553.1 
Net premiums written549.0 0.1 — 549.1 
Net premiums earned526.1 — — 526.1 
Net investment income62.3 0.2 3.0 65.5 
Net realized and unrealized gains on investments30.3 0.1 2.9 33.3 
Other income0.6 — — 0.6 
Total revenues619.3 0.3 5.9 625.5 
Losses and loss adjustment expenses278.7 — (10.5)268.2 
Commission expense67.7 — — 67.7 
Underwriting and general and administrative expenses111.4 11.7 13.5 136.6 
Interest and financing expenses0.6 — — 0.6 
Total expenses458.4 11.7 3.0 473.1 
Net income (loss) before income taxes$160.9 $(11.4)$2.9 $152.4 

Entity-Wide Disclosures
The Company operates solely within the U.S. and does not have revenue from transactions with a single policyholder accounting for 10% or more of its revenues. The following table shows the Company's in-force premiums and number of policies in-force for each state with approximately five percent or more of our in-force premiums and all other states combined for the periods presented:
September 30, 2020December 31, 2019September 30, 2019December 31, 2018
StateIn-force PremiumsPolicies
In-force		In-force PremiumsPolicies
In-force		In-force
Premiums		Policies
In-force		In-force
Premiums		Policies
In-force
(dollars in millions)
California$273.6 40,567 $329.8 43,079 $338.3 43,465 $357.1 41,988 
Florida37.0 6,680 36.3 5,822 37.0 5,688 41.0 5,833 
New York27.8 6,625 31.7 5,679 31.4 5,120 23.9 3,663 
Other (43 states and D.C.)
254.5 49,478 266.8 44,104 257.8 42,627 244.2 40,014 
Total$592.9 103,350 $664.6 98,684 $664.5 96,900 $666.2 91,498 
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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. In this Quarterly Report on Form 10-Q, the Company and its management discuss and make statements based on currently available information regarding their intentions, beliefs, current expectations, and projections of, among other things, the Company's future performance, business growth, retention rates, loss costs, claim trends and the impact of key business initiatives, future technologies and planned investments. Certain of these statements may constitute "forward-looking" statements as that term is defined in the Private Securities Litigation Reform Act of 1995.  Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts and are often identified by words such as "may," "will," "could," "would," "should," "expect," "plan," "anticipate," "target," "project," "intend," "believe," "estimate," "predict," "potential," "pro forma," "seek," "likely," or "continue," or other comparable terminology and their negatives. The Company and its management caution investors that such forward-looking statements are not guarantees of future performance. Risks and uncertainties are inherent in the Company’s future performance. Factors that could cause the Company's actual results to differ materially from those indicated by such forward-looking statements include, among other things, those discussed or identified from time to time in the Company’s public filings with the SEC, including the risks detailed in the Company's Annual Reports on Form 10-K and in Part II, Item 1A of this report. Except as required by applicable securities laws, the Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
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 throughout the U.S., with a concentration in California, where 46% 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 and claims handling in 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, developing and implementing 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: achieving internal and customer-facing business process excellence; diversifying our risk exposure across geographic markets; and utilizing a multi-company pricing platform and 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 and further development of digital insurance solutions, including direct-to-customer workers’ compensation coverage.
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. As a result of these competitive conditions pricing on our renewals showed an overall price decrease of 5.3% and 6.0% for the three and nine months ended September 30, 2020, respectively, versus the rate level in effect on such business a year earlier.
Coronavirus Disease (COVID-19) Considerations
On March 11, 2020, the World Health Organization formally declared the COVID-19 outbreak to be a pandemic. The global spread of COVID-19 has caused illness, death, quarantines, cancellation of events and travel, business and school shutdowns, reduction in business activity, widespread unemployment, supply chain interruptions, and overall economic and financial market instability.

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All states, including California, where we generated 46% of our in-force premiums as of September 30, 2020, declared states of emergency and imposed various restrictions on business operations and social gatherings. Certain classes of business that we insure, especially those related to the restaurant and hospitality industries, have been particularly affected by these restrictions.
During the majority of the first quarter of 2020, we experienced strong new business opportunities, as evidenced by record levels of submissions, quotes, and binds. As a result of the abrupt and severe economic impacts attributable to the COVID-19 pandemic, the number of submissions, quotes, and binds decreased significantly in the latter half of March 2020 and that trend continued through May 2020. Since then, as many businesses began to reopen, we have experienced significant year-over-year increases in new business submissions and new policies bound in nearly all of the states in which we operate, with the notable exception of California. Our California new business submissions, binds and estimated annual premium volumes have declined year-over-year throughout 2020 and, although our new business opportunities in California have recently improved, they are not currently as strong as those that we have observed in other states. Despite the increases in new business that we have experienced year-to-date, our new business premium has fallen, driven primarily by a significant decline in policies with premium greater than $25,000.
We currently expect that our in-force premium will continue to be down, as compared to that of the prior year, until such time as our insureds and businesses can resume their operations at a more normalized rate, and increase staffing and payrolls accordingly. Although our new business growth, as defined by number of policies, has been strong, it has been insufficient to offset the decline in premium that we have experienced year-to-date. The amount of the decrease in premium that we will ultimately experience remains uncertain. This is largely due to: (i) concerns that many small business owners face permanent closure or heavy reliance on newly-established federal government programs, such as the Coronavirus Aid, Relief, and Economic Security Act of 2020 (CARES Act), in order to retain their businesses and the ultimate success of these programs remains unknown; (ii) uncertainty as to when our insureds and targeted businesses will be permitted to fully reopen and resume their normal operations; and (iii) fluctuations in payroll exposure.
Overall, our renewal business has remained strong throughout the year-to-date period.
We continually review and adjust to changes in our policyholders' payrolls, economic conditions, and seasonality, as experience develops or new information becomes known. Any such adjustments are included in our current operations. Approximately 25% of our current payroll exposure, including that associated with policies generated by our largest payroll partners, is considered to be “pay as you go,” where the associated premium charged to the underlying policyholder is adjusted in real-time based on changes in the underlying payroll. For all other policyholders, payroll adjustments are made periodically through mid-term endorsements and/or premium audits. We reduced our final audit premium accruals by approximately $15.7 million and $35.0 million for the three and nine months ended September 30, 2020 to reflect our estimate of the exposure adjustments on our in-force policies that we expect have resulted and will result from the impact of economic contraction.
We have been fully functional since we closed our buildings to employees and the general public on March 20, 2020, and it is expected that our business can remain fully functional while our employees work-from-home for an indefinite period of time. As a result of the effectiveness of our work-from-home transition, we have begun to reduce our real estate footprint by terminating or non-renewing certain operating leases. We will continue to evaluate our real estate needs.
We are taking precautions to protect the safety and well-being of our employees while providing uninterrupted service to our policyholders and claimants. However, no assurance can be given that these actions will be sufficient, nor can we predict the level of disruption that will occur should the COVID-19 pandemic and its related macro-economic risks continue for an extended period of time. Additional information regarding risks and uncertainties related to the COVID-19 pandemic to our business, financial condition, and results of operations are set forth in Part II, Item 1A of this report.
We formally test the goodwill that we carry on our Consolidated Balance Sheets for impairment in the fourth quarter of each year. In addition, at the end of each quarter, we review the results of the previous analysis, as well as any recent developments that may constitute triggering events requiring the impairment analysis of our goodwill to be updated. Our fair value has decreased significantly year-to-date, due to a decline in our market capitalization as a result of investor concerns of the potential adverse effects of COVID-19 on our business. However, as of September 30, 2020, we reviewed our goodwill analysis and determined that no impairment was necessary because our fair value, in accordance with ASC 350-20-35-23, exceeded our carrying value.
A further decline in our market capitalization in future periods, or any other relevant developments, could constitute a triggering event that could lead us to impair the valuation of all or a portion of our goodwill. As of September 30, 2020, the carrying value of our goodwill was $36.2 million.
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Results of Operations
Our results of operations are as follows:
Three Months EndedNine Months Ended
September 30,September 30,
2020201920202019
(in millions)
Gross premiums written$131.3 $166.5 $456.2 $553.1 
Net premiums written$129.6 $165.2 $452.0 $549.1 
Net premiums earned$144.4 $175.8 $463.8 $526.1 
Net investment income18.5 22.3 58.3 65.5 
Net realized and unrealized gains (losses) on investments19.1 2.6 (2.3)33.3 
Other income (loss)(0.1)0.3 0.5 0.6 
Total revenues181.9 201.0 520.3 625.5 
Losses and LAE77.1 92.9 254.5 268.2 
Commission expense19.4 21.9 59.9 67.7 
Underwriting and general and administrative expenses46.4 45.3 137.9 136.6 
Interest and financing expenses— — — 0.6 
Other expense0.7 — 0.7 — 
Total expenses143.6 160.1 453.0 473.1 
Income tax expense7.2 8.1 11.5 27.0 
Net income$31.1 $32.8 $55.8 $125.4 
Overview
Our net income was $31.1 million and $55.8 million for the three and nine months ended September 30, 2020, respectively, compared to $32.8 million and $125.4 million for the corresponding periods of 2019. The key factors that affected our financial performance during the three and nine months ended September 30, 2020, compared to the same periods of 2019 included:
•Net premiums earned decreased 17.9% and 11.8%, respectively;
•Losses and LAE decreased 17.0% and 5.1%, respectively;
•Underwriting and general and administrative expenses increased 2.4% and 1.0%, respectively;
•Net investment income decreased 17.0% and 11.0%, respectively; and
•Net realized and unrealized gains (losses) on investments increased by $16.5 million and decreased by $35.6 million, respectively.
Summary of Consolidated Financial Results
Gross Premiums Written
Gross premiums written were $131.3 million and $456.2 million and for the three and nine months ended September 30, 2020, respectively, compared to $166.5 million and $553.1 million for the corresponding periods of 2019. The year-over-year decrease was related to our Employers segment. See "—Summary of Financial Results by Segment —Employers".
Net Premiums Written
Net premiums written are gross premiums written less reinsurance premiums ceded.
Net Premiums Earned
Net premiums earned are primarily a function of the amount and timing of net premiums previously written.
Net Investment Income and Net Realized and Unrealized Gains and Losses on Investments
We invest in fixed maturity securities, equity securities, other invested assets, 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.
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Net investment income decreased 17.0% and 11.0% for three and nine months ended September 30, 2020, compared to the same periods of 2019. The decreases were primarily due to lower bond yields and a sharp increase in the amortization of bond premiums associated with our residential mortgage-backed securities, which was caused by an acceleration of near-term mortgage loan prepayment speed assumptions during the current periods. The average pre-tax book yield on invested assets decreased to 3.0% as of September 30, 2020, down from 3.4% as of September 30, 2019. Average invested assets decreased 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 for changes in our expected credit loss allowance or when securities are written down as a result of an other-than-temporary impairment. Changes in fair value of equity securities and other invested assets are also included in Net realized and unrealized gains (losses) on investments on our Consolidated Statements of Comprehensive Income.
Net realized and unrealized gains (losses) on investments were $19.1 million and $(2.3) million for the three and nine months ended September 30, 2020, respectively, compared to $2.6 million and $33.3 million for the corresponding periods of 2019. The net realized and unrealized gains on investments for the three months ended September 30, 2020 and 2019 included $17.4 and $0.5 million of net realized and unrealized gains on equity securities and other investments, respectively, and $1.7 million and $2.1 million of net realized gains on fixed maturity securities and short-term investments, respectively. The net realized and unrealized (losses) gains on investments for the nine months ended September 30, 2020 and 2019 included $(4.6) million and $30.3 million of net realized and unrealized (losses) gains on equity securities and other investments, respectively, and $2.3 million and $3.0 million of net realized gains on fixed maturity securities and cash equivalents, respectively.
The net investment gains (losses) on our equity securities during the three and nine months ended September 30, 2020 were largely consistent with the performance of U.S. equity markets. The net investment gains on our fixed maturity securities during the three and nine months ended September 30, 2020 were primarily the result of decreases in market interest rates. The net investment gains on our fixed maturity securities for the nine months ended September 30, 2020 were reduced by a $1.2 million allowance for expected credit losses.
The net investment gains on our equity securities during the three and nine months ended September 30, 2019 were largely consistent with the performance of U.S. equity markets. The net investment gains on our fixed maturity securities during the three and nine months ended September 30, 2019 were primarily the result of decreases in market interest rates. No other-than-temporary impairments on our fixed maturity securities were recorded for the nine months ended September 30, 2019.
Additional information regarding our Investments is set forth under “—Liquidity and Capital Resources—Investments.”
Other Income (Loss)
Other income (loss) consists of net gains and losses on fixed assets, non-investment interest, installment fee revenue, and other miscellaneous income.
Losses and LAE
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) continued to decrease through September 30, 2020, while medical and indemnity costs per claim increased over the same period. However, we recognize that the impacts of the COVID-19 pandemic, including the potential for further expansions or permanent extensions of presumed compensability of COVID-19 in certain jurisdictions. These trends and considerations are reflected in our current accident year loss estimate. Total claims costs have also been reduced by cost savings associated with increased claims settlement activity that continued in 2020. We believe our current accident year loss estimate is adequate; however, ultimate losses will not be known with any certainty for many years. We assume that increasing medical and indemnity cost trends will continue to impact our long-term claims costs, which may be offset by rate increases. See "—Summary of Financial Results by Segment —Employers".
Commission Expenses
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. See "—Summary of Financial Results by Segment —Employers".
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Underwriting and General and Administrative Expenses
Underwriting expenses represent those costs that we incur to underwrite and maintain the insurance policies we issue, excluding commissions. Direct underwriting expenses, such as premium taxes, policyholder dividends, and those expenses that vary directly with the production of new or renewal business, are recognized as the associated premiums are earned. Indirect underwriting expenses, such as the operating expenses of each of the Company's subsidiaries, do not vary directly with the production of new or renewal business and are recognized as incurred.
General and administrative expenses of the holding company are excluded in determining the underwriting expense ratios of our reportable segments.
Other Expenses
Due to the evolving nature of our business impacted by the COVID-19 pandemic and the continuation of work-from-home status, we made the decision to reduce our real estate footprint in order to achieve operating efficiencies. As a result, during the three months ended September 30, 2020, we recorded charges of $0.7 million related to the abandonment of operating leases.
Interest and Financing Expenses
Interest and financing expenses include interest on notes payable, letter of credit fees, finance lease interest, and other financing fees.
Income Tax Expense
Income tax expense was $7.2 million and $11.5 million for the three and nine months ended September 30, 2020, respectively, compared to $8.1 million and $27.0 million for the corresponding periods of 2019. The effective tax rates were 18.8% and 17.1% for the three and nine months ended September 30, 2020, respectively, compared to 19.8% and 17.7% for the same periods of 2019. The lower effective tax rates for the three and nine months ended September 30, 2020, versus those of the corresponding 2019 periods, were primarily due to having a higher proportion of tax-advantaged income to total pre-tax income in the current periods.
Summary of Financial Results by Segment
EMPLOYERS
The components of Employers' net income before income taxes are set forth in the following table:
Three Months EndedNine Months Ended
September 30,September 30,
2020201920202019
(dollars in millions)
Gross premiums written$131.2 $166.4 $456.1 $553.0 
Net premiums written$129.5 $165.1 $451.9 $549.0 
Net premiums earned$144.4 $175.8 $463.7 $526.1 
Net investment income17.5 21.4 54.9 62.3 
Net realized and unrealized gains on investments19.2 2.6 0.1 30.3 
Other income (loss)(0.1)0.3 0.5 0.6 
Total revenues181.0 200.1 519.2 619.3 
Losses and LAE79.5 95.2 261.8 278.7 
Commission expense19.4 21.9 59.9 67.7 
Underwriting expenses38.6 36.2 116.2 111.4 
Interest and financing expenses— — — 0.6 
Other expense0.7 — 0.7 — 
Total expenses138.2 153.3 438.6 458.4 
Net income before income taxes$42.8 $46.8 $80.6 $160.9 
Underwriting income$6.9 $22.5 $25.8 $68.3 
Combined ratio95.2 %87.3 %94.5 %87.1 %
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Underwriting Results
Gross Premiums Written
Gross premiums written were $131.2 million and $456.1 million for the three and nine months ended September 30, 2020, respectively, compared to $166.4 million and $553.0 million for the corresponding periods of 2019. The year-over-year decreases for the three and nine months ended September 30, 2020 were primarily driven by the impacts of the COVID-19 pandemic during 2020, including higher levels of unemployment and declines in payrolls for many of our insureds, upon which our premiums are based, particularly in our restaurant and hospitality classes. We reduced our final audit accruals by approximately $15.7 million and $35.0 million for the three and nine months ended September 30, 2020 to reflect our estimate of the exposure adjustments on our in-force policies that we expect have resulted and will result from the impact of economic contraction. During the majority of the first quarter of 2020, we experienced strong new business opportunities, as evidenced by record levels of submissions, quotes, and binds. As a result of the abrupt and severe economic impacts attributable to the COVID-19 pandemic, the number of submissions, quotes, and binds decreased significantly in the latter half of March 2020 and that trend continued through May 2020. Since then, as many businesses began to reopen, we have experienced significant year-over-year increases in new business submissions and new policies bound in nearly all of the states in which we operate, with the notable exception of California. Our California new business submissions, binds and estimated annual premium volumes have declined year-over-year throughout 2020 and, although our new business opportunities in California have recently improved in the three months ended September 30, 2020, they are not currently as strong as those that we have observed in other states. Despite the increases in new business that we have experienced year-to-date, our new business premium has fallen, driven primarily by a significant decline in policies with premium greater than $25,000. Additionally, year-over-year decreases in average rates in many of the states in which we do business further impacted our gross premiums written during the nine months ended September 30, 2020.
Net Premiums Written
Net premiums written were $129.5 million and $451.9 million for the three and nine months ended September 30, 2020, respectively, compared to $165.1 million and $549.0 million for the corresponding periods of 2019. Reinsurance premiums ceded were $1.7 million and $4.2 million for the three and nine months ended September 30, 2020, respectively, compared to $1.3 million and $4.0 million for the corresponding periods of 2019.
Net Premiums Earned
Net premiums earned were $144.4 million and $463.7 million for the three and nine months ended September 30, 2020, respectively, compared to $175.8 million and $526.1 million for the corresponding periods of 2019.
The following table shows the percentage change in Employers' in-force premiums, policy count, average policy size, and payroll exposure (upon which our premiums are based) overall, for California, where 46% of our premiums were generated, and for all other states, excluding California:
As of September 30, 2020
Year-to-Date ChangeYear-Over-Year Change
OverallCaliforniaAll Other StatesOverallCaliforniaAll Other States
In-force premiums(10.8)%(17.0)%(4.7)%(10.8)%(19.1)%(2.2)%
In-force policy count4.7 (5.8)12.8 6.6 (6.7)17.4 
Average in-force policy size(14.8)(11.9)(15.5)(16.3)(13.3)(16.7)
In-force payroll exposure(0.1)(8.3)4.7 3.5 (6.6)9.3 
The following table shows Employers' in-force premiums and number of policies in-force for each state with approximately five percent of our in-force premiums and all other states combined for the periods presented:
September 30, 2020December 31, 2019September 30, 2019December 31, 2018
StateIn-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$273.6 40,567 $329.8 43,079 $338.3 43,465 $357.1 41,988 
Florida37.0 6,680 36.3 5,822 37.0 5,688 41.0 5,833 
New York27.8 6,625 31.7 5,679 31.4 5,120 23.9 3,663 
Other (43 states and D.C.)
254.3 49,342 266.7 44,019 257.8 42,561 244.2 40,014 
Total$592.7 103,214 $664.5 98,599 $664.5 96,834 $666.2 91,498 
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Our alternative distribution channels that utilize partnerships and alliances generated $159.2 million and $163.0 million, or 26.9% and 24.5%, of our in-force premiums as of September 30, 2020 and 2019, respectively. We believe that the bundling of payroll-related 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.
The current COVID-19 pandemic and its ongoing impacts on the marketing and distribution of our insurance products, including potential for the further and/or prolonged disruption of business of our independent agents and strategic partnerships and alliances, remains uncertain.
Losses and LAE, Commission Expenses, and Underwriting Expenses
Prior to December 31, 2019, we operated under a single reportable segment and presented our Combined Ratio on that basis, including general and administrative expenses of the holding company expenses and the impact of the LPT. Beginning in the fourth quarter of 2019, we now present the Combined Ratio for each of our reporting segments on a stand-alone basis and have adjusted all prior periods presented herein to conform to this presentation.
The following table presents the components of our calendar year combined ratios for our Employers segment.
Three Months EndedNine Months Ended
September 30,September 30,
2020201920202019
Loss and LAE ratio55.1 %54.2 %56.5 %53.0 %
Underwriting expense ratio26.7 20.6 25.1 21.2 
Commission expense ratio13.4 12.5 12.9 12.9 
Combined Ratio95.2 %87.3 %94.5 %87.1 %
Loss and LAE Ratio. We analyze our loss and LAE ratios on both a calendar year and accident year basis.
The calendar year loss and LAE ratio is calculated by dividing the losses and LAE recorded during the calendar year, regardless of when the underlying insured event occurred, by the net premiums earned during that calendar year. The calendar year loss and LAE ratio includes changes made during the calendar year in reserves for losses and LAE established for insured events occurring in the current and prior years. The calendar year loss and LAE ratio for a particular year will not change in future periods.
The accident year loss and LAE ratio is calculated by dividing cumulative losses and LAE for reported events that occurred during a particular year by the net premiums earned for that year. The accident year loss and LAE ratio for a particular year can decrease or increase when recalculated in subsequent periods as the reserves established for insured events occurring during that year develop favorably or unfavorably. The accident year loss and LAE ratio is based on our statutory financial statements and is not derived from our GAAP financial information.
We analyze our calendar year loss and LAE ratio to measure our profitability in a particular year and to evaluate the adequacy of our premium rates charged in a particular year to cover expected losses and LAE from all periods, including development (whether favorable or unfavorable) of reserves established in prior periods. In contrast, we analyze our current accident year loss and LAE ratios to evaluate our underwriting performance and the adequacy of the premium rates we charged in a particular year in relation to ultimate losses and LAE from insured events occurring during that year. The loss and LAE ratios provided in this report are calendar year basis, except where they are expressly identified as accident year loss and LAE ratios.
The table below reflects prior accident year loss and LAE reserve adjustments and the impact to the loss ratio.
Three Months EndedNine Months Ended
September 30,September 30,
2020201920202019
(dollars in millions)
Losses and LAE$79.5 $95.2 $261.8 $278.7 
Prior accident year favorable development, net14.8 20.2 41.9 66.1 
Current accident year losses and LAE$94.3 $115.4 $303.7 $344.8 
Current accident year loss ratio65.3 %65.6 %65.5 %65.5 %

Losses and LAE during the three and nine months ended September 30, 2020 were lower, compared to the same periods of 2019, primarily due to lower earned premiums for both periods. Additionally, the decrease for the nine months ended
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September 30, 2020 was partially offset by lower levels of favorable prior accident year loss development in 2020, compared to 2019. Favorable development totaled $14.8 million and $41.9 million during the three and nine months ended September 30, 2020, respectively, which included $15.0 million and $41.5 million favorable development on our voluntary business and $0.2 million of unfavorable development and $0.4 million favorable development on our assigned risk business, respectively. Favorable development for the three and nine months ended September 30, 2019 totaled $20.2 million and $66.1 million, which included $20.0 million and $66.0 million of favorable development on our voluntary business and $0.2 million and $0.1 million of favorable development on our assigned risk business, respectively. Favorable prior accident year loss development on our voluntary business during the three and nine months ended September 30, 2020 was the result of observed favorable loss cost trends across most prior accident years; however, we believe that the current economic conditions resulting from the COVID-19 pandemic have introduced significant risk of a prolonged recession, which could impact future development trends, including the increased risk of cumulative trauma claims and latent claim reporting, particularly for the more recent prior accident years. As a result, during the first quarter of 2020, we limited the recognition of favorable development for accident years subsequent to 2010, which were not impacted by the last recession. Favorable prior accident year loss development on our voluntary business during the three and nine months ended September 30, 2019 was the result of observed favorable loss cost trends, which have been impacted by our internal initiatives to reduce loss costs, including: (i) accelerating claims settlements; (ii) utilizing a claims triage predictive model; (iii) implementing a medical provider fraud tool; and (iv) aggressively pursuing subrogation recoveries.
The current accident year loss and LAE ratio of 65.3% and 65.5% for the three and nine months ended September 30, 2020 remains consistent with the 65.6% ratio for the full-year ratio 2019. Our current accident year loss and LAE ratio continues to reflect the impact of our key business initiatives, including: (i) settling of open claims quickly and efficiently; (ii) diversifying our risk exposure across geographic markets; and (iii) leveraging data-driven strategies to target, underwrite, and price profitable classes of business across all of our markets. Our current accident year loss and LAE ratio also considers the impact of increased competitive pressures and price decreases across most of our markets, as well as, the potential for an increase in claims frequency by the presumed compensability of COVID-19 claims in certain jurisdictions.
Commission Expense Ratio. The commission expense ratio was 13.4% and 12.9% for the three and nine months ended September 30, 2020, respectively, compared to 12.5% and 12.9% for the corresponding periods of 2019. Our commission expenses were $19.4 million and $59.9 million for the three and nine months ended September 30, 2020, respectively, compared to $21.9 million and $67.7 million for the same periods of 2019. Our commission expense ratio increased 0.9 percentage points, or 7.2% for the three months ended September 30, 2020, compared to the same period of 2019. Our commission expense ratio was flat for the nine months ended September 30, 2020, compared to the same period of 2019. The increase in the commission expense ratio for the three months ended September 30, 2020 was primarily the result of a higher concentration of partnership and alliance business, which is subject to a higher commission rate, and increased commission expense on new business writings.
Underwriting Expenses Ratio. The underwriting expense ratio was 26.7% and 25.1% for the three and nine months ended September 30, 2020, respectively, compared to 20.6% and 21.2% for the same periods of 2019. Our underwriting expenses were $38.6 million and $116.2 million for the three and nine months ended September 30, 2020, respectively, compared to $36.2 million and $111.4 million for the same periods of 2019. Our underwriting and other operating expenses ratio increased 6.1 and 3.9 percentage points, or 29.6% and 18.4%, for the three and nine months ended September 30, 2020, compared to the same periods of 2019, primarily driven by year-over-year decreases in net premiums earned and certain expense increases. During the three months ended September 30, 2020, premium taxes and assessments increased $1.3 million, bad debt expenses increased $1.1 million, and depreciation and amortization increased $1.1 million, partially offset by a decrease in professional fees of $0.7 million and a decrease in travel expenses of $0.5 million, each compared to the same period of 2019. During the nine months ended September 30, 2020, depreciation and amortization increased $2.8 million, bad debt expenses increased $1.9 million, premium taxes and assessments increased $1.5 million, compensation-related expenses increased $1.5 million, partially offset by a decrease in travel expenses of $1.2 million, a decrease in professional fees of $0.7 million, and a decrease in IT expenses of $0.7 million, each compared to the same period of 2019.
Underwriting Income
Underwriting income for our Employers segment was $6.9 million and $25.8 million for the three and nine months ended September 30, 2020, respectively, compared to $22.5 million and $68.3 million for the same periods of 2019. Underwriting income or loss is determined by deducting losses and LAE, commission expense, and underwriting expenses from net premiums earned.
Non-Underwriting Income and Expenses
For a further discussion of non-underwriting related income and expenses, including Net Investment Income and Net Realized and Unrealized Gains and Losses on Investments, Other Income, Interest and Financing Expenses and Other Expenses see "—Results of Operations —Summary of Consolidated Financial Results".
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CERITY
The components of Cerity's net loss before income taxes are set forth in the following table:
Three Months EndedNine Months Ended
September 30,September 30,
2020201920202019
(in millions)
Gross premiums written$0.1 $0.1 $0.1 $0.1 
Net premiums written$0.1 $0.1 $0.1 $0.1 
Net premiums earned$— $— $0.1 $— 
Net investment income0.8 0.2 2.5 0.2 
Net realized and unrealized (losses) gains on investments(0.1)0.1 (0.5)0.1 
Total revenues0.7 0.3 2.1 0.3 
Losses and LAE0.1 — 0.1 — 
Underwriting expenses3.8 4.1 11.9 11.7 
Total expenses3.9 4.1 12.0 11.7 
Net loss before income taxes$(3.2)$(3.8)$(9.9)$(11.4)
Underwriting loss$(3.9)$(4.1)$(11.9)$(11.7)
Combined ration/mn/mn/mn/m
n/m - not meaningful
Underwriting Results
Gross Premiums Written and Net Premiums Written
Gross premiums written and net premiums written were $0.1 million for the each of three and nine months ended September 30, 2020 and 2019.
Net Premiums Earned
Net premiums earned were less than $0.1 million for the three months ended September 30, 2020 and $0.1 million for the nine months ended September 30, 2020.
Underwriting Expenses
Underwriting expenses for our Cerity segment were $3.8 million and $11.9 million for the three and nine months ended September 30, 2020, respectively, compared to $4.1 million and $11.7 million for the same periods of 2019. The decrease during the three months ended September 30, 2020 was primarily related to a decrease in compensation-related expenses, compared to the same period of 2019. The increase during the nine months ended September 30, 2020 was primarily due to increases in professional fees, partially offset by decreases in advertising expenses and compensation-related expenses, each as compared to the same period of 2019.
Underwriting Loss
Underwriting losses for our Cerity segment were $3.9 million and $11.9 million for the three and nine months ended September 30, 2020, respectively, compared to $4.1 million and $11.7 million for the same periods of 2019. Underwriting income or loss is determined by deducting losses and LAE, commission expense, and underwriting expenses from net premiums earned.
Non-Underwriting Income
For a further discussion of non-underwriting related income, including Net Investment Income and Net Realized and Unrealized Gains and Losses on Investments, see "–Results of Operations –Summary of Consolidated Financial Results Consolidated."
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CORPORATE AND OTHER
The components of Corporate and Other's net income (loss) before income taxes are set forth in the following table:
Three Months EndedNine Months Ended
September 30,September 30,
2020201920202019
(in millions)
Net investment income0.2 0.7 0.9 3.0 
Net realized and unrealized (losses) gains on investments— (0.1)(1.9)2.9 
Total revenues0.2 0.6 (1.0)5.9 
Losses and LAE - LPT(2.5)(2.3)(7.4)(10.5)
General and administrative expenses4.0 5.0 9.8 13.5 
Total expenses1.5 2.7 2.4 3.0 
Net (loss) income before income taxes$(1.3)$(2.1)$(3.4)$2.9 
Net Investment Income and Net Realized and Unrealized Gains and Losses on Investments
See "–Results of Operations –Summary of Consolidated Financial Results."
Losses and LAE - LPT
The table below reflects the impact of the LPT on Losses and LAE, which are recorded as a reduction to Losses and LAE incurred on our Consolidated Statements of Comprehensive Income.
Three Months EndedNine Months Ended
September 30,September 30,
2020201920202019
(in millions)
Amortization of the Deferred Gain related to losses$2.0 $1.9 $6.1 $7.1 
Amortization of the Deferred Gain related to contingent commission0.5 0.4 1.3 1.4 
Impact of LPT Reserve Adjustments(1)
— — — 1.8 
Impact of LPT Contingent Commission Adjustments(2)
— — — 0.2 
Total impact of the LPT$2.5 $2.3 $7.4 $10.5 
(1)LPT Reserve Adjustments result in a cumulative adjustment to the Deferred Gain, which is recognized in losses and LAE incurred on our Consolidated Statements of Comprehensive Income, such that the Deferred Gain reflects the balance that would have existed had the revised reserves been recognized at the inception of the LPT Agreement.
(2)LPT Contingent Commission Adjustments result in an adjustment to the Deferred Gain, which is recognized in losses and LAE incurred on our Consolidated Statements of Comprehensive Income, such that the Deferred Gain reflects the balance that would have existed had the revised contingent profit commission been recognized at the inception of the LPT Agreement.
General and Administrative Expenses
General and administrative expenses primarily consist of compensation related expenses, professional fees, and other corporate expenses at the holding company level. General and administrative expenses were $4.0 million and $9.8 million for three and the nine months ended September 30, 2020, respectively, compared to $5.0 million and $13.5 million for the same periods of 2019. During the three months ended September 30, 2020, our Corporate and Other compensation-related expenses decreased $0.7 million and professional fees decreased $0.3 million, each compared to the same period of 2019. During the nine months ended September 30, 2020, our Corporate and Other compensation-related expenses decreased $3.3 million and professional fees decreased $0.6 million, each compared to the same period of 2019.
Liquidity and Capital Resources
COVID-19 Liquidity and Capital Resources Considerations
The impacts of the COVID-19 pandemic on the U.S. economy, our operations and our investment portfolio have been significant. Nonetheless we believe that the liquidity available to our holding company and its operating subsidiaries remains adequate and we do not currently foresee a need to: (i) suspend ordinary dividends; (ii) seek a capital infusion; or (iii) seek any
36

material non-investment asset sales. Furthermore, the holding company has no outstanding debt obligations and its operating subsidiaries have no interest-bearing debt obligations.
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. During the first quarter of 2020, EICN made a $20.0 million cash dividend payment to its parent company. As a result of that payment, EICN’s dividend capacity is limited to $1.1 million without prior regulatory approval for the remainder of 2020. During the second quarter of 2020, EPIC made a $21.7 million cash dividend payment to its parent company, and EAC made a $20.8 million cash dividend to its parent company. As a result of those payments, EPIC cannot pay any dividends through the remainder of 2020 without prior regulatory approval, and EAC's dividend capacity is limited to $0.1 million for the remainder of 2020 without prior regulatory approval. During the third quarter of 2020, ECIC made a $32.1 million cash dividend payment to its parent company. As a result of that payment, ECIC cannot pay any dividends through the remainder of 2020 without prior regulatory approval; and CIC cannot pay dividends without prior regulatory approval until July 31, 2021.
Total cash and investments at the holding company was $47.3 million at September 30, 2020, consisting of $22.8 million of cash and cash equivalents, $24.1 million of unaffiliated fixed maturity securities, and $0.4 million of equity securities. We do not currently have a revolving credit facility at the holding company because we believe that its 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, proceeds from FHLB advances, 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 $2,906.9 million at September 30, 2020, consisting of $214.8 million of cash and cash equivalents, $2,418.5 million of fixed maturity securities, $195.0 million of equity securities, $32.8 million of other invested assets, and $45.8 million of short-term investments. Sources of immediate and unencumbered liquidity at our operating subsidiaries as of September 30, 2020 consisted of $214.5 million of cash and cash equivalents, $188.3 million of publicly traded equity securities whose proceeds are available within three business days, $912.9 million of highly liquid fixed maturity securities, and $45.8 million of short-term investments 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.
EICN, ECIC, EPIC, and EAC are members 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.
During the second quarter of 2020, the FHLB announced its FHLB Advance Program. The FHLB Advance Program is a zero percent interest, six-month or one-year credit product that members can use to provide immediate relief to property owners, businesses, and other customers struggling with the financial impacts of the COVID-19 pandemic. Each member was allocated up to $10.0 million in advances under the FHLB Advance Program.
On May 11, 2020, our insurance subsidiaries received a total of $35.0 million of advances under the FHLB Advance Program. The advances were secured by collateral previously pledged to the FHLB by our insurance subsidiaries in support of our existing collateralized advance facility, which has been reduced by the amount of these outstanding advances. The advances are required to be repaid to the FHLB on November 12, 2020 in the amount of $15.0 million and on May 11, 2021 in the amount of $20.0 million.
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 amended its Letter of Credit Agreement to increase its credit amount and on March 2, 2020, FHLB and EAC and EPIC 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 $80.0 million, and EPIC, in the amount of $125.0 million. On April 20, 2020, FHLB and ECIC, amended its Letter of Credit Agreement to decrease its credit limit amount to $70.0 million. The amended Letter of
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Credit Agreements will expire March 31, 2021, and 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 (See Note 10).
We purchase reinsurance to protect us against the costs of severe claims and catastrophic events, including pandemics. On July 1, 2020, we entered into a new reinsurance program that is effective through June 30, 2021 with similar terms and conditions to the expiring program. 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. We further believe that we will not trigger a recovery under our current excess of loss reinsurance program in connection with the COVID-19 pandemic.
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 $772.9 million and $844.9 million were on deposit at September 30, 2020 and December 31, 2019, respectively. Additionally, standby letters of credit from the FHLB have been issued in lieu of $275.0 million and $260.0 million of securities on deposit at September 30, 2020 and December 31, 2019, respectively.
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 $3.3 million and $2.9 million at September 30, 2020 and December 31, 2019, 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 nine months ended:
 September 30,
 20202019
 (in millions)
Cash, cash equivalents, and restricted cash provided by (used in):  
Operating activities$47.6 $112.6 
Investing activities107.0 18.4 
Financing activities(72.2)(92.4)
Increase in cash, cash equivalents, and restricted cash $82.4 $38.6 
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 nine months ended September 30, 2020 included net premiums received of $480.6 million and investment income received of $65.2 million. These operating cash inflows were partially offset by net claims payments of $295.0 million, underwriting and other operating expenses paid of $126.1 million, commissions paid of $63.0 million, and federal income taxes paid of $13.3 million.
Net cash provided by operating activities for the nine months ended September 30, 2019 included net premiums received of $569.6 million, investment income received of $73.1 million, and cash received of $19.1 million for the LPT Contingent Commission. These operating cash inflows were partially offset by net claims payments of $312.5 million, underwriting and other operating expenses paid of $135.6 million, commissions paid of $71.8 million, and federal taxes paid of $28.7 million.
Investing Activities
Net cash provided by investing activities for the nine months ended September 30, 2020 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 provided by investing activities for the nine months ended September 30, 2019 was primarily related to sales, maturities, and redemptions of investments whose proceeds were used to fund the acquisition of CIC, claims payments, underwriting and other operating expenses, stockholder dividend payments, debt repayment, and share repurchases, partially offset by the investment of premiums received and the reinvestment of funds from sales, maturities, redemptions, and interest income.
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Financing Activities
Net cash used in financing activities for the nine months ended September 30, 2020 was primarily related to share repurchases and stockholder dividend payments, partially offset by cash received from the FHLB Advance Program.
Net cash used in financing activities for the nine months ended September 30, 2019 was primarily related to share repurchases, the redemption of notes payable, and stockholder dividend payments.
Dividends
Stockholder dividends paid were $23.3 million and $21.8 million for the nine months ended September 30, 2020 and 2019, respectively. On October 21, 2020, the Board of Directors declared a $0.25 dividend per share, payable November 18, 2020, to stockholders of record on November 4, 2020.
Share Repurchases
We repurchased 314,241 shares of our common stock for $9.3 million during the three months ended September 30, 2020 and 2,490,870 shares of our common stock for $82.6 million during the nine months ended September 30, 2020.
Capital Resources
As of September 30, 2020, the capital resources available to us consisted of $1,167.4 million of stockholders’ equity and the $129.7 million Deferred Gain.
Contractual Obligations and Commitments
The following table identifies our long-term debt and contractual obligations as of September 30, 2020.
 Payment Due By Period
 TotalLess Than
1-Year		1-3 Years4-5 YearsMore Than
5 Years
 (in millions)
Operating leases$22.4 $4.2 $9.9 $4.9 $3.4 
Non-cancellable contracts22.9 5.3 7.2 9.6 0.8 
FHLB advances35.0 35.0 — — — 
Finance leases0.5 0.1 0.4 — — 
Unpaid losses and LAE reserves (1)(2)
2,141.4 334.9 405.7 247.7 1,153.1 
Unfunded investment commitments67.4 67.4 — — — 
Total contractual obligations$2,289.6 $446.9 $423.2 $262.2 $1,157.3 
(1)Estimated losses and LAE reserve payment patterns have been computed based on historical information. Our calculation of loss and LAE reserve payments by period is subject to the same uncertainties associated with determining the level of reserves and to the additional uncertainties arising from the difficulty of predicting when claims (including claims that have not yet been reported to us) will be paid. Actual payments of losses and LAE by period will vary, perhaps materially, from the above table to the extent that current estimates of losses and LAE reserves vary from actual ultimate claims amounts due to variations between expected and actual payout patterns.
(2)The unpaid losses and LAE reserves are presented gross of reinsurance recoverables for unpaid losses, which were as follows for each of the periods presented above:
 Recoveries Due By Period
 TotalLess Than
1-Year		1-3 Years4-5 YearsMore Than
5 Years
 (in millions)
Reinsurance recoverables on unpaid losses and LAE$(513.7)$(33.6)$(58.0)$(52.3)$(369.8)
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 September 30, 2020, the total cost and amortized cost of our investments recorded at fair value was $2,457.8 million and its fair value was $2,677.1 million. These investments provide a steady source of income, which may fluctuate with changes in interest rates and our current investment strategies.
As of September 30, 2020, our investment portfolio consisted of 90% 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
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(excluding cash and cash equivalents) had a duration of 3.0 at September 30, 2020. 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) or an equivalent rating assigned by another nationally recognized statistical rating agency. Our fixed maturity securities portfolio had a weighted average quality of “A+” as of September 30, 2020, with 52.0% 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.
Our investment portfolio also contains equity securities. We strive to limit the exposure to equity price risk associated with our publicly traded equity securities by diversifying our holdings across several industry sectors. These equity securities had a fair value of $188.7 million at September 30, 2020, which represented 7% of our investment portfolio at that time. We also have a $6.7 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.
Our Other invested assets made up 1% of our investment portfolio as of September 30, 2020 and include private equity limited partnerships and convertible preferred shares of real estate investment trusts. Our investments in private equity limited partnerships totaled $12.8 million at September 30, 2020 and are generally not redeemable by the investees and cannot be sold without approval of the general partner. These investments have a fund term of 10 to 12 years, subject to two or three one-year extensions at the general partner’s discretion. We expect to receive distributions of proceeds from dividends and interest from fund investments, as well as from the disposition of a fund investment or portion thereof, from time-to-time during the full course of the fund term. As of September 30, 2020, we had unfunded commitments to these private equity limited partnerships totaling $67.4 million. Our investments in convertible preferred shares of real estate investment trusts totaled $20.0 million at September 30, 2020 and are non-redeemable until conversion and are periodically evaluated for impairment based on the ultimate recovery of the investment.
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 September 30, 2020.
CategoryEstimated Fair
Value		Percentage
of Total		Book Yield
Tax Equivalent Yield (1)
 (in millions, except percentages)
U.S. Treasuries$82.9 3.1 %2.1 %2.1 %
U.S. Agencies3.1 0.1 2.4 2.4 
States and municipalities478.7 17.9 2.7 3.1 
Corporate securities1,029.9 38.5 3.5 3.5 
Residential mortgage-backed securities462.8 17.3 2.4 2.4 
Commercial mortgage-backed securities107.2 4.0 3.1 3.1 
Asset-backed securities33.0 1.2 3.6 3.6 
Collateralized loan obligations82.9 3.1 2.0 2.0 
Other securities162.1 6.1 3.1 3.1 
Equity securities188.7 7.0 3.1 4.4 
Short-term investments45.8 1.7 4.7 4.7 
Total investments at fair value$2,677.1 100.0 % 
Weighted average yield  3.0 %3.2 %
(1) Computed using a statutory income tax rate of 21%
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The following table shows the percentage of total estimated fair value of our fixed maturity securities as of September 30, 2020 by credit rating category, using the lower of ratings assigned by Moody’s Investors Service or S&P.
RatingPercentage of Total
Estimated Fair Value
“AAA”7.3 %
“AA”44.7 
“A”29.3 
“BBB”11.6 
Below investment grade7.1 
Total100.0 %
Investments that we currently own could be subject to default by the issuer. We regularly assess individual securities as part of our ongoing portfolio management, including the identification of credit related losses. Our assessment includes reviewing the extent 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, including those caused by the current COVID-19 pandemic. 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 for the nine months ended September 30, 2020. We recorded an allowance for expected credit losses on AFS debt securities of $1.2 million during the nine months ended September 30, 2020, primarily driven by COVID-19 related disruptions to the economy and financial markets. Those fixed maturity securities whose total fair value was less than amortized cost at September 30, 2020, were those in which the Company had no intent, need, or requirement to sell at an amount less than their 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.
Credit Risk
Our fixed maturity securities, equity securities, other invested assets and cash equivalents are exposed to credit risk, which we attempt to manage through issuer and industry diversification. Our investment guidelines include limitations on the minimum rating of fixed maturity securities and concentrations of a single issuer for certain investment securities.
We also bear credit risk with respect to the reinsurers, which can be significant considering that some loss reserves remain outstanding for an extended period of time. We are required to pay losses even if a reinsurer refuses or fails to meet its obligations to us under the applicable reinsurance agreement(s). We continually monitor the financial condition and financial strength ratings of our reinsurers. Additionally, we bear credit risk with respect to premiums receivable, which is generally diversified due to the large number of entities comprising our policyholder base and their dispersion across many different industries and geographies.
The recent economic disruptions caused by the COVID-19 pandemic has increased the credit risk associated with certain of our investment holdings, reinsurance recoverables and premiums receivable. As a result, and in accordance with the adoption of ASU 2016-13, we recorded $1.2 million of impairment for expected credit losses during the nine-month period ended September 30, 2020. See Note 5 to the consolidated financial statements.
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Interest Rate Risk
Fixed Maturity Securities
The fair value of our fixed maturity portfolio is exposed to interest rate risk, which is the risk of a decline in fair value resulting from changes in prevailing interest rates, which we strive to limit by managing duration. Our fixed maturity investments (excluding cash and cash equivalents) had a duration of 3.0 at September 30, 2020. Future market interest rates are particularly uncertain at this time given the abrupt interest rate cuts recently made by the Federal Reserve in response to the COVID-19 pandemic. 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. We continually monitor the changes in interest rates and the impact on our liquidity and ability to meet our obligations.
Sensitivity Analysis
The fair values or cash flows of market sensitive instruments are subject to potential losses in future earnings resulting from changes in interest rates and other market conditions. Our sensitivity analysis applies a hypothetical parallel shift in market rates and reflects what we believe are reasonably possible near-term changes in those rates (covering a period of time going forward up to one year from the date of the consolidated financial statements). Actual results may differ from the hypothetical change in market rates assumed in this disclosure. This sensitivity analysis does not reflect the results of any action that we may take to mitigate such hypothetical losses in fair value.
We use fair values to measure our potential loss in this model, which includes fixed maturity securities and short-term investments. For invested assets, we use modified duration modeling to calculate changes in fair values. Durations on invested assets are adjusted for call, put, and interest rate reset features. Invested asset portfolio durations are calculated on a market value weighted basis, excluding accrued investment income, using holdings as of September 30, 2020. The estimated changes in fair values on our fixed maturity securities, which had an aggregate value of $2,442.6 million as of September 30, 2020, based on specific changes in interest rates are as follows:
Hypothetical Changes in Interest RatesEstimated Pre-tax Increase (Decrease) in Fair Value
(in millions, except percentages)
300 basis point rise$(276.4)(11.6)%
200 basis point rise(180.6)(7.6)
100 basis point rise(87.7)(3.7)
50 basis point decline44.1 1.8 
100 basis point decline77.5 3.2 
The most significant assessment of the effects of hypothetical changes in interest rates on investment income would be based on GAAP guidance related to "Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases," which requires amortization adjustments for mortgage-backed securities. The rates at which the mortgages underlying mortgage-backed securities are prepaid, and therefore the average life of mortgage-backed securities, can vary depending on changes in interest rates (for example, mortgages are prepaid faster and the average life of mortgage-backed securities falls when interest rates decline). Adjustments for changes in amortization are based on revised average life assumptions and would have an impact on investment income if a significant portion of our commercial and residential mortgage-backed securities were purchased at significant discounts or premiums to par value. As of September 30, 2020, the par value of our commercial and residential mortgage-backed securities holdings was $531.5 million, and the amortized cost was 102.5% of par value. Since a majority of our mortgage-backed securities were purchased at a premium or discount that is significant as a percentage of par, an adjustment could have a significant effect on investment income. The commercial and residential mortgage-backed securities portion of the portfolio totaled 21.3% of total investments as of September 30, 2020. Agency-backed residential mortgage pass-throughs totaled $425.6 million, or 92.0%, of the residential mortgage-backed securities portion of the portfolio as of September 30, 2020.
Equity Price Risk
Equity price risk is the risk that we may incur losses in the fair value of the equity securities we hold in our investment portfolio. Adverse changes in the market prices of the equity securities we hold in our investment portfolio would result in decreases in the fair value of our total assets on our Consolidated Balance Sheets and in net realized and unrealized gains and losses on our Consolidated Statements of Comprehensive Income. Recent economic and market disruptions caused by the COVID-19 pandemic have resulted in significant volatility in the fair value of our equity securities. We minimize our exposure to equity price risk by investing primarily in the equity securities of mid-to-large capitalization issuers and by diversifying our equity holdings across several industry sectors.
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The table below shows the sensitivity of our equity securities at fair value to price changes as of September 30, 2020:
(in millions)CostFair Value20% Fair Value DecreasePre-tax Impact on Total Equity Securities20% Fair Value IncreasePre-tax Impact on Total Equity Securities
Equity securities$110.8 $188.7 $151.0 $(37.7)$226.4 $37.7 
Effects of Inflation
Inflation could impact our financial statements and results of operations. Our estimates for losses and LAE include assumptions about the timing of closure and future payment of claims and claims handling expenses, such as medical treatments and litigation costs. To the extent inflation causes these costs to increase above established reserves, we will be required to increase those reserves for losses and LAE, reducing our earnings in the period in which the deficiency is identified. We consider inflation in the reserving process by reviewing cost trends and our historical reserving results. We also consider an estimate of increased costs in determining the adequacy of our rates, particularly as it relates to medical and hospital rates where historical inflation rates have exceeded general inflation rates.
Fluctuations in rates of inflation also influence interest rates, which in turn impact the market value of our investment portfolio and yields on new investments. Operating expenses, including payrolls, are also impacted to a certain degree by inflation.
The COVID-19 pandemic has created great uncertainty about the path of the economy, consumer behavior, and workplace norms in the years ahead. Recent supply and demand shocks and dramatic changes in fiscal policy may lead to higher levels of inflation in future periods.
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.
Despite the Company being in work-from-home status, 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.
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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
The following risk factors are in addition to, or serve to update, the risk factors contained in our Annual Report. Investing in our common stock involves risks. In evaluating our company, you should carefully consider such risks, together with all the information included or incorporated by reference in this report, as well as our Annual Report. Additional risks that we are not presently aware of or that we currently believe are immaterial may also impair our business operations. The occurrence of one or more of these events could significantly and adversely affect our business, financial condition, results of operations, cash flows, and stock price, and you could lose all or part of your investment.
The effects of the COVID-19 pandemic have significantly affected the global and U.S. economies and financial markets, and may further disrupt our operations and the operations of our insureds, agents, and third parties upon which we rely.
The COVID-19 health emergency has caused significant disruption in the global and U.S. economies and financial markets. The spread of COVID-19 has caused illness, quarantines, cancellation of events and travel, business and school shutdowns, reduction in business activity, widespread unemployment, supply chain interruptions, and overall economic and financial market instability. The U.S. currently has the most reported COVID-19 cases in the world, and all 50 states and the District of Columbia have reported cases of infected individuals. All U.S. states, including California, where we generated 46% of our in-force premiums as of September 30, 2020, have declared states of emergency. Impacts to our business could be widespread and material, including but not limited to, the following:
•employees contracting COVID-19;
•reductions in our operating effectiveness as our employees work from home;
•unavailability of key personnel necessary to conduct our business activities;
•reductions in our insureds' payrolls upon which our premiums are based;
•unprecedented volatility in financial markets that could materially affect our investment portfolio valuations and returns;
•government mandates and/or legislative changes, including premium grace periods and presumed COVID-19 compensability for all or certain occupational groups;
•increases in frequency and/or severity of compensable claims;
•increased credit risk;
•business disruption to independent insurance agents and brokers and/or our partners that market and sell our insurance products; and
•business disruptions to third parties that we outsource certain business functions to and whose technology upon which we rely.
We are taking precautions to protect the safety and well-being of our employees while providing uninterrupted service to our policyholders and claimants. However, no assurance can be given that these actions will be sufficient, nor can we predict the level of disruption that will occur to our employees' ability to continue to provide customer support and service as they work from home. Furthermore, should the COVID-19 pandemic and its related macro-economic risks continue for an extended period of time, demand for our insurance products would be negatively impacted and the frequency and severity of our compensable claims could increase, each of which could result in a material adverse effect on our results of operations and financial condition.
It is not possible at this time to estimate the impact that COVID-19 could have on our business, as the impact will depend on future developments, which are highly uncertain and cannot be predicted.
The insurance business is subject to extensive regulation and legislative changes, which impact the manner in which we operate our business.
Our insurance business is subject to extensive regulation by the applicable state agencies in the jurisdictions in which we operate, most significantly by the insurance regulators in California, Florida, Nevada, and New York, the states in which our insurance subsidiaries are domiciled. Changes in laws and regulations could have a significant negative impact on our business. As of September 30, 2020, 46% of our in-force premiums were generated in California. Accordingly, we are particularly affected by regulation in California.
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More generally, insurance regulators have broad regulatory powers designed to protect policyholders and claimants, and not stockholders or other investors. Regulations vary from state to state, but typically address or include:
•standards of solvency, including RBC measurements;
•restrictions on the nature, quality, and concentration of investments;
•restrictions on the types of terms that we can include in the insurance policies we offer;
•mandates that may affect wage replacement and medical care benefits paid under the workers' compensation system;
•requirements for the handling and reporting of claims and procedures for adjusting claims;
•restrictions on the way rates are developed and premiums are determined;
•the manner in which agents may be appointed;
•establishment of liabilities for unearned premiums, unpaid losses and LAE;
•limitations on our ability to transact business with affiliates;
•mergers, acquisitions, and divestitures involving our insurance subsidiaries;
•licensing requirements and approvals that affect our ability to do business;
•compliance with all applicable privacy laws;
•compliance with cyber-security laws and regulations;
•potential assessments for the settlement of covered claims under insurance policies issued by impaired, insolvent, or failed insurance companies or other assessments imposed by regulatory agencies; and
•the amount of dividends that our insurance subsidiaries may pay to EGI and CGI and, in turn, the ability of EGI and CGI to pay dividends to EHI.
Workers' compensation insurance is statutorily provided for in all of the states in which we do business. State laws and regulations specify the form and content of policy coverage and the rights and benefits that are available to injured workers, their representatives, and medical providers. Additionally, any retrospective change in regulatorily required benefits could materially increase the benefits costs that we would be responsible for to the extent of the legislative increase. In "administered pricing" states, insurance rates are set by the state insurance regulators and are adjusted periodically. Rate competition is generally not permitted in these states. Of the states in which we currently operate, Florida, Wisconsin, and Idaho are administered pricing states. Additionally, we are exposed to the risk that other states in which we operate will adopt administered pricing laws.
Legislation and regulation impact our ability to investigate fraud and other abuses of the workers' compensation system in the states in which we do business. Our relationships with medical providers are also impacted by legislation and regulation, including penalties for failure to make timely payments.
Federal legislation typically does not directly impact our workers' compensation business, but our business can be indirectly affected by changes in healthcare, occupational safety and health, and tax and financial regulations. Since healthcare costs are the largest component of our loss costs, we may be impacted by changes in healthcare legislation, which could affect healthcare costs and delivery in the future. There is also the possibility of federal regulation of insurance.
This extensive regulation of our business may affect the cost or demand for our products and may limit our ability to obtain rate increases or to take other actions that we might desire to maintain our profitability. In addition, we may be unable to maintain all required approvals or comply fully with applicable laws and regulations, or the relevant governmental authority's interpretation of such laws and regulations. If that were to occur, we might lose our ability to conduct business in certain jurisdictions. Further, changes in the level of regulation of the insurance industry or changes in laws or regulations or interpretations by regulatory authorities could impact our operations, require us to bear additional costs of compliance, and impact our profitability.
Any government mandates and/or legislative changes related to the COVID-19 pandemic, including mandated premium refunds or credits, extended premium grace periods, and presumed COVID-19 compensability for all or certain occupational groups, could have a material adverse effect on our results of operations and financial condition. Premium grace periods, along with prolonged declines in our insureds' payrolls upon which our premiums are based, could significantly increase our expenses and adversely impact our liquidity. Furthermore, the presumption of COVID-19 compensability for all or certain occupational groups could significantly increase the frequency and severity of our compensable claims and increase our losses and LAE.
We focus on small businesses, and those businesses may be severely and disproportionately impacted by the recent downturn in economic conditions caused by the COVID-19 pandemic.
All states, including California, where we generated 46% of our in-force premiums as of September 30, 2020, have declared states of emergency related to the COVID-19 pandemic and have imposed various types and levels of economic and social restrictions. At various times there have been impositions of greater restrictions in some states and lessening of restrictions in others, and in some cases a return to complete shutdown of certain government-defined non-essential businesses after re-opening had occurred. Certain classes of our business, especially those related to restaurants and hospitality, have been particularly hard-hit. Restaurants and Other Eating Places is currently our largest class of business, which at December 31,
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2019, represented 24.7% of our in-force premiums. As a result of these significant business disruptions related to the COVID-19 pandemic and the uncertainty and inconsistency as to when economic activity will resume, estimating the likely impact of the COVID-19 pandemic on our business, financial condition, and results of operations in future periods remains difficult.
In light of the COVID-19 pandemic, concerns persist that many non-essential small business owners face permanent closure or heavy reliance on newly-established federal government programs (such as the CARES Act) in order to retain their businesses or that no further federal economic relief programs are enacted. The ultimate success of these programs is currently unknown. To the extent that such programs prove to be ineffective or are otherwise unattractive, unavailable, or overly burdensome, many of our insureds could face permanent closure, which could have a material adverse effect on our future revenues and results of operations.
Our concentration in California ties our performance to the business, economic, demographic, natural perils, competitive, and regulatory conditions in that state.
Our business is concentrated in California, where we generated 46% of our in-force premiums as of September 30, 2020. Accordingly, the loss environment and unfavorable business, economic, demographic, natural perils, competitive, and regulatory conditions in California, including the impacts of the ongoing COVID-19 pandemic, could negatively impact our business. Our California new business opportunities are not currently as strong as those that we have observed in other states.
Many California businesses are dependent on tourism revenues, which are, in turn, dependent on a robust economy. A downturn in the national economy or the economy of California, or any other event that causes deterioration in tourism, could adversely impact small businesses, such as restaurants, that we have targeted as customers. The departure from California or insolvency of a significant number of small businesses could also have a material adverse effect on our financial condition and results of operations. California is also exposed to climate and environmental changes, natural perils such as earthquakes, and susceptible to pandemics, or terrorist acts. Additionally, the workers' compensation industry has seen a higher level of claims litigation in California, which could expose us to further liabilities beyond what are currently expected and included on our financial statements. Because of the concentration of our business in California, we may be exposed to losses and business, economic, and regulatory risks or risk from natural perils that are greater than the risks associated with companies with greater geographic diversification.
We rely on independent insurance agents and brokers.
We market and sell the majority of our insurance products through independent, non-exclusive insurance agents and brokers. These agents and brokers are not obligated to promote our products and can and do sell our competitors' products. In addition, these agents and brokers may find it easier to promote the broader range of programs of some of our competitors than to promote our single-line workers' compensation insurance products. Additionally, any disruptions to or changes in the distribution of our insurance products, including Cerity's direct-to-customer workers' compensation insurance offerings or other potential market disruptions, could negatively impact the relationship between us and our independent agents and brokers. The loss or disruption of business of a number of our independent agents and brokers or the failure or inability of these agents and brokers to successfully market our insurance products, including impacts related to the COVID-19 pandemic, could have a material adverse effect on our business, financial condition, and results of operations.
If we are unable to obtain reinsurance or collect on ceded reinsurance, our ability to write new policies and to renew existing policies could be adversely affected and our financial condition and results of operations could be materially adversely affected.
At September 30, 2020, we had $521.0 million of reinsurance recoverables for paid and unpaid losses and LAE, of which $7.7 million was due to us on paid claims.
We purchase reinsurance to protect us against the costs of severe claims and catastrophic events, including natural perils and acts of terrorism, excluding nuclear, biological, chemical, and radiological events. On July 1, 2020, we entered into a new reinsurance program that is effective through June 30, 2021. 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.
The availability, amount, and cost of reinsurance depend on market conditions and our loss experience and may vary significantly. We cannot be certain that our reinsurance agreements will be renewed or replaced prior to their expiration with terms satisfactory to us. If we are unable to renew or replace our reinsurance agreements with terms satisfactory to us, our net liability on individual risks would increase and we would have greater exposure to large and catastrophic losses, which could have a material adverse effect on our financial condition and results of operations.
In addition, we are subject to credit risk with respect to our reinsurers, and they may refuse to pay or delay payment of losses we cede to them. We remain liable to our policyholders even if we are unable to make recoveries that we believe we are entitled
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to under our reinsurance contracts. Losses may not be recovered from our reinsurers until claims are paid and, in the case of long-term workers' compensation cases, the creditworthiness of our reinsurers may change before we can recover amounts that we are entitled to. The inability of any of our reinsurers to meet their financial obligations could have a material adverse effect on our financial condition and results of operations.
Intense competition and the fact that we write only a single line of insurance could adversely affect our ability to sell policies at rates that we deem adequate.
The market for workers' compensation insurance products is highly competitive. Competition in our business is based on many factors, including premiums charged, services provided, ease of doing business, financial ratings assigned by independent rating agencies, speed of claims payments, reputation, policyholder dividends, perceived financial strength, and general experience. In some cases, our competitors offer lower priced products than we do. If our competitors offer more competitive premiums, policyholder dividends, or payment plans, services or commissions to independent agents, brokers, and other distributors, we could lose market share, have to reduce our premium rates, or increase commission rates, which could adversely affect our profitability. We compete with regional and national insurance companies, professional employer organizations, third-party administrators, self-insured employers, and state insurance funds. Our main competitors vary from state to state, but are usually those companies that offer a full range of services in underwriting, loss control, and claims. We compete on the basis of the services that we offer to our policyholders and on ease of doing business rather than solely on price.
Many of our competitors are significantly larger and possess greater financial, marketing, and management resources than we do. Some of our competitors benefit financially by not being subject to federal income tax. Intense competitive pressure on prices can result from the actions of even a single large competitor. Competitors with more surplus than us have the potential to expand in our markets more quickly than we can and invest more heavily in new technologies. Greater financial resources also permit an insurer to gain market share through more competitive pricing, even if that pricing results in reduced underwriting margins or an underwriting loss.
Many of our competitors are multi-line carriers that can price the workers' compensation insurance they offer at a loss in order to obtain other lines of business at a profit. This creates a competitive disadvantage for us, as we only offer a single line of insurance. For example, a business may find it more efficient or less expensive to purchase multiple lines of commercial insurance coverage from a single carrier. Additionally, we primarily target small businesses, which may be more significantly and disproportionately impacted by a downturn in economic conditions such as those created by the COVID-19 pandemic.
The property and casualty insurance industry is cyclical in nature and is characterized by periods of so-called "soft" market conditions, in which premium rates are stable or falling, insurance is readily available, and insurers' profits decline, and by periods of so-called "hard" market conditions, in which rates rise, insurance may be more difficult to find, and insurers' profits increase. According to the Insurance Information Institute, since 1970, the property and casualty insurance industry experienced hard market conditions from 1975 to 1978, 1984 to 1987, and 2001 to 2004. Although the financial performance of an individual insurance company is dependent on its own specific business characteristics, the profitability of most workers' compensation insurance companies generally tends to follow this cyclical market pattern. We believe the workers' compensation industry currently has excess underwriting capacity resulting in lower rate levels and smaller profit margins. We continue to experience price competition in our target markets.
Because of cyclicality in the workers' compensation market, due in large part to competition, capacity, and general economic factors, we cannot predict the timing or duration of changes in the market cycle. This cyclical pattern has in the past and could in the future adversely affect our financial condition and results of operations. If we are unable to compete effectively, our business, financial condition, and results of operations could be materially adversely affected.
We may be unable to realize our investment objectives, and economic conditions in the financial markets could lead to investment losses.
Investment income is an important component of our revenue and net income. Our investment portfolio is managed by independent asset managers that operate under investment guidelines approved by the Finance Committee of the Board of Directors. Although these guidelines stress diversification and capital preservation, our investments are subject to a variety of risks that are beyond our control, including risks related to general economic conditions, interest rate fluctuations or prolonged periods of low interest rates, and market volatility. Interest rates are highly sensitive to many factors, including governmental fiscal and monetary policies and domestic and international economic and political conditions. These and other factors affect the capital markets and, consequently, the value of our investment portfolio.
We are exposed to significant financial risks related to the capital markets, including 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 interest rate risk, credit risk, and equity price risk. For more information regarding market risk, see "Part I, Item 3-Quantitative and Qualitative Disclosures About Market Risk."
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The outlook for our investment income is dependent on the future direction of interest rates, maturity schedules, and cash flow from operations that is available for investment. The fair values of fixed maturity securities that are AFS fluctuate with changes in interest rates and credit risk assumptions, which cause fluctuations in our stockholders' equity, net income and comprehensive income. Future market interest rates are particularly uncertain at this time given the abrupt interest rate cuts recently made by the Federal Reserve in response to the COVID-19 pandemic. Any significant decline in our investment income or the value of our investments as a result of changes in interest rates, deterioration in the credit of companies or municipalities in which we have invested, decreased dividend payments, general market conditions, or events that have an adverse impact on any particular industry or geographic region in which we hold significant investments could have an adverse effect on our net income and, as a result, on our stockholders' equity and policyholder surplus.
The valuation of our investments, including the determination of the amount of impairments, includes estimates and assumptions and could result in changes to investment valuations that may adversely affect our financial condition and results of operations. Beginning on January 1, 2018, we were required to measure equity securities at fair value with changes in fair value recognized in net income, which causes increased volatility in our results of operations. Equity securities represented 7% of our total investment portfolio as of September 30, 2020. The use of internally developed valuation techniques may have a material effect on the estimated fair value amounts of our investments and our financial condition.
We regularly review the valuation of our entire portfolio of fixed maturity investments, including the identification of other-than-temporary declines in fair value and expected credit losses. The determination of the amount of impairments taken on our investments is based on our periodic evaluation and assessment of our investments and known and inherent risks associated with the various asset classes. There can be no assurance that we have accurately determined the level of other-than-temporary impairments reflected on our financial statements and additional impairments may need to be taken in the future. Historical trends may not be indicative of future impairments.
Bank loans represented approximately 6.1% of our investment portfolio as of September 30, 2020. The yield on our bank loans is currently based on the London Interbank Offered Rate (LIBOR). With the likelihood that there will be a cessation of LIBOR by the end of 2021, the yields and associated fair values of our bank loans could be impacted favorably or unfavorably by a transition from LIBOR to another rate.
We may require additional capital in the future, which may not be available to us or may be available only on unfavorable terms.
Our future capital requirements will depend on many factors, including state regulatory requirements, our ability to write new business successfully, and to establish premium rates and reserves at levels sufficient to cover losses. If we have to raise additional capital, equity or debt financing may not be available on terms that are favorable to us. In the case of equity financings, there could be dilution to our stockholders and the securities may have rights, preferences, and privileges senior to our common stock. In the case of debt financings, we may be subject to covenants that restrict our ability to freely operate our business. If we cannot obtain adequate capital on favorable terms or at all, we may be unable to implement our future growth or operating plans and our business, financial condition, and results of operations could be materially adversely affected.
The capital and credit markets continue to experience volatility and disruption that could negatively affect market liquidity. These conditions have produced downward pressure on stock prices and limit the availability of credit for certain issuers without regard to those issuers' underlying financial strength. In addition, we could be forced to delay raising capital or be unable to raise capital on favorable terms, or at all, which could decrease our profitability, significantly reduce our financial flexibility, and cause rating agencies to reevaluate our financial strength ratings.
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 third quarter of 2020:
PeriodTotal Number of Shares PurchasedAverage
Price Paid
Per Share		Total Number of Shares Purchased as Part of Publicly Announced ProgramApproximate
Dollar Value of Shares that
May Yet be Purchased Under the Program
    (in millions)
July 1 - July 31111,899 $29.21 111,899 $51.8 
August 1 - August 31— — — 51.8 
September 1 - September 30202,342 30.04 202,342 45.7 
314,241 $29.75 314,241  
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On February 21, 2018, the Board of Directors announced 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 $50.0 million expansion of the 2018 Program, to $100.0 million, and extended the repurchase authority pursuant to the 2018 Program through June 30, 2020. On March 11, 2020, the Board of Directors authorized a second $50.0 million expansion of the 2018 Program, to $150.0 million, and extended the repurchase authority pursuant to the 2018 Program through June 30, 2021. On July 22, 2020, the Board of Directors authorized a third $50.0 million expansion of the 2018 Program, to $200.0 million, and extended the repurchase authority pursuant to the 2018 Program through September 30, 2021. 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.
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 ExhibitIncluded
Herewith		FormFile No.ExhibitFiling Date
31.1X   
31.2X   
32.1X   
32.2X   
101.INSXBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded with the Inline XBRL document.X   
101.SCHXBRL Taxonomy Extension Schema DocumentX   
101.CALXBRL Taxonomy Extension Calculation Linkbase DocumentX   
101.DEFXBRL Taxonomy Extension Definition Linkbase DocumentX
101.LABXBRL Taxonomy Extension Label Linkbase DocumentX   
101.PREXBRL Taxonomy Extension Presentation Linkbase DocumentX   
—————

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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:October 27, 2020/s/ Michael S. Paquette
 Michael S. Paquette
 Executive Vice President and Chief Financial Officer
 Employers Holdings, Inc.
(Principal Financial and Accounting Officer)
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