Employers Holdings, Inc.
2011 Annual Report
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To fellow stockholders
Douglas D. Dirks
President & CEO
Robert J. Kolesar
Chairman of the Board
Our focus in 2011 was to build scale by growing in markets which
have historically produced losses that are lower than industry
averages, to prudently price our products, to closely monitor and
react to loss trends, to continue to control operating expenses,
and to actively and judiciously manage our capital - all aimed at
improving our financial and operating performance and continuing
to build long-term shareholder value.
While our adjusted net income was $13.4 million lower in
2011 than in 2010 and our adjusted combined ratio was 6.3
percentage points higher than in 2010, our combined ratio
improved each quarter throughout the year. On the positive side,
in 2011 compared to 2010, we increased premiums and policies,
increased rates in several of our largest in-force premium states,
and decreased underwriting operating costs. On the negative side,
net investment income was slightly lower, and losses and loss
adjustment expenses (LAE) were substantially higher than in 2010
based largely on a higher rate of loss and LAE provisions for the
current accident year.
Last year we told you that while economic growth remained
sluggish, we were driving a set of growth initiatives that would
strengthen our performance. Those initiatives, implemented in
July of 2010, were to add new agencies, policies and premium
nationally, with particular emphasis on our newer markets.
Specifically, we targeted the addition of 20,000 policies, $160
million in premium and over 900 new producer appointments by
the middle of 2012.
In 2011, our growth initiatives yielded positive results and we
succeeded in achieving meaningful growth during a time when
national employment trends improved only slightly. At year-end
2011, our net premiums written increased 31% year over year
driven by a 36% increase in policy count. We exceeded our
monthly targets for adding policies, with 16,000 new policies
at the end of December. We surpassed our twenty-four month
target for adding agencies with over 1,100 new appointments at
December 31st. Much of our growth in policy count and premium
was from a higher rate of electronic submittals of new business
applications through our rapid quote system by agents and
strategic partners. Overall payroll exposure increased 24% year
over year at December 31, 2011 compared with a negative 12%
in 2010.
We achieved or exceeded virtually all of our growth projections
in 2011 with the exception of premium growth. While premium
growth has been substantial, our average policy size continued to
decline throughout the year. However, in January of 2012, our rate
of premium growth outpaced policy growth and we saw a slight
increase in average policy size. Although it is too early to call a
change in the trend, we are encouraged by this development,
something we have not seen in many years.
Additionally, as planned, our underwriting remained selective
as we succeeded in shifting a larger percentage of our in-force
premium to the least risky hazard groups A and B with increases
in those groups totaling 5% at year-end 2011. Hazard groups A
and B represented 18% and 24%, respectively, of our total in-
force premium at year-end.
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For the first time in recent years, the change in our net rate
(in-force premium divided by payroll) was a positive 1% in
the fourth quarter of 2011 relative to the third quarter of 2011.
The improvement in net rate was largely led by California. At
December 31, 2011, our year over year change in net rate was a
negative 1% compared with a negative 5% at December 31, 2010.
Investment income decreased slightly in 2011, 3.5% year over
year, resulting from a modest decrease in invested assets
primarily attributable to share repurchases and dividends paid to
stockholders, and a slight decline in yield.
Over the past several years, we have implemented cost control
measures in response to declining levels of premium and the
resulting impact on the company’s financial and operating
performance. We combined four regional operating units into
two, consolidated offices and decreased staffing by 35%. These
measures resulted in meaningful cost savings and by year-end,
2011, underwriting and other operating expenses declined 5%
compared with 2010.
The ratio of total expenses to net premiums earned – the
combined ratio – was 114.0% in 2011, and 118.7% when adjusted
for the impact of the LPT deferred reinsurance gain, increases
over 2010 of 7.2 and 6.3 percentage points, respectively. The
combined ratio is the sum of the losses and loss adjustment
expenses (LAE) ratio, the commission expense ratio, the
policyholder dividend ratio and the underwriting and other
operating expense ratio. When the combined ratio is below 100%,
we have recorded underwriting income, and conversely, when the
combined ratio is greater than 100%, as it was in 2011, we cannot
be profitable without investment income.
Losses and LAE represents our largest expense item and includes
claim payments made, amortization of the deferred gain related to
the LPT, estimates for future claim payments and changes in those
estimates for current and prior periods, and costs associated with
investigating, defending and adjusting claims. Increases in losses
and LAE related to premium growth and recent loss cost trends
have temporarily outpaced our cost reductions and rate increases.
While our underwriting and other operating expense ratio
improved (declined) 5.2 percentage points year over year, the loss
ratio before the LPT increased 11.3 percentage points at year-end
2011 compared with year-end 2010 primarily due to two factors:
(1) an increase in the current accident year loss provision rate (the
portion of each premium dollar, approximately 77 cents in 2011,
that we set aside for claims in the current accident year); and
(2) the impact of favorable prior accident year loss development
(reserve releases) in the first two quarters of 2010, but absent in
2011. Our prior period reserves remained adequate throughout
the year. Small unfavorable prior period development in 2011 was
related to assigned risk business, which represents our share
of residual market business that is applied to us as a market
participant in many of the states in which we operate.
Our markets are influenced by state-directed legislative and rate
actions. We did not see significant workers’ compensation reform
in any of our states in 2011. In terms of rates, we increased our
pure premium filed rates in California over 33% since early 2009.
To fellow stockholders (continued)
Several states implemented rate changes, most notably Florida
with a rate increase of 8.9% on January 1st, 2012. Pricing trends
appear to have stabilized nationally, with rating bureaus having
filed increases in 19 jurisdictions in 2011. We write business in 13
of those 19 jurisdictions.
Historically low yields continued to suppress investment income
throughout 2011, although the tax equivalent return on our
invested assets was 5%. In the fourth quarter, we repositioned our
investment portfolio to achieve the following strategic objectives:
to reduce tax-exempt municipal exposure, to shorten duration,
and to increase high dividend yielding equities. Realized gains
of $20 million were from the sale of municipal bonds and longer-
term treasury, agency and corporate bonds. While our unrealized
gains at the end of 2011 were still substantial, at approximately
$180 million, we chose to take some profits off the table in the
fourth quarter and modestly lower overall exposure to tax exempt
municipal securities.
We continue to actively and deliberately manage our capital. Our
balance sheet remains strong, evidenced by the repurchase of
over 6 million common shares in 2011. We have in place a $200
million stock repurchase authorization through June 30, 2013
with $93.0 million of that program remaining at December 31,
2011. In the past year, we returned $92.6 million to shareholders
through share repurchases which contributed significantly to our
14% increase in book value per share since December 31st of
last year. The adjusted book value per share of EIG was $25.07 at
December 31, 2011.
Reflecting on 2011, we are pleased with what we have achieved.
2011 was a year in which we met most of our strategic growth
goals. We increased total policies and added significantly to our
number of producers. We successfully completed the deployment
of our rapid quote technology, which is now in use throughout all
of our markets. We saw our overall net rate increase for the first
time in several years, and are beginning to see signs of growth in
our average policy size. We reduced our underwriting and other
operating expenses and grew book value per share while returning
significant capital to our shareholders.
The workers’ compensation market continues to be impacted by
an uncertain economic situation, cycle high combined ratios, and
historically low yields on investments. Any one of these conditions
creates challenges in the workers’ compensation business. All
three of them create an extremely difficult environment through
which we will continue to actively and cautiously manage.
Looking forward to 2012, we expect that we will progress further
in building scale and producing additional revenue as a result of
our growth initiatives, with perhaps a larger policy size than in the
recent past. We will continue to assiduously manage expenses,
although we expect a $7 million increase in underwriting and other
operating expenses due to a Financial Accounting Standards
Board (FASB) accounting change related to deferred acquisition
costs that will be recorded in 2012.
The key question in 2012 for us and for the workers’ compensation
industry as a whole is whether increases in pricing will be adequate
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To fellow stockholders (continued)
to overcome increased losses. Additionally, we expect historically
low investment yields will continue throughout the year. While
overall profitability will remain a challenge, increasing rates and a
sluggish, but recovering job market may help to provide some lift
in the workers’ compensation market this year. While economic
recovery coming out of the 2008-2009 recession continues to be
a lengthy process, we are hearing some anecdotal evidence that
our markets are beginning to firm. We had a solid start to our 2012
new and renewal business activity levels and we are hopeful that a
long-needed firming in the marketplace has begun.
On behalf of the Board of Directors and all the men and women of
EMPLOYERS, we thank you for your support.
Douglas D. Dirks
President & CEO
Robert J. Kolesar
Chairman of the Board
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Summary of Performance
(Thousands of dollars, except per share and ratios)
Income Statement Data
Net income per diluted share
Net income before LPT per diluted share
Net investment income
Realized gains (losses) on investments, net
Gross premiums written
Underwriting and other operating expense
$3.00
$2.50
$2.00
$1.50
$1.00
$0.50
$0
$1.98
$1.69
2007
2008
2011
2010
$1.29
$0.83
$80,117
$20,161
$1.51
$1.07
$83,032
$10,137
$418,512
$322,277
$100,717
$106,026
Earnings per Share
$1.41
2009
$1.07
2010
$0.83
2011
Earnings before the LPT per diluted share
GAAP earnings per diluted share
The table below shows the reconciliation of net income before impact of the LPT for the periods presented:
Net income
Less:
Years Ended December 31,
2011
2010
2009
2008
2007
$48,313
$62,799
$83,021
$101,785
$120,283
Impact of the deferred reinsurance gain – LPT agreement
$17,147
$18,233
$18,007
$18,421
$18,034
Net income before impact of the LPT
$31,166
$44,566
$65,014
$83,364
$102,249
Combined Ratio
140%
120%
100%
80%
60%
40%
20%
0%
85.6%
91.5%
102.5%
112.4%
118.7%
2007
2008
2009
2010
2011
Combined ratio before the LPT
Unadjusted combined ratio
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Balance Sheet Data
Total assets
Total investments
Average pre-tax yield
Tax equivalent yield
Duration
Net unrealized gains
Debt to capital ratio
Stockholders’ equity including deferred reinsurance gain – LPT agreement
Adjusted return on average adjusted equity (net income before the LPT divided by average stockholders’ equity including
LPT deferred reinsurance gain)
2011
2010
$3,481,744
$3,480,120
$1,950,745
$2,080,494
4.1%
5.0%
4.2
4.2%
5.3%
4.9
$179,567
$129,435
12.9%
13.3%
$827,380
$860,457
3.7%
5.1%
Stockholders’ Equity including LPT Deferred Reinsurance Gain per Share
$16.21
$17.43
$20.67
$22.08
$25.07
2007
2008
2009
2010
2011
$30
$25
$20
$15
$10
$5
$0
The table below shows the reconciliation of total stockholders’ equity including the LPT deferred
reinsurance gain for the periods presented:
Total stockholders’ equity
Plus:
LPT deferred reinsurance gain
2011
2010
2009
2008
2007
$474,186
$490,116
$498,399
$444,728
$379,453
353,194
370,341
388,574
406,581
425,002
Total stockholders’ equity including LPT deferred reinsurance gain
$827,380 $860,457
$886,973
$851,309
$804,455
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89397
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(cid:2) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 2011
OR
(cid:3) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from
to
Commission file number: 001-33245
EMPLOYERS HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
NEVADA
(State or other jurisdiction of
incorporation or organization)
04-3850065
(I.R.S. Employer
Identification Number)
10375 Professional Circle, Reno, Nevada 89521
(Address of principal executive offices and zip code)
(888) 682-6671
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
Common Stock, $0.01 par value per share
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes (cid:3) No (cid:2)
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange
Act. Yes (cid:3) No (cid:2)
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 (cid:2) No (cid:3)
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes (cid:2) No (cid:3)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K. (cid:3)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a
smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” “non-accelerated filer,” and
“smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer (cid:2)
Accelerated filer (cid:3)
Non-accelerated filer (cid:3)
Smaller reporting company (cid:3)
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of June 30,
2011 was $634,835,041.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes (cid:3) No (cid:2)
Class
February 23, 2012
Common Stock, $0.01 par value per share
32,596,685 shares outstanding
Portions of the registrant’s Definitive Proxy Statement relating to the 2012 Annual Meeting of Stockholders are
incorporated by reference in Items 10, 11, 12, 13 and 14 of Part III of this report.
DOCUMENTS INCORPORATED BY REFERENCE
30267
TABLE OF CONTENTS
Page No.
Forward-Looking Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3
PART I
Item 1
Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1A Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1B Unresolved Staff Comments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 2
Item 3
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 4 Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART II
Item 5 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 6
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 7 Management’s Discussion and Analysis of Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 7A Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . .
Item 8
Item 9
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9A Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9B Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART III
Item 10 Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 11 Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 12
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 13 Certain Relationships and Related Transactions, and Director Independence . . . . . .
Item 14
Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4
18
28
28
28
28
29
31
33
55
57
92
92
92
93
93
93
94
94
Item 15 Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
95
PART IV
2
60844
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking
statements if accompanied by meaningful cautionary statements identifying important factors that could
cause actual results to differ materially from those discussed. You should not place undue reliance on
these statements, which speak only as of the date of this report. Forward-looking statements include
those related to our expected financial position, business, financing plans, litigation, future premiums,
revenues, earnings, pricing,
reserves,
acquisitions, competition, and rate increases with respect to our business and the insurance industry
in general. Statements including words such as “expect,” “intend,” “plan,” “believe,” “estimate,”
“may,” “anticipate,” “will” or similar statements of a future or forward-looking nature identify forward-
looking statements.
relationships, expected losses,
investments, business
loss
We undertake no obligation to publicly update or revise any forward-looking statements, whether
as a result of new information, future events or otherwise, except as required by law. All forward-
looking statements address matters that involve risks and uncertainties that could cause actual results to
differ materially from historical or anticipated results, depending on a number of factors. These risks
and uncertainties include, but are not limited to, those set forth in Item 1A. “Risk Factors” and the
other documents that we have filed with the Securities and Exchange Commission.
NOTE REGARDING RELIANCE ON STATEMENTS IN OUR CONTRACTS
The agreements included or incorporated by reference as exhibits to this Annual Report on Form
10-K may contain representations and warranties by each of the parties to the applicable agreement.
These representations and warranties were made solely for the benefit of the other parties to the
applicable agreement and:
• were not intended to be treated as categorical statements of fact, but rather as a way of
allocating the risk to one of the parties if those statements prove to be inaccurate;
• may have been qualified in such agreement by disclosures that were made to the other party in
connection with the negotiation of the applicable agreement;
• may apply contract standards of “materiality” that are different from “materiality” under the
applicable securities laws; and
• were made only as of the date of the applicable agreement or such other date or dates as may be
specified in the agreement.
Notwithstanding the inclusion of the foregoing cautionary statements, Employers Holdings, Inc.
acknowledges that it is responsible for considering whether additional specific disclosures of material
information regarding material contractual provisions are required to make the statements in this report
not misleading.
3
97214
PART I
Item 1. Business
General
Employers Holdings, Inc. (EHI) is a Nevada holding company incorporated in Nevada in 2005.
Unless otherwise indicated, all references to “we,” “us,” “our,” the “Company” or similar terms refer to
EHI together with its subsidiaries. We had 651 full-time employees at December 31, 2011 and our
principal executive offices are located at 10375 Professional Circle in Reno, Nevada.
Our insurance subsidiaries have each been assigned an A.M. Best Company (A.M. Best) rating
of “A-” (Excellent), with a “stable” financial outlook.
Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, current reports on Form 8-
K, amendments to those reports, and Proxy Statement for our Annual Meeting of Stockholders are
available free of charge on our website at www.employers.com as soon as reasonably practicable after
they are electronically filed with or furnished to the Securities and Exchange Commission (SEC). Our
website also provides access to reports filed by our Directors, executive officers and certain significant
stockholders pursuant to Section 16 of the Securities Exchange Act of 1934. In addition, our Corporate
Governance Guidelines, Code of Business Conduct and Ethics, Code of Ethics for Senior Financial
Officers, and charters for the standing committees of our Board of Directors are available on our
website. Copies of these documents may also be obtained free of charge by written request to Investor
Relations, 10375 Professional Circle, Reno, Nevada 89521-4802. The SEC also maintains a website at
www.sec.gov that contains these materials and other information that we file electronically with the
SEC.
Description of Business
We are a specialty provider of workers’ compensation insurance focused on select small businesses
engaged in low to medium hazard industries. We employ a disciplined, conservative underwriting
approach designed to individually select specific types of businesses, predominantly those in the lowest
four of the seven workers’ compensation insurance industry defined hazard groups, that we believe will
have fewer and less costly claims relative to other businesses in the same hazard groups. Workers’
compensation is a statutory system that generally requires an employer to provide coverage for its
employees’ medical, disability, vocational rehabilitation, and death benefit costs for work-related
injuries or illnesses. We operate as a single reportable segment and conduct operations in 31 states and
the District of Columbia, with more than one-half of our business in California. We had total assets of
$3.5 billion, $3.5 billion, and $3.7 billion at December 31, 2011, 2010, and 2009, respectively. The
following table highlights key results of our operations for the last three years.
For the Years Ended
December 31, 2011. . . . . . . . . . . . . . . . . . . . . . .
December 31, 2010. . . . . . . . . . . . . . . . . . . . . . .
December 31, 2009. . . . . . . . . . . . . . . . . . . . . . .
Net
Premiums
Written
$410,038
313,098
368,290
Total
Revenue
Net
Income
(in thousands, except ratios)
$464,154
415,604
495,935
$48,313
62,799
83,021
Statutory
Combined
Ratio(1)
112.1%
109.8
99.0
(1) Our combined ratio on a statutory basis is a measure of underwriting profitability. Elsewhere in this report, unless otherwise
stated, the term “combined ratio” refers to a calculation based on U.S. generally accepted accounting principles (GAAP).
Our statutory combined ratio for the five years ended December 31, 2010 was 91.3%, compared to
the industry composite statutory combined ratio of 110.8% for the same five-year period (calculated by
A.M. Best
their business in workers’
compensation).
for individual companies that have more than 50% of
4
18093
Our insurance subsidiaries are domiciled in the following states:
State of Domicile
Employers Insurance Company of Nevada (EICN) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employers Compensation Insurance Company (ECIC) . . . . . . . . . . . . . . . . . . . . . . . . . .
Employers Preferred Insurance Company (EPIC). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employers Assurance Company (EAC). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nevada
California
Florida
Florida
Products and Services
Workers’ compensation provides insurance coverage for the statutorily prescribed benefits that
employers are required to provide to their employees who may be injured or suffer illness in the course
of employment. The level of benefits varies by state, the nature and severity of the injury or disease,
and the wages of the injured worker. Each state has a statutory, regulatory, and adjudicatory system
that sets the amount of wage replacement to be paid, determines the level of medical care required to
be provided, establishes the degree of permanent impairment, and specifies the options in selecting
healthcare providers. These state laws generally require two types of benefits for injured employees: (a)
medical benefits, including expenses related to the diagnosis and treatment of an injury, disease, or
both, as well as any required rehabilitation, and (b) indemnity payments, which consist of temporary
wage replacement, permanent disability payments, and death benefits to surviving family members.
Disciplined Underwriting
Our strategy is to focus on disciplined underwriting and continue to pursue profitable growth
opportunities across market cycles. We carefully monitor market trends to assess new business
opportunities that we expect will meet our pricing and risk standards. We price our policies based on
the specific risks associated with each potential insured rather than solely on the industry class in which
a potential insured is classified. Our disciplined underwriting approach is a critical element of our
culture and has allowed us to offer competitive prices, diversify our risks, and out-perform the industry.
The following table compares our statutory losses and loss adjustment expenses (LAE) ratio, a
measure which relates inversely to our underwriting profitability, to the statutory industry composite
losses and LAE ratio reported by A.M. Best (calculated for U.S. insurance companies having more than
50% of their premiums generated by workers’ compensation insurance products).
Year
Statutory Losses and LAE Ratio
A.M. Best
EHI
2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
37.9%
46.4
51.4
57.5
66.2
77.6
77.1%
77.7
78.6
86.1
87.4
N/A(1)
(1) Statutory industry composite loss and LAE ratio data is not currently available for 2011.
We execute our underwriting processes through automated systems and experienced underwriters
with specific knowledge of local markets. We have developed automated underwriting templates for
specific classes of business that produce faster quotes when certain underwriting criteria are met. Our
underwriting guidelines consider many factors, such as type of business, nature of operations and risk
exposures, and are designed to minimize or prevent underwriting of certain undesirable classes of
business.
Loss Control
Our loss control professionals provide consultation to policyholders to assist them in preventing
losses and containing costs once claims occur. They also assist our underwriting personnel in evaluating
potential and current policyholders and are an important part of our underwriting discipline.
5
36433
Premium Audit
We conduct premium audits on our policyholders annually upon the policy expiration. Audits allow
us to comply with applicable state and reporting bureau requirements and to verify that policyholders
have accurately reported their payroll and employee job classifications. We also selectively perform
interim audits on certain classes of business or if unusual claims are filed or concerns are raised
regarding projected annual payrolls, which could result in substantial variances at final audit.
Claims and Medical Case Management
The role of our claims department is to actively and efficiently investigate, evaluate, and pay
claims, and to aid injured workers in returning to work in accordance with applicable laws and
regulations. We have implemented rigorous claims guidelines and control procedures in our claims units
and have claims operations throughout
the markets we serve. We also provide medical case
management services for those claims that we determine will benefit from such involvement.
Our claims department also provides claims management services for those claims incurred by the
Nevada State Industrial Insurance System (the Fund) and assumed by EICN and subject to a 100%
retroactive reinsurance agreement (the LPT Agreement) with dates of injury prior to July 1, 1995.
forth under “—Reinsurance—LPT
Additional
Agreement.” We receive a management fee from the third party reinsurers equal to 7% of the loss
payments on these claims.
information regarding the LPT Agreement
is set
We maintain an exclusive medical provider network in Nevada and make every appropriate effort
to direct injured workers into this network for medical treatments. We utilize networks affiliated with
Anthem Blue Cross of California (Anthem) and Coventry Health Care, Inc. in other states. In addition
to our medical networks, we work closely with local vendors, including attorneys, medical professionals,
and investigators, to bring local expertise to our reported claims. We pay special attention to reducing
costs and have established discounting arrangements with the aforementioned service providers. We use
preferred provider organizations, bill review services, and utilization management to closely monitor
medical costs.
We actively pursue fraud and subrogation recoveries to mitigate claims costs. Subrogation rights
are based upon state and federal laws, as well as the insurance policies we issue. Our fraud and
subrogation efforts are handled through dedicated units.
Information Technology
Core Operating Systems
We have an efficient, cost-effective and scalable infrastructure that complements our geographic
reach and business model and have developed a highly automated underwriting system. This technology
allows for the electronic submission, review, and quoting of insurance applications applying our
underwriting standards and guidelines. This policy administration system reduces transaction costs and
provides for more efficient and timely processing of applications for small policies that meet our
independent agents and brokers
underwriting standards. We believe this approach saves our
considerable time in processing customer applications and maintains our competitiveness in our target
markets. We will continue to invest in technology and systems across our business to maximize
efficiency and create increased capacity that will allow us to lower our expense ratios while growing
premiums.
Business Continuity/Disaster Recovery
We maintain business continuity and disaster recovery plans for our critical business functions,
including the restoration of information technology infrastructure and applications. We have two data
centers that act as production facilities and as disaster recovery sites for each other. In addition, we
utilize an off-site data storage facility.
6
17434
Customers and Workers’ Compensation Premiums
The workers’ compensation insurance industry classifies risks into seven hazard groups, as defined
by the National Council on Compensation Insurance (NCCI), based on severity of claims with
businesses in the first or lowest group having the lowest claims costs.
We target select small businesses engaged in low to medium hazard industries. Our historical loss
experience has been more favorable for lower industry defined hazard groups than for higher hazard
groups. Further, we believe it is generally less costly to service and manage the risks associated with
these lower hazard groups. Our underwriters use their local market expertise and disciplined
underwriting to select specific types of businesses and risks within the classes of business we underwrite
that allow us to generate loss ratios that are consistently better than the industry average.
The following table sets forth our in-force premiums by hazard group and as a percentage of our
total in-force premiums as of December 31:
Hazard
Group
A . . . . . . . . . . . . . . . . . . .
B . . . . . . . . . . . . . . . . . . .
C . . . . . . . . . . . . . . . . . . .
D . . . . . . . . . . . . . . . . . . .
E . . . . . . . . . . . . . . . . . . .
F . . . . . . . . . . . . . . . . . . .
G . . . . . . . . . . . . . . . . . . .
Percentage
of 2011
Total
Percentage
of 2010
Total
Percentage
of 2009
Total
2009
2010
(in thousands, except percentages)
17.9% $ 45,537
74,435
24.3
120,656
36.9
47,906
14.9
24,592
4.8
7,531
1.2
480
<0.1
14.2% $ 45,683
82,086
23.2
137,973
37.6
54,582
14.9
43,036
7.7
20,131
2.3
1,534
0.1
11.9%
21.3
35.8
14.2
11.2
5.2
0.4
2011
$ 70,398
95,783
145,282
58,534
19,094
4,682
148
Total . . . . . . . . . . . . . . .
$393,921
100.0% $321,137
100.0% $385,025
100.0%
Our in-force premiums for our top ten types of insureds and as a percentage of our total in-force
premiums as of December 31, 2011 were as follows:
Employer Classifications
In-force
Premiums
Percentage
of Total
(in thousands,
except percentages)
Restaurants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dentists, Optometrists, and Physicians . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Automobile Service or Repair Shops . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Wholesale Stores . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Hotels, Motels, and Clubs (Country, Golf, etc.) . . . . . . . . . . . . . . . . . . .
Schools—Colleges and Religious Organizations . . . . . . . . . . . . . . . . . . .
Gasoline Stations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real Estate Management. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Professional Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Groceries and Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 65,644
31,836
26,983
19,725
18,220
12,811
12,519
12,109
9,582
8,109
$217,538
16.7%
8.1
6.8
5.0
4.6
3.2
3.2
3.1
2.4
2.1
55.2%
We currently write business in 31 states and the District of Columbia. Our business is concentrated
in California, which makes the results of our operations more dependent on the trends that are unique
to that state and that from time-to-time may differ from national trends. State legislation,
local
competition, economic and employment trends, and workers’ compensation medical costs trends can be
material to our financial results.
As of December 31, 2011, our policyholders had average annual in-force premiums of $6,490. We
are not dependent on any single policyholder and the loss of any single policyholder would not have a
material adverse effect on our business.
7
31890
Our total
December 31:
in-force premiums and number of policies in-force by state were as follows as of
2011
2010
2009
State
Premium
In-force
Policies
In-force
California . . . . . . . . . . .
Illinois . . . . . . . . . . . . . .
Georgia . . . . . . . . . . . . .
Florida . . . . . . . . . . . . . .
Nevada. . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . .
$221,910
24,744
16,393
15,226
14,639
101,009
Total . . . . . . . . . . . . . . . .
$393,921
36,867
2,433
2,050
2,399
3,718
13,226
60,693
Policies
Premium
In-force
In-force
(dollars in thousands)
29,244
$172,621
932
18,617
757
10,772
1,963
15,071
3,596
16,940
8,069
87,116
$321,137
44,561
Premium
In-force
Policies
In-force
$180,474
19,389
12,744
27,964
24,050
120,404
$385,025
27,812
801
539
2,630
4,119
8,253
44,154
The following trends affected our workers’ compensation business from 2009 through 2011:
• Premium in-force increased 22.7% during 2011, primarily due to increasing policy count as we
continued to execute our growth strategy;
• The decrease in premium in-force during 2010 reflected the impacts of the most recent recession,
which particularly affected certain classes of
including contractors and
restaurants, and declining payrolls due to reduced employment and work hours, closures of
small businesses and our continued focus on profitable underwriting despite aggressive pricing in
a highly competitive market; and
small business,
• The increase in total policies in-force reflects our efforts to continue to grow our business
profitably across market cycles.
We cannot be certain how these trends will ultimately impact our consolidated financial position
and results of operations.
Our premiums are generally a function of the applicable premium rate, the amount of the insured’s
payroll, and if applicable, a factor reflecting the insured’s historical
loss experience (experience
modification factor). Premium rates vary by state according to the nature of the employees’ duties and
the business of the employer. The premium is computed by applying the applicable premium rate to
each class of the insured’s payroll after it has been appropriately classified. Total policy premium is
determined after applying an experience modification factor and a further adjustment, known as a
schedule rating adjustment, which may be made in certain circumstances, to increase or decrease the
policy premium. Schedule rating adjustments are made at the discretion of the underwriter based on
individual risk characteristics of the insured and subject to maximum amounts as established in our
premium rate filings.
Our premium rates are based upon actuarial analyses for each state in which we do business,
except in “administered pricing” states, primarily Florida and Wisconsin, where premium rates are set
by state insurance regulators.
In California, where over one-half of our premiums are earned, the Workers’ Compensation
Insurance Rating Bureau (WCIRB) recommends claims cost benchmarks to be used by companies in
determining their premium rates. These benchmark rates are advisory only and cover expected loss
costs, but do not contain elements to cover operating expenses or profit.
In April 2011, the WCIRB provided an informational filing highlighting the cost drivers that
indicated a cumulative 39.8% increase in the claims cost benchmark since January 1, 2009 based on an
analysis of December 31, 2010 loss experience. This included deterioration of more than 12 percentage
points in the claims cost benchmark since the WCIRB’s previous recommendation for a 27.7% increase
based on an analysis of June 30, 2010 loss experience. The WCIRB indicated that this further
deterioration was due to: (a) continued adverse loss development on the 2009 accident year; (b) high
emerging costs on the 2010 accident year, primarily due to increased claims frequency; (c) less
optimistic forecasts for statewide wage growth in California; and (d) increased LAE that is likely as a
result of certain Workers’ Compensation Appeals Board decisions.
8
59528
In August 2011, the WCIRB modified its benchmark for pure premium rates. The benchmark is
now based on the industry average filed pure premium rate, rather than the pure premium rate
approved by the California Commissioner of Insurance. The WCIRB submitted its new proposed pure
premium rate proposed to be effective January 1, 2012. The WCIRB noted that while 2012 projected
costs continue to be below pre-reform highs and the new proposed pure premium rate is slightly less
than the industry average filed rate, these new proposed rates reflect significant deterioration in
projected losses and LAE and less optimistic economic forecasts, compared to last year.
We set our premium rates in California based upon actuarial analyses of current and anticipated
loss trends with a goal of maintaining underwriting profitability. Due to increasing loss costs, primarily
medical cost inflation, we increased our filed premium rates in California by a cumulative 33.3% since
February 1, 2009.
The following table sets forth the percentage increases to our filed California rates effective for
new and renewal policies incepting on or after the dates shown.
Effective Date
Premium Rate
Change
Filed in
California
February 1, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
August 15, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
March 15, 2010. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
March 15, 2011. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
September 15, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10.0%
10.5
3.0
2.5
3.9
Losses and LAE Reserves and Loss Development
We are directly liable for losses and LAE under the terms of insurance policies our insurance
subsidiaries write. Significant periods of time can elapse between the occurrence of an insured loss, the
reporting of the loss to us and our payment of that loss. Loss reserves are reflected on our consolidated
balance sheets under the line item caption “unpaid losses and loss adjustment expenses.” Estimating
reserves is a complex process that involves a considerable degree of judgment by management and, as
of any given date, is inherently uncertain. Loss reserve estimates represent a significant risk to our
business, which we attempt to mitigate by continually reviewing loss cost trends and by attempting to
set our premium rates to adequately cover anticipated costs.
For a detailed description of our reserves,
the judgments, key assumptions and actuarial
methodologies that we use to estimate our reserves, and the role of our consulting actuary, see
“Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations—
Critical Accounting Policies—Reserves for Losses and LAE” and Note 8 in the Notes to our
Consolidated Financial Statements.
The following tables show changes in the historical loss reserves, on a gross basis and net of
reinsurance, at December 31 for each of the 10 years prior to 2011 for EICN and ECIC, and for each of
the years ended December 31, 2008 through December 31, 2010 for EPIC and EAC. This information is
presented on a GAAP basis and the paid and reserve data is presented on a calendar year basis.
The top line of each table shows the net and gross reserves for unpaid losses and LAE recorded at
each year-end. Such amount represents an estimate of unpaid losses and LAE occurring in that year as
well as future payments on claims occurring in prior years. The upper portion of these tables (net and
gross cumulative amounts paid, respectively) present the cumulative amounts paid during subsequent
years on those losses for which reserves were carried as of each specific year. The lower portions (net
and gross reserves re-estimated, respectively) show the re-estimated amounts of the previously recorded
reserves based on experience as of the end of each succeeding year. The re-estimated amounts change
as more information becomes known about the actual losses for which the initial reserve was carried.
An adjustment to the carrying value of unpaid losses for a prior year will also be reflected in the
adjustments for each subsequent year. The gross cumulative redundancy, or deficiency, line represents
the cumulative change in estimates since the initial reserve was established. It is equal to the difference
between the initial reserve and the latest re-estimated reserve amount. A redundancy means that the
original estimate was higher than the current estimate. A deficiency means that the current estimate is
higher than the original estimate.
9
48325
2001
2002
2003
2004
2005
2006
(in thousands)
2007
2008
2009
2010
2011
Net reserves for losses and LAE
Originally estimated . . . . . . . . . . . . . $ 887,000 $ 908,326 $ 962,457 $1,089,814 $1,208,481 $1,209,652 $1,217,069 $1,430,128 $1,373,153 $1,323,686 $1,331,523
Net cumulative amounts paid
as of:
One year later . . . . . . . . . . . . . . . . . .
Two years later . . . . . . . . . . . . . . . . .
Three years later . . . . . . . . . . . . . . . .
Four years later . . . . . . . . . . . . . . . . .
Five years later . . . . . . . . . . . . . . . . .
Six years later . . . . . . . . . . . . . . . . . . .
Seven years later . . . . . . . . . . . . . . . .
Eight years later . . . . . . . . . . . . . . . .
Nine years later . . . . . . . . . . . . . . . . .
Ten years later . . . . . . . . . . . . . . . . . .
Net reserves re-estimated
as of:
One year later . . . . . . . . . . . . . . . . . .
Two years later . . . . . . . . . . . . . . . . .
Three years later . . . . . . . . . . . . . . . .
Four years later . . . . . . . . . . . . . . . . .
Five years later . . . . . . . . . . . . . . . . .
Six years later . . . . . . . . . . . . . . . . . . .
Seven years later . . . . . . . . . . . . . . . .
Eight years later . . . . . . . . . . . . . . . .
Nine years later . . . . . . . . . . . . . . . . .
Ten years later . . . . . . . . . . . . . . . . . .
Net cumulative redundancy
(deficiency):. . . . . . . . . . . . . . . . . . .
Gross reserves—December 31. . .
Reinsurance recoverable, gross . .
Net reserves—December 31 . . . . .
Gross re-estimated reserves . . . . .
Re-estimated reinsurance
recoverables. . . . . . . . . . . . . . . . . . .
Net re-estimated reserves . . . . . . .
Gross reserves for losses
and LAE
Originally estimated . . . . . . . . . . . . .
Gross cumulative amounts paid
as of:
One year later . . . . . . . . . . . . . . . . . .
Two years later . . . . . . . . . . . . . . . . .
Three years later . . . . . . . . . . . . . . . .
Four years later . . . . . . . . . . . . . . . . .
Five years later . . . . . . . . . . . . . . . . .
Six years later . . . . . . . . . . . . . . . . . . .
Seven years later . . . . . . . . . . . . . . . .
Eight years later . . . . . . . . . . . . . . . .
Nine years later . . . . . . . . . . . . . . . . .
Ten years later . . . . . . . . . . . . . . . . . .
Gross reserves re-estimated
as of:
One year later . . . . . . . . . . . . . . . . . .
Two years later . . . . . . . . . . . . . . . . .
Three years later . . . . . . . . . . . . . . . .
Four years later . . . . . . . . . . . . . . . . .
Five years later . . . . . . . . . . . . . . . . .
Six years later . . . . . . . . . . . . . . . . . . .
Seven years later . . . . . . . . . . . . . . . .
Eight years later . . . . . . . . . . . . . . . .
Nine years later . . . . . . . . . . . . . . . . .
Ten years later . . . . . . . . . . . . . . . . . .
Gross cumulative redundancy
81,022
120,616
149,701
173,204
194,980
215,507
235,653
260,036
280,809
299,289
875,522
781,142
742,272
719,912
730,112
730,456
720,155
712,717
707,037
697,215
80,946
130,386
165,678
194,400
218,453
242,143
269,341
292,791
313,506
847,917
805,058
779,373
788,262
788,481
776,329
763,988
755,793
740,182
91,130
150,391
193,766
226,127
255,851
288,039
315,180
338,611
96,661
161,252
207,868
247,217
285,388
317,489
344,968
106,859
175,531
229,911
279,405
321,060
354,765
109,129
186,014
249,059
302,863
345,801
924,878
886,711
884,426
877,151
858,617
839,430
826,608
804,958
1,011,759
975,765
954,660
927,382
900,588
883,388
855,070
1,101,352
1,049,628
1,004,589
970,671
949,446
917,843
1,149,641
1,085,358
1,035,028
1,010,407
973,921
127,912
219,496
295,646
354,867
214,499
342,174
449,914
206,653
361,048
218,569
1,151,246
1,100,706
1,079,913
1,046,648
1,378,769
1,352,021
1,319,989
1,359,023
1,340,366
1,324,813
189,785
2,226,000
1,339,000
887,000
1,969,508
168,144
2,212,368
1,304,042
908,326
1,970,936
157,499
2,193,439
1,230,982
962,457
1,990,684
234,744
2,284,542
1,194,728
1,089,814
2,001,243
290,638
2,349,981
1,141,500
1,208,481
2,027,729
235,731
2,307,755
1,098,103
1,209,652
2,050,177
170,421
2,269,710
1,052,641
1,217,069
2,094,050
110,137
2,506,478
1,076,350
1,430,128
2,386,424
32,786
2,425,658
1,052,505
1,373,153
2,370,646
(1,127)
2,279,729
956,043
1,323,686
2,299,653
—
2,272,363
940,840
1,331,523
2,272,363
1,272,292
697,216
1,230,754
740,182
1,185,726
804,958
1,146,173
855,070
1,109,886
917,843
1,076,257
973,920
1,047,402
1,046,648
1,066,435
1,319,989
1,030,280
1,340,366
974,840
1,324,813
940,840
1,331,523
2,226,000
2,212,368
2,193,439
2,284,542
2,349,981
2,307,755
2,269,710
2,506,478
2,425,658
2,279,729
2,272,363
128,066
215,176
291,099
360,535
427,307
490,296
553,103
619,373
682,656
741,301
128,462
224,740
306,006
379,881
447,687
514,091
583,226
649,241
710,168
2,211,566
2,089,850
2,049,340
2,000,560
2,009,608
2,009,480
1,997,550
1,990,116
1,979,480
1,969,508
2,121,867
2,072,205
2,024,790
2,032,553
2,028,211
2,012,943
2,000,610
1,986,694
1,970,936
137,968
243,203
331,731
407,845
480,283
554,408
624,114
687,757
142,632
252,379
342,748
424,811
504,918
579,585
647,276
152,006
264,430
361,524
452,955
537,175
611,093
152,879
272,478
377,459
473,828
556,978
170,626
304,146
422,862
522,296
258,412
449,206
599,176
269,771
466,398
260,799
2,148,829
2,088,437
2,084,764
2,072,428
2,050,124
2,030,945
2,011,945
1,990,684
2,178,514
2,138,648
2,110,481
2,078,223
2,050,937
2,027,187
2,001,243
2,233,077
2,170,292
2,119,764
2,084,854
2,053,869
2,027,729
2,233,176
2,162,695
2,110,615
2,074,466
2,050,177
2,200,689
2,148,399
2,110,230
2,094,050
2,470,746
2,405,837
2,386,424
2,373,479
2,370,646
2,299,653
(deficiency):. . . . . . . . . . . . . . . . . . . $ 256,492 $ 241,432 $ 202,755 $ 283,299 $ 322,252 $ 257,578 $ 175,660 $ 120,052 $
55,012 $ (19,923) $
—
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56271
Reinsurance
Reinsurance is a transaction between insurance companies in which an original insurer, or ceding
company, remits a portion of its premiums to a reinsurer, or assuming company, as payment for the
reinsurer assuming a portion of the risk. Excess of loss reinsurance may be written in layers, in which a
reinsurer or group of reinsurers accepts a band of coverage in excess of a specified amount, or
retention, and up to a specified amount. Any liability exceeding the coverage limits of the reinsurance
program is retained by the ceding company. The ceding company also bears the credit risk of a
reinsurers’
industry practices, we purchase excess of loss
reinsurance to protect against the impact of large individual, irregularly-occurring losses, and aggregate
catastrophic losses from natural perils and terrorism. Such reinsurance reduces the magnitude of such
losses on net income and the capital of our insurance subsidiaries.
insolvency. In accordance with general
Excess of Loss Reinsurance
Our current reinsurance program applies to all covered losses occurring between 12:01 a.m. July 1,
2011 and 12:01 a.m. July 1, 2012. The reinsurance program consists of one treaty covering excess of loss
and catastrophic loss events in five layers of coverage. Our reinsurance coverage is $195.0 million in
excess of our $5.0 million retention on a per occurrence basis, subject to a $2.0 million annual aggregate
deductible and certain exclusions. We are solely responsible for any losses we suffer above $200.0
million except those covered by the Terrorism Risk Insurance Program Reauthorization Act of 2007
(TRIPRA). Covered losses which occur prior to expiration or cancellation of the agreement continue to
be obligations of the subscribing reinsurers, subject to the other conditions in the agreement. The
subscribing reinsurers may terminate the agreement only for our breach of the obligations of the
agreement. We are responsible for the losses if the subscribing reinsurer cannot or refuses to pay.
The agreement includes certain exclusions for which our subscribing reinsurers are not liable for
losses, including but not limited to losses arising from the following: reinsurance assumed by us under
obligatory reinsurance agreements; financial guarantee and insolvency; certain nuclear risks; liability as
a member, subscriber or reinsurer of any pool, syndicate or association, but not assigned risk plans;
liability arising from participation or membership in any insolvency fund; loss or damage caused by war
or civil unrest other than terrorism; certain workers’ compensation business covering persons employed
in Minnesota; and any loss or damage caused by any act of terrorism involving biological, chemical,
nuclear or radioactive pollution or contamination. Our underwriting guidelines generally require that
insured risks fall within the coverage provided in the reinsurance program. Any risks written outside the
reinsurance program require executive review and approval.
The agreement provides that we, or any subscribing reinsurer, may request commutation of any
outstanding claim or claims 10 years after the effective date of termination or expiration of the
agreements and provide a mechanism for the parties to achieve valuation for commutation. We may
require a special commutation of the percentage share of any loss in the reinsurance program of any
subscribing reinsurer that is in runoff.
LPT Agreement
In 1999, Nevada enacted Senate Bill 37. That bill stated that the Fund could take retroactive credit
as an asset, or a reduction of liability, amounts ceded to (reinsured with) assuming insurers with security
based on discounted reserves for losses related to periods beginning before July 1, 1995, at a rate not to
exceed 6%.
The Fund entered into a retroactive 100% quota share reinsurance 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 for loss and outstanding loss under the covered policies
have closed, the agreement is commuted, or terminated, upon the mutual agreement of the parties, or
the reinsurers’ aggregate maximum limit of liability is exhausted, whichever occurs earlier. The LPT
Agreement does not provide for any additional termination terms. The LPT Agreement substantially
reduced the Fund’s exposure to losses for pre-July 1, 1995 Nevada insured risks. On January 1, 2000,
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20377
EICN assumed all of the assets, liabilities and operations of the Fund, including the Fund’s rights and
obligations associated with the LPT Agreement.
Under the LPT Agreement, the Fund initially ceded $1.5 billion in liabilities for the incurred but
unpaid losses and LAE related to claims incurred prior to July 1, 1995, for consideration of $775.0
million in cash. The LPT Agreement, which ceded to the reinsurers substantially all of the Fund’s
outstanding losses as of June 30, 1999 for claims with original dates of injury prior to July 1, 1995,
provides coverage for losses up to $2.0 billion, excluding losses for burial and transportation expenses.
The estimated remaining liabilities subject to the LPT Agreement were approximately $807.5 million
and $846.7 million, as of December 31, 2011 and 2010, respectively. Losses and LAE paid with respect
to the LPT Agreement totaled approximately $569.9 million and $530.7 million through December 31,
2011 and 2010, respectively.
The reinsurers agreed to assume responsibilities for the claims at the benefit levels which existed in
June 1999. The LPT Agreement required each reinsurer to place assets supporting the payment of
claims by them in a trust that requires collateral be held at a specified level. The level must not be less
than the outstanding reserve for losses and a loss expense allowance equal to 7% of estimated paid
losses discounted at a rate of 6%. If the assets held in trust fall below this threshold, we may require the
reinsurers to contribute additional assets to maintain the required minimum level of collateral. The
value of these assets as of December 31, 2011 and 2010 was $896.1 million and $962.1 million,
respectively.
The reinsurers currently party to the LPT Agreement are ACE Bermuda Insurance Limited, XL
Reinsurance Limited, and National Indemnity Company. The contract provides that during the term of
the agreement all reinsurers need to maintain a rating of not less than “A-” as determined by A.M.
Best. Currently, each of the reinsurers party to the LPT Agreement have a rating of A- or higher.
We account for the LPT Agreement as retroactive reinsurance. Upon entry into the LPT
Agreement, an initial deferred reinsurance gain was recorded as a liability on our consolidated balance
sheet as Deferred reinsurance gain—LPT Agreement (Deferred Gain). The Deferred Gain is amortized
using the recovery method, whereby the amortization is determined by the proportion of actual
reinsurance recoveries to total estimated recoveries, and the amortization is reflected in losses and LAE
in our consolidated financial statements.
We are also 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. Since the inception of the agreement, we have
recognized approximately $28 million in contingent profit commission. Increases and decreases in the
estimated contingent profit commission are reflected in our commission expense in the period that the
estimate is revised.
Recoverability of Reinsurance
Reinsurance makes the assuming reinsurer liable to the ceding company to the extent of the
reinsurance. It does not, however, discharge the ceding company from its primary liability to its
policyholders in the event the reinsurer is unable to meet its obligations under such reinsurance. We
monitor the financial strength of our reinsurers and we do not believe that we are currently exposed to
any material credit risk through our reinsurance arrangements because our reinsurance is recoverable
from generally large, well-capitalized reinsurance companies. At December 31, 2011, $896.1 million was
in trust accounts for reinsurance related to the LPT Agreement and an additional $11.6 million, not
related to the LPT Agreement, was collateralized by cash or letter of credit.
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52346
The following table provides certain information regarding our ceded reinsurance recoverables as
of December 31, 2011.
Reinsurer
A.M. Best
Rating(1)
Total
Paid
Total
Unpaid
Losses and
LAE, net
A+ $
ACE Bermuda Insurance Limited . . . . . . . . . . . . . . . . . . . . . . . .
A+
Ace Property & Casualty Insurance Company . . . . . . . . . . .
A
Alterra Bermuda Limited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
B++
American Healthcare Indemnity Company . . . . . . . . . . . . . . .
A
Aspen Insurance UK Limited . . . . . . . . . . . . . . . . . . . . . . . . . . . .
A+
Everest Reinsurance Company . . . . . . . . . . . . . . . . . . . . . . . . . . .
A-
Finial Reinsurance Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
A
Hannover Rueckversicherung-AG . . . . . . . . . . . . . . . . . . . . . . . .
A+
Munich Reinsurance America, Inc . . . . . . . . . . . . . . . . . . . . . . .
A++
National Indemnity Company . . . . . . . . . . . . . . . . . . . . . . . . . . . .
A
National Union Fire Insurance Co of Pittsburg. . . . . . . . . . .
A+
PartnerRe Group. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
A
Relia Star Life Insurance Company . . . . . . . . . . . . . . . . . . . . . .
A+
ST Paul Fire & Marine Insurance Company . . . . . . . . . . . . .
A+
Swiss Reinsurance America Corporation . . . . . . . . . . . . . . . . .
A++
Tokio Marine & Nichido Fire Insurance Ltd (US) . . . . . . .
A+
Westport Insurance Corporation. . . . . . . . . . . . . . . . . . . . . . . . . .
A
XL Reinsurance Limited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lloyds Syndicates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
A
All Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Various
(in thousands)
952
—
146
—
55
122
—
98
190
5,235
72
20
68
17
96
96
52
3,331
4
175
$ 80,754
2,608
3,741
2,486
8,047
2,727
7,221
15,933
9,402
444,146
1,657
1,294
2,619
3,915
12,409
5,859
1,151
282,638
44,898
7,335
Total
$ 81,706
2,608
3,887
2,486
8,102
2,849
7,221
16,031
9,592
449,381
1,729
1,314
2,687
3,932
12,505
5,955
1,203
285,969
44,902
7,510
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$10,729
$940,840
$951,569
(1) A.M. Best’s highest financial strength ratings for insurance companies are “A++” and “A+” (superior) and “A” and “A”
(excellent).
We review the aging of our reinsurance recoverables on a quarterly basis. At December 31, 2011,
0.4% of our reinsurance recoverables on paid losses were greater than 90 days overdue.
Inter-Company Reinsurance Pooling Agreement
Our insurance subsidiaries are parties to an inter-company pooling agreement for statutory
reporting purposes. Under this agreement, the results of underwriting operations of each company are
transferred to and combined with those of the others and the combined results are then reapportioned.
The allocations under the pooling agreement are as follows:
• EICN—53%
• ECIC—27%
• EPIC—10%
• EAC—10%
Transactions under the pooling agreement are eliminated on consolidation and have no impact on
our consolidated GAAP financial statements.
Investments
As of December 31, 2011, the total amortized cost of our investment portfolio was $1.8 billion and
the fair value of the portfolio was $2.0 billion. These investments provide a source of income, although
short-term changes in interest rates and our current investment strategies affect the amount of
investment income we earn and the fair value of our portfolio. Our investment strategy balances
consideration of duration, yield, and credit risk.
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We seek to maximize total
investment returns within the constraints of prudent portfolio
management. The asset allocation is reevaluated by the Finance Committee of the Board of Directors
on a quarterly basis. We employ Conning Asset Management (Conning) as our independent investment
manager. Conning follows our written investment guidelines based upon strategies approved by our
Board of Directors. We also utilize Conning’s investment advisory services. These services include
investment accounting and company modeling using Dynamic Financial Analysis (DFA). The DFA tool
is utilized in developing a tailored set of portfolio targets and objectives, which in turn, is used in
constructing an optimal portfolio.
Additional information regarding our investment portfolio, including our approach to managing
is set forth under “Item 7—Management’s Discussion and Analysis of Financial
investment risk,
Condition and Results of Operations—Liquidity and Capital Resources—Investments” and “Item 7A—
Quantitative and Qualitative Disclosures about Market Risk.”
Marketing and Distribution
We market and sell our workers’ compensation insurance products through independent local,
regional, and national agents and brokers, and through our strategic partnerships and alliances,
including our principal partners ADP, Inc. (ADP) and Anthem Blue Cross of California (Anthem), and
through relationships with national and regional trade groups and associations, including the National
Federation of Independent Business (NFIB).
Independent Insurance Agents and Brokers
We establish and maintain strong, long-term relationships with independent insurance agencies that
actively market our products and services. We offer ease of doing business, provide responsive service,
and pay competitive commissions. Our sales representatives and underwriters work closely with
independent agencies to market and underwrite our business. This results in enhanced understanding of
the businesses and risks we underwrite and the needs of prospective customers. We do not delegate
underwriting authority to agents or brokers. We are not dependent on any one agency and the loss of
any one agency would not be material.
The following table sets forth the number of independent agencies that marketed and sold our
in-force premiums generated by those agencies, and the
insurance products,
percentage of in-force premium generated by our largest agency.
the percentage of
At December 31,
2010
2009
2011
Number of independent agencies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Percentage of in-force premiums generated by independent agencies . . . . . . . . . .
Percentage of in-force premiums generated by our largest agency. . . . . . . . . . . . . .
3,742
2,610
2,290
75.7% 77.2% 80.4%
0.9% 1.2% 0.7%
Strategic Partnerships and Alliances
We have developed important strategic relationships with companies that have established sales
forces and common markets to expand our reach to alternative distribution channels. We jointly market
our workers’ compensation insurance products with ADP’s payroll services and with Anthem’s group
health insurance plans. Additionally, we have entered into other strategic partnerships and alliances
with payroll service providers and insurance brokerages. These relationships have allowed us to access
new customers and to write attractive business in an efficient manner, and we are actively pursuing
additional strategic partnership and alliance opportunities. We do not delegate underwriting authority
to our strategic distribution partners.
Our strategic partnerships and alliances generated 23.8%, 22.1%, and 18.8% of our in-force
premiums as of December 31, 2011, 2010, and 2009, respectively.
ADP. ADP is the largest payroll services provider in the United States servicing small and
medium-sized businesses. As part of its services, ADP sells our workers’ compensation insurance
product along with its payroll and accounting services through its insurance agency and field sales staff
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primarily to small businesses. The majority of business written is through ADP’s small business unit,
which has accounts of 1 to 50 employees. We pay ADP fees that are a percentage of premiums received
for services provided through the ADP program.
ADP utilizes innovative methods to market workers’ compensation insurance including the Pay-by-
Pay(cid:4) (PBP) program. An advantage of ADP’s PBP program is that the policyholder is not required to
pay a deposit at the inception of the policy. The workers’ compensation premium is deducted each time
ADP processes the policyholders’ payrolls along with its appropriate federal, state, and local taxes.
These characteristics of the PBP program enable us to competitively price the workers’ compensation
insurance written as a part of that program.
Our relationship with ADP is non-exclusive; however, we believe we are a key strategic partner of
ADP for our selected markets and classes of business. Our agreement with ADP may be terminated
without cause upon 120 days notice.
Anthem. The Integrated MediCompSM joint marketing program is an exclusive relationship that
allows us to combine our workers’ compensation product with Anthem’s group health coverage through
a single bill in most cases. We believe that, in general, when businesses purchase this combination of
coverage, their employees make fewer workers’ compensation claims because those employees are
insured for non-work related illnesses or injuries and thus are less likely to seek treatment for a non-
work related illness or injury through their employers’ workers’ compensation insurance policy. As the
largest group health carrier in California, Anthem has negotiated favorable rates with its medical
providers and associated facilities, which we benefit from through reduced claims costs. We pay
Anthem fees that are a percentage of premiums received for services provided under the Integrated
MediComp program.
Our agreement with Anthem automatically renews for one-year periods unless terminated by
either party with at least 60 days notice prior to the expiration of the then current term and has been
renewed through January 1, 2013.
Direct Business
We write a small amount of business that comes to us directly without using an agent or broker or
one of our strategic distribution relationships. This direct business is a legacy of our assumption of the
assets and liabilities of the Fund. Policies underwritten directly generated $2.0 million, $2.3 million, and
$3.2 million of our in-force premiums at December 31, 2011, 2010, and 2009, respectively.
Competition and Market Conditions
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, third-party administrators, self-insurance funds, and state insurance pools.
Many of our competitors are significantly larger, are more widely known, and/or possess considerably
greater financial resources. Our three primary competitors in California are The Hartford Financial
Services Group, Inc., Travelers Insurance Group Holdings Inc., and Meadowbrook Insurance Group,
Inc.
Our competitive advantages include our strong reputation in the markets in which we operate,
excellent claims service, experienced and professional independent agents and brokers, our strategic
partnerships and alliances, and the ease of doing business with us. We also strive to maintain the high
quality of our care management services, and to provide consultation services to our agents and
insureds on loss prevention and loss reduction strategies. We also compete on price, based on our
actuarial analysis of current and anticipated loss cost trends.
The workers’ compensation sector continued to see average medical and indemnity claims costs
and claim frequency increase in 2010, the most recent year for which industry data is available. We
continue to have concerns related to the volatility and uncertainty in the financial markets and current
economic conditions, including the high rate of unemployment.
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85800
Regulation
State Insurance Regulation
transact business. These state agencies have broad regulatory,
Insurance companies are subject to regulation and supervision by the insurance regulator in the
state in which they are domiciled and, to a lesser extent, other states in which they conduct business.
Our insurance subsidiaries are subject to regulation by the states in which our insurance subsidiaries are
supervisory and
domiciled or
administrative powers,
including among other things, the power to grant and revoke licenses to
transact business, license agencies, set the standards of solvency to be met and maintained, determine
the nature of, and limitations on, investments and dividends, approve policy forms and rates in some
states, periodically examine financial statements, determine the form and content of required financial
statements, and periodically examine market conduct.
Detailed annual and quarterly financial statements, prepared in accordance with statutory
accounting principles (SAP), and other reports are required to be filed with the insurance regulator
in each of the states in which we are licensed to transact business. The California DOI, Florida OIR,
and Nevada DOI periodically examine the statutory financial statements of their respective domiciliary
insurance companies. In 2009, California and Nevada completed exams for ECIC and EICN,
respectively. There were no material findings. California, Florida, and Nevada are currently examining
ECIC, EPIC and EAC, and EICN, respectively.
In Florida, workers’ compensation insurance companies are subject to statutes related to excessive
profits. Florida excessive profits are calculated based upon a statutory formula that is applied over
rolling three year periods. Workers’ compensation insurers are required to file annual excessive profit
forms and to return any “Florida excessive profits” to policyholders in the form of a cash refund or
credit toward the future purchase of insurance.
Many states have laws and regulations that limit an insurer’s ability to withdraw from a particular
market. For example, states may limit an insurer’s ability to cancel or not renew policies. Furthermore,
certain states prohibit an insurer from withdrawing one or more lines of business from the state, except
pursuant to a plan that is approved by the state insurance regulator. The state insurance regulator may
disapprove a plan that may lead to market disruption. Laws and regulations that limit cancellation and
non-renewal and that subject program withdrawals to prior approval requirements may restrict our
ability to exit unprofitable markets.
Holding Company Regulation. Nearly all states have enacted legislation that regulates insurance
holding company systems. Each insurance company in a holding company system is required to register
with the insurance regulator of its state of domicile and furnish information concerning the operations
of companies within the holding company system that may materially affect
the operations,
management or financial condition of the insurers within the system. All transactions within a holding
company system affecting an insurer must have fair and reasonable terms, the charges or fees for
services performed must be reasonable, the insurer’s total statutory surplus following any transaction
must be both reasonable in relation to its outstanding liabilities and adequate for its needs, and the
transactions are subject to other standards and requirements established by law and regulation. Notice
to state insurance regulators is required prior to the consummation of certain affiliated and other
transactions involving our insurance subsidiaries and such transactions may be disapproved by the state
insurance regulators.
Pursuant to applicable insurance holding company laws, EICN is required to register with the
Nevada Division of Insurance (Nevada DOI), ECIC is required to register with the California
Department of Insurance (California DOI), and EPIC and EAC are required to register with the
Florida Office of Insurance Regulation (Florida OIR). Under these laws, the respective state insurance
departments may examine us at any time, require disclosure of material transactions and require prior
notice for, or approval of, certain transactions.
Change of Control. Our insurance subsidiaries are domiciled in Florida, California and Nevada.
The insurance laws of these states generally require that any person seeking to acquire control of a
domestic insurance company obtain the prior approval of the state’s insurance commissioner. In
Florida, “control” is generally presumed to exist through the direct or indirect ownership of 5% or
16
84247
more of the voting securities of a domestic insurance company or of any entity that controls a domestic
insurance company. In California and Nevada, “control” is presumed to exist through the direct or
indirect ownership of 10% or more of the voting securities of a domestic insurance company or of any
entity that controls a domestic insurance company. In addition, insurance laws in many states in which
we are licensed require pre-notification to the state’s insurance commissioner of a change in control of a
non-domestic insurance company licensed in those states.
Statutory Accounting and Solvency Regulations. State insurance regulators closely monitor the
financial condition of insurance companies reflected in financial statements based on SAP and can
impose significant financial and operating restrictions on an insurance company that becomes financially
impaired under SAP guidelines. State insurance regulators can generally impose restrictions or
conditions on the activities of a financially impaired insurance company, including: the transfer or
disposition of assets; the withdrawal of funds from bank accounts; payment of dividends or other
distributions; the extension of credit or the advancement of loans; and investments of funds, including
business acquisitions or combinations.
Financial, Dividend, and Investment Restrictions. State laws require insurance companies to
maintain minimum levels of surplus and place limits on the amount of premiums a company may write
based on the amount of that company’s surplus. These limitations may restrict the rate at which our
insurance operations can grow.
State laws also require insurance companies to establish reserves for payments of policyholder
liabilities and impose restrictions on the kinds of assets in which insurance companies may invest. These
restrictions may require us to invest in assets more conservatively than we would if we were not subject
to state law restrictions and may prevent us from obtaining as high a return on our assets as we might
otherwise be able to realize absent the restrictions.
The ability of EHI to pay dividends on our common stock and to pay other expenses will be
dependent to a significant extent upon the ability of EICN and EPIC to pay dividends to their
immediate holding company, Employers Group, Inc. (EGI) and, in turn, the ability of EGI to pay
dividends to EHI. Additional information regarding financial, dividend, and investment restrictions is
set forth in Note 14 in the Notes to our Consolidated Financial Statements.
Guaranty Fund Assessments. All of the states where our insurance subsidiaries are licensed to
transact business require property and casualty insurers doing business within the respective state to
participate as member insurers in a guaranty association, which is organized to pay contractual benefits
owed pursuant to insurance policies issued by insolvent or failed insurers. These associations levy
assessments, up to prescribed limits, on all member insurers in a particular state on the basis of the
proportionate share of the premium written by member insurers. Various mechanisms exist in some of
these states for assessed insurance companies to recover these assessments. Additional information
regarding guaranty fund assessments is set forth in Note 11 to our Consolidated Financial Statements.
Pooling Arrangements. As a condition to conduct business in some states insurance companies are
required to participate in mandatory workers’ compensation shared market mechanisms, or pooling
arrangements, which provide workers’ compensation insurance coverage to private businesses that are
otherwise unable to obtain coverage due, for example, to their prior loss experiences.
The National Association of Insurance Commissioners (NAIC). NAIC is a group formed by state
insurance regulators to discuss issues and formulate policy with respect to regulation, reporting and
accounting of and by U.S. insurance companies. Although the NAIC has no legislative authority and
insurance companies are at all times subject to the laws of their respective domiciliary states and, to a
lesser extent, other states in which they conduct business, the NAIC is influential in determining the
form in which such laws are enacted. Model Insurance Laws, Regulations and Guidelines (Model Laws)
have been promulgated by the NAIC as a minimum standard by which state regulatory systems and
regulations are measured. Adoption of state laws that provide for substantially similar regulations to
those described in the Model Laws is a requirement for accreditation of state insurance regulatory
agencies by the NAIC.
Under the Model Laws, insurers are required to maintain minimum levels of capital based on their
investments and operations. These risk-based capital (RBC) requirements provide a standard by which
regulators can assess the adequacy of an insurance company’s capital and surplus relative to its
17
63210
operations. An insurance company must maintain capital and surplus of at least 200% of the RBC
computed by the NAIC’s RBC model, known as the “Authorized Control Level” of RBC. At
December 31, 2011, each of our insurance subsidiaries had total adjusted capital in excess of the
minimum RBC requirements.
The key financial ratios of the NAIC’s Insurance Regulatory Information System (IRIS) were
developed to assist state regulators in overseeing the financial condition of insurance companies. These
ratios are reviewed by financial examiners of the NAIC and state insurance regulators for the purposes
of detecting financial distress and preventing insolvency and to select those companies that merit
highest priority in the allocation of the regulators’ resources. IRIS identifies 13 key financial ratios and
specifies a “usual range” for each. Departure from the usual ranges on four or more of the ratios can
lead to inquiries from individual state insurance regulators as to certain aspects of an insurer’s business.
None of our insurance subsidiaries are currently subject to any action by any state regulator with
respect to IRIS ratios.
Federal Regulation
We are affected by a variety of federal legislative and regulatory measures and judicial decisions.
The Terrorism Risk Insurance Act of 2002 (the 2002 Act) was enacted in November 2002. The
principal purpose of the 2002 Act was to create a role for the Federal government in the provision of
insurance for losses sustained in connection with foreign terrorism. The 2002 Act was extended by
TRIPRA, with the inclusion of some adjustments. The workers’ compensation laws of the various states
generally do not permit the exclusion of coverage for losses arising from terrorism or nuclear,
biological, and chemical or radiological attacks. In addition, we are not able to limit our losses arising
from any one catastrophe or any one claimant. Our reinsurance policies exclude coverage for losses
arising out of nuclear, biological, chemical or radiological attacks. Under TRIPRA, federal protection
may be provided to the insurance industry for certain acts of foreign and domestic terrorism, including
nuclear, biological, chemical or radiological attacks.
The impact of any future terrorist acts is unpredictable, and the ultimate impact on our insurance
subsidiaries, if any, of losses from any future terrorist acts will depend upon their nature, extent,
location and timing. Small businesses constitute a large portion of our policies, and we monitor the
geographic concentration of our policyholders to help mitigate the risk of loss from terrorist acts.
Item 1A. Risk Factors
Investing in our common stock involves risks. In evaluating our company, you should carefully
consider the risks described below, together with all the information included in this annual report. The
risks facing our company include, but are not limited to, those described below. 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.
Risks Related to Our Business
Difficult conditions in the economy and capital markets may adversely affect our profitability,
financial condition, and results of operations.
The financial market volatility experienced worldwide that began in 2008 continued into 2011.
Although the U.S. and foreign governments have taken various actions to stabilize the financial
markets, it is uncertain whether those actions will be effective over the long-term. Therefore, the
financial market volatility could continue, resulting in a prolonged negative economic impact.
We cannot predict future market conditions or their impact on our stock price,
investment
portfolio, or our workers’ compensation business. In addition, continuing financial market volatility and
economic downturn could have a material adverse affect on our insureds, agents, claimants, reinsurers,
vendors, and competitors. Depending on financial market conditions, we could incur additional realized
and unrealized losses in the future in our investment portfolio, which could have an adverse effect on
our results of operations and financial condition. Selection of customers is more complex as certain
businesses are facing unprecedented challenges in sustaining their operations. Over time we expect that
recovery from the recession will improve hiring and payroll trends, but we cannot predict when this will
occur.
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Our liability for losses and LAE is based on estimates and may be inadequate to cover our actual
losses and expenses.
We must establish and maintain reserves for our estimated losses and LAE. We establish loss
reserves in our financial statements that represent an estimate of amounts needed to pay and administer
claims with respect to insured claims that have occurred, including claims that have occurred but have
not yet been reported to us. Loss reserves are estimates of the ultimate cost of individual claims based
on actuarial estimation techniques, are inherently uncertain, and do not represent an exact measure of
liability.
Several factors contribute to the uncertainty in establishing estimated losses, including the length of
time to settle long-term, severe cases, claim cost inflation (deflation) trends, and uncertainties in the
long-term outcome of legislative reforms. Judgment is required in applying actuarial techniques to
determine the relevance of historical payment and claim settlement patterns under current facts and
circumstances. In certain states, we have a relatively short operating history and must rely on a
combination of industry experience and our specific experience regarding claims emergence and
payment patterns, medical cost inflation, and claim cost trends, adjusted for future anticipated changes
in claims-related and economic trends, as well as regulatory and legislative changes, to establish our
best estimate of reserves for losses and LAE. As we receive new information and update our
assumptions over time regarding the ultimate liability, our loss reserves may prove to be inadequate to
cover our actual losses. Any changes in these estimates could be material and could have an adverse
effect on our results of operations and financial condition during the period the changes are made.
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,
and Nevada, the states in which our insurance subsidiaries are domiciled. As of December 31, 2011,
over one-half of our in-force premiums were generated in California. Accordingly, we are particularly
affected by regulation in California. The passage of any form of rate regulation in California could
impair our ability to operate profitably in California, and any such impairment could have a material
adverse effect on our financial condition and results of operations. Insurance regulators have broad
regulatory powers designed to protect policyholders and claimants, 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, and for other
purposes;
• 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;
• complliance with all applicable privacy laws;
• 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
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• the amount of dividends that our insurance subsidiaries may pay to EGI and, in turn, the ability
of EGI to pay dividends to EHI.
In addition, 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. 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 also 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
regulations. Since healthcare costs are the largest component of our loss costs, we may be impacted by
changes in healthcare legislation, such as the Affordable Care Act. 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. 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.
If we fail to price our insurance policies appropriately, our business competitiveness, financial
condition, and results of operations could be materially adversely affected.
Premiums are based on the particular class of business and our estimates of expected losses and
LAE and other expenses related to the policies we underwrite. We analyze many factors when pricing a
policy, including the policyholder’s prior loss history and industry classification. Inaccurate information
regarding a policyholder’s past claims experience could put us at risk for mispricing our policies. For
example, when initiating coverage on a policyholder, we must rely on the information provided by the
policyholder or the policyholder’s previous insurer(s) to properly estimate future claims expense. In
order to set premium rates accurately, we must utilize an appropriate pricing model which correctly
assesses risks based on their individual characteristics and takes into account actual and projected
industry characteristics. As a result, our business, financial condition, and results of operations could be
materially adversely affected.
Our concentration in California ties our performance to the business, economic, demographic, natural
perils, and regulatory conditions in that state.
Our business is concentrated in California, where we generated 56% of our in-force premiums as of
December 31, 2011. Accordingly, unfavorable business, economic, demographic, competitive, or
regulatory conditions in California could negatively impact our business.
California has been greatly affected by the overall economic downturn and tightening of the credit
markets. California is also experiencing budget deficits. The economic condition of the state has
resulted in high unemployment and decreased payrolls. In addition, many California businesses are
dependent on tourism revenues, which are, in turn, dependent on a robust economy. The downturn in
the national economy and 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 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, along with the possibility of
pandemics or terrorist acts. Accordingly, we could suffer losses as a result of catastrophic events in this
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state. Because our business is concentrated in this manner, we may be exposed to economic and
regulatory risks or risk from natural perils that are greater than the risks associated with greater
geographic diversification.
We rely on independent insurance agents and brokers.
We market and sell our insurance products primarily 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. The loss of a number of our independent agents and brokers or the
failure or inability of these agents to successfully market our insurance programs could have a material
adverse effect on our business, financial condition and results of operations. 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.
We rely on our principal strategic partners.
We have agreements with two principal strategic partners, ADP and Anthem, to market and
service our insurance products through their sales forces and insurance agencies. ADP and Anthem
generated 10% and 12%, respectively, of our total in-force premiums as of December 31, 2011. Our
agreement with ADP is not exclusive, and ADP may terminate the agreement without cause upon 120
days notice. Although our distribution agreements with Anthem are exclusive, Anthem may terminate
its agreements with us if the A.M. Best financial strength rating of ECIC is downgraded and we are not
able to provide coverage through a carrier with an A.M. Best financial strength rating of “B++” or
better. Anthem may also terminate its agreements with us without cause upon 60 days notice. The
termination of any of our principal strategic partnership agreements, our failure to maintain good
relationships with our principal strategic partners, or their failure to successfully market our products
may materially reduce our revenues and could have a material adverse effect on our results of
operations. In addition, we are subject to the risk that our principal strategic partners may face financial
difficulties, reputational issues, or problems with respect to their own products and services, which may
lead to decreased sales of our products and services. Moreover, if either of our principal strategic
partners consolidates or aligns itself with another company or changes its products that are currently
offered with our workers’ compensation insurance product, we may lose business or suffer decreased
revenues.
We are also subject to credit risk with respect to ADP and Anthem, as they collect premiums on
our behalf for the workers’ compensation products that are marketed together with their own products.
Any failure to remit such premiums to us or to remit such amounts on a timely basis could have an
adverse effect on our results of operations.
A downgrade in our financial strength rating could reduce the amount of business that we are able to
write or result in the termination of certain of our agreements with our strategic partners.
Rating agencies rate insurance companies based on financial strength as an indication of an ability
to pay claims. Our insurance subsidiaries are currently assigned a group letter rating of “A” (Excellent)
by A.M. Best, which is the rating agency that we believe has the most influence on our business. This
rating is assigned to companies that, in the opinion of A.M. Best, have demonstrated an excellent
overall performance when compared to industry standards. A.M. Best considers “A” rated companies
to have an excellent ability to meet their ongoing obligations to policyholders. This rating does not refer
to our ability to meet non-insurance obligations.
The financial strength ratings of A.M. Best and other rating agencies are subject to periodic review
using, among other things, proprietary capital adequacy models, and are subject to revision or
withdrawal at any time. Insurance financial strength ratings are directed toward the concerns of
policyholders and insurance agents and are not intended for the protection of investors or as a
recommendation to buy, hold, or sell securities. Our competitive position relative to other companies is
determined in part by our financial strength rating. A reduction in our A.M. Best rating could adversely
affect the amount of business we could write, as well as our relationships with independent agents and
brokers and strategic partners.
In view of the difficulties experienced recently by many financial
including our
competitors in the insurance industry, we believe that it is possible that external rating agencies, such as
institutions,
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A.M. Best, may increase their scrutiny of financial institutions, increase the frequency and scope of
their reviews, request additional information from the companies that they rate, including additional
information regarding the valuation of investment securities held, and may adjust upward the capital
and other requirements employed in their models for maintenance of certain rating levels. We cannot
predict what actions rating agencies may take, or what actions we may take in response to the actions of
rating agencies.
One of our strategic partners, Anthem, requires that we offer workers’ compensation coverage
through a carrier with a financial strength rating of “B++” or better by A.M. Best. We currently offer
this coverage through our subsidiary, ECIC. Our inability to offer such coverage could cause a
reduction in the number of policies we write. If ECIC’s financial strength rating were downgraded, and
we were not able to enter into an agreement to provide coverage through a carrier rated “B++” or
better by A.M. Best, Anthem could terminate its distribution agreements with us. We cannot assure you
that we would be able to enter such an agreement if our rating was downgraded.
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 December 31, 2011, we had $952 million of reinsurance recoverables for paid and unpaid losses
and LAE of which $11 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, 2011, we entered into a new reinsurance program that is effective through June 30,
2012. The reinsurance program consists of one treaty covering excess of loss and catastrophic loss events
in five layers of coverage. Our reinsurance coverage is $195 million in excess of our $5 million retention
on a per occurrence basis, subject to a $2 million annual aggregate deductible and 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 upon terms satisfactory to us. If we are unable to renew or
replace our reinsurance agreements upon terms satisfactory to us, our net liability on individual risks
would increase and we would have greater exposure to catastrophic losses, which could have a material
adverse affect 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 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, see “Item 1—Business—Reinsurance.” The inability of any of our reinsurers to
meet their financial obligations could have a material adverse affect on our financial condition and
results of operations.
We obtained reinsurance covering the losses incurred prior to July 1, 1995, and we could be liable for
all of those losses if the coverage provided by the LPT Agreement proves inadequate or we fail to
collect from the reinsurers party to such transaction.
On January 1, 2000, EICN assumed all of the assets, liabilities, and operations of the Fund,
including losses incurred by the Fund prior to such date. EICN also assumed the Fund’s rights and
obligations associated with the LPT Agreement that the Fund entered into with third party reinsurers
with respect to its losses incurred prior to July 1, 1995, see “Item 1—Business—Reinsurance—LPT
Agreement.” We could be liable for all of those losses if the coverage provided by the LPT Agreement
proves inadequate or we fail to collect from the reinsurers party to such transaction. As of December
31, 2011, the estimated remaining liabilities subject to the LPT Agreement were $808 million. If we are
unable to collect on these reinsurance recoverables, our financial condition and results of operations
could be materially adversely affected.
The reinsurers under the LPT Agreement agreed to assume responsibilities for the claims at the
benefit levels which existed in June 1999. Accordingly, if the Nevada legislature were to increase the
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benefits payable for the pre-July 1, 1995 claims, we would be responsible for the increased benefit costs
to the extent of the legislative increase. Similarly, if the credit rating of any of the third party reinsurers
that are party to the LPT Agreement were to fall below “A” as determined by A.M. Best or one of the
reinsurers becomes insolvent, we would be responsible for replacing any such reinsurer or would be
liable for the claims that otherwise would have been transferred to such reinsurer. For example, in 2002,
the rating of one of the original reinsurers under the LPT Agreement, Gerling Global International
Reinsurance Company Ltd. (Gerling), dropped below the mandatory “A” A.M. Best rating to “B+.”
Accordingly, we entered into an agreement to replace Gerling with National Indemnity Company
(NICO) at a cost to us of $33 million. We can give no assurance that circumstances requiring us to
replace one or more of the current reinsurers under the LPT Agreement will not occur in the future,
that we will be successful in replacing such reinsurer or reinsurers in such circumstances, or that the cost
of such replacement or replacements will not have a material adverse effect on our results of operations
or financial condition.
The LPT Agreement also required the reinsurers to each place assets supporting the payment of
claims by them in individual trusts that require that collateral be held at a specified level. The
collateralization level must not be less than the outstanding reserve for losses and a loss expense
allowance equal to 7% of estimated paid losses discounted at a rate of 6%. If the assets held in trust fall
below this threshold, we can require the reinsurers to contribute additional assets to maintain the
required minimum level. The value of these assets at December 31, 2011 was $896 million. If the value
of the collateral in the trusts drops below the required minimum level and the reinsurers are unable to
contribute additional assets, we could be responsible for substituting a new reinsurer or paying those
claims without the benefit of reinsurance. One of the reinsurers has collateralized its obligations under
the LPT Agreement by placing shares of stock of a publicly held corporation, with a value of $649
million at December 31, 2011, in a trust to secure the reinsurer’s obligation of $444 million. The value
of this collateral is subject to fluctuations in the market price of such stock. The other reinsurers have
placed treasury and fixed maturity securities in trusts to collateralize their obligations.
Intense competition and the fact that we write only a single line of insurance could adversely affect our
ability to sell policies at rates 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, 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, dividends or payment plans,
services or commissions to independent agents, brokers, and other distributors, we could lose market
share or have to reduce our premium 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. 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.
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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
insurance company is dependent on its own specific business
performance of an individual
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.
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. We have experienced significant increased price competition in our target markets since
2003. 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 and financial condition
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 an independent asset manager that operates under investment guidelines
approved by our 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, and market volatility. Interest
rates are highly sensitive to many factors, including governmental 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 spread risk,
credit risk, and equity price risk. For more information regarding market risk, interest rate risk, credit
spread risk, or equity price risk, see “Item 7A—Quantitative and Qualitative Disclosures About Market
Risk.”
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 “available-for-sale” fluctuate with changes in interest rates and cause
fluctuations in our stockholders’ equity. 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 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,
include estimates and assumptions and could result in changes to investment valuations that may
adversely affect our financial condition and results of operations.
Our estimates of fair value for our investments are based upon the inputs used in the valuation and
give the highest priority to quoted prices in active markets and require that observable inputs be used in
the valuations when available. In determining the level of the hierarchy in which the valuation is
disclosed, the highest priority is given to unadjusted quoted prices in active markets and the lowest
priority to unobservable inputs that reflect the Company’s significant market assumptions. 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.
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Additionally, we regularly review our entire investment portfolio, including the identification of
other-than-temporary declines in fair value. 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 in our financial
statements and additional impairments may need to be taken in the future. Historical trends may not be
indicative of future impairments. Additional information regarding the determination of impairments
on our investments is set forth under “Item 7—Management’s Discussion and Analysis of Financial
Condition and Results of Operations—Investments.”
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 the 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 have negatively
affected market liquidity conditions. In some cases, the markets have produced downward pressure on
stock prices and limited the availability of credit for certain issuers without regard to those issuers’
underlying financial strength. As a result, we may 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.
We are a holding company with no direct operations. We depend on the ability of our subsidiaries to
transfer funds to us to meet our obligations, and our insurance subsidiaries’ ability to pay dividends to
us is restricted by law.
EHI is a holding company that transacts substantially all of its business through operating
subsidiaries. Its primary assets are the shares of stock of our insurance subsidiaries. The ability of EHI
to meet obligations on outstanding debt, to pay stockholder dividends and to make other payments,
depends on the surplus and earnings of our subsidiaries and their ability to pay dividends or to advance
or repay funds, and upon the ability of our insurance subsidiaries, to pay dividends to EGI and, in turn,
the ability of EGI to pay dividends to EHI.
Payments of dividends by our insurance subsidiaries are restricted by state insurance laws,
including laws establishing minimum solvency and liquidity thresholds, and could be subject to
contractual restrictions in the future, including those imposed by indebtedness we may incur in the
future, see “Item 1—Business—Regulation—Financial, Dividend and Investment Restrictions” and
Note 14 in the Notes to our Consolidated Financial Statements. As a result, we may not be able to
receive dividends from these subsidiaries and we may not receive dividends in the amounts necessary to
meet our obligations or to pay dividends on our common stock.
We have outstanding indebtedness, which could impair our financial strength ratings and adversely
affect our ability to react to changes in our business and fulfill our debt obligations.
Our indebtedness could have significant consequences, including:
• making it more difficult for us to satisfy our financial obligations;
• limiting our ability to borrow additional amounts to fund working capital, capital expenditures,
debt service requirements, the execution of our business strategy, acquisitions, and other
purposes;
• affecting the way we manage our business due to restrictive covenants;
• requiring us to provide collateral which restricts our use of funds;
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• requiring us to use a portion of our cash flow from operations to pay principal and interest on
our debt; and
• making us more vulnerable to adverse changes in general economic and industry conditions, and
limiting our flexibility to plan for, and react quickly to, changing conditions.
We rely on our information technology and telecommunication systems, and the failure of these
systems or cyber attacks on our systems could materially and adversely affect our business.
Our business is highly dependent upon the successful and uninterrupted functioning of our
information technology and telecommunications systems. We rely on these systems to process new and
renewal business, provide customer service, administer and make payments on claims, facilitate
collections, and to automatically underwrite and administer the policies we write. The failure of any of
our systems could interrupt our operations or materially impact our ability to evaluate and write new
business. Our information technology and telecommunications systems interface with and depend on
third-party systems; and we could experience service denials if demand for such services exceeds
capacity or such third-party systems fail or experience interruptions.
Certain events outside of our control, including cyber attacks on our systems, could render our
systems inoperable such that we would be unable to service our agents, insureds, and injured workers,
or meet certain regulatory requirements. If such an event were to occur and our systems were unable to
be restored or secured within a reasonable timeframe, our results of operations and financial condition
could be adversely affected. Additionally, cyber attacks, resulting in a breach of security, could
jeopardize the privacy, confidentiality, and integrity of our data or our customers’ data, which could
harm our reputation and expose us to possible liability.
Acts of terrorism and catastrophes could materially adversely impact our financial condition and
results of operations.
Under our workers’ compensation policies and applicable laws in the states in which we operate,
we are required to provide workers’ compensation benefits for losses arising from acts of terrorism. The
impact of any terrorist act is unpredictable, and the ultimate impact on us would depend upon the
nature, extent, location, and timing of such an act. We would be particularly adversely affected by a
terrorist act affecting any metropolitan area where our policyholders have a large concentration of
workers.
Notwithstanding the protection provided by the reinsurance we have purchased and any protection
provided by the 2002 Act, or its extension, the TRIPRA, the risk of severe losses to us from acts of
terrorism has not been eliminated because our excess of loss reinsurance treaty program contains
various sub-limits and exclusions limiting our reinsurers’ obligation to cover losses caused by acts of
terrorism. Our excess of loss reinsurance treaties do not protect against nuclear, biological, chemical, or
radiological events. If such an event were to impact one or more of the businesses we insure, we would
be entirely responsible for any workers’ compensation claims arising out of such event, subject to the
terms of the 2002 Act, and the TRIPRA (see “Item 1—Business—Regulation—Federal Legislative
Changes”) and could suffer substantial losses as a result.
Our operations also expose us to claims arising out of catastrophes because we may be required to
pay benefits to workers who are injured in the workplace as a result of a catastrophe. Catastrophes can
be caused by various unpredictable events, either natural or man-made. Any catastrophe occurring in
the states in which we operate could expose us to potentially substantial losses and, accordingly, could
have a material adverse effect on our financial condition and results of operations.
Administrative proceedings or legal actions involving our insurance subsidiaries could have a material
adverse effect on our business, financial condition and results of operations.
Our insurance subsidiaries are involved in various administrative proceedings and legal actions in
the normal course of their insurance operations. Our subsidiaries have responded to the actions and
intend to defend against these claims. These claims concern issues including eligibility for workers’
compensation insurance coverage or benefits, the extent of injuries, wage determinations, and disability
ratings. Adverse decisions in multiple administrative proceedings or legal actions could require us to
pay significant amounts in the aggregate or to change the manner in which we administer claims, which
could have a material adverse effect on our financial condition and results of operations.
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Our business is largely dependent on the efforts of our management because of its industry expertise,
knowledge of our markets, and relationships with the independent agents and brokers that sell our
products.
Our success depends in substantial part upon our ability to attract and retain qualified executive
officers, experienced underwriting personnel, and other skilled employees who are knowledgeable
about our business. The current success of our business is dependent in significant part on the efforts of
Douglas D. Dirks, our President and Chief Executive Officer, and William E. Yocke, our Executive
Vice President and Chief Financial Officer. Many of our regional and local officers are also critical to
our operations because of their industry expertise, knowledge of our markets, and relationships with the
independent agents and brokers who sell our products. We have entered into employment agreements
with certain of our key executives. Currently, we maintain key man life insurance for our Chief
Executive Officer. If we were to lose the services of members of our management team or key regional
or local officers, we may be unable to find replacements satisfactory to us and our business. As a result,
our operations may be disrupted and our financial performance may be adversely affected.
Assessments and other surcharges for guaranty funds, second injury funds, and other mandatory
pooling arrangements may reduce our profitability.
All states require insurance companies licensed to do business in their state to bear a portion of the
unfunded obligations of insolvent insurance companies. These obligations are funded by assessments
that can be expected to continue in the future in the states in which we operate. Many states also have
laws that established second injury funds to provide compensation to injured employees for aggravation
of a prior condition or injury, which are funded by either assessments based on paid losses or premium
surcharge mechanisms. In addition, as a condition to the ability to conduct business in some states,
insurance companies are required to participate in mandatory workers’ compensation shared market
mechanisms or pooling arrangements, which provide workers’ compensation insurance coverage from
private insurers. The effect of these assessments and mandatory shared market mechanisms or changes
in them could reduce our profitability in any given period or limit our ability to grow our business.
State insurance laws, certain provisions of our charter documents, and Nevada corporation law could
prevent or delay a change of control that could be beneficial to us and our stockholders.
Our insurance subsidiaries are domiciled in Florida, California, and Nevada. The insurance laws of
these states generally require that any person seeking to acquire control of a domestic insurance
company obtain the prior approval of the state’s insurance commissioner. In Florida, “control” is
generally presumed to exist through the direct or indirect ownership of 5% or more of the voting
securities of a domestic insurance company or of any entity that controls a domestic insurance company.
In California and Nevada, “control” is presumed to exist through the direct or indirect ownership of
10% or more of the voting securities of a domestic insurance company or of any entity that controls a
domestic insurance company. In addition, insurance laws in many states in which we are licensed
require pre-notification to the state’s insurance commissioner of a change in control of a non-domestic
insurance company licensed in those states. Because we have insurance subsidiaries domiciled in
Florida, California, and Nevada, any future transaction that would constitute a change in control of us
would generally require the party acquiring control to obtain the prior approval of the insurance
commissioners of these states and may require pre-notification of the change of control. The time
required to obtain these approvals may result in a material delay of, or deter, any such transaction.
These laws may discourage potential acquisition proposals or tender offers, and may delay, deter, or
prevent a change of control, even if the acquisition proposal or tender offer is beneficial to our
stockholders.
Provisions of our amended and restated articles of incorporation and amended and restated by-laws
could discourage, delay, or prevent a merger, acquisition, or other change in control of us, even if our
stockholders might consider such a change in control to be in their best interests. These provisions
could also discourage proxy contests and make it more difficult for stockholders to elect Directors and
take other corporate actions. In particular, our amended and restated articles of incorporation and
amended and restated by-laws include provisions:
• dividing our Board of Directors into three classes;
27
08902
• eliminating the ability of our stockholders to call special meetings of stockholders;
• permitting our Board of Directors to issue preferred stock in one or more series;
• imposing advance notice requirements for nominations for election to our Board of Directors or
for proposing matters that can be acted upon by stockholders at the stockholder meetings;
• prohibiting stockholder action by written consent, thereby limiting stockholder action to that
taken at a meeting of our stockholders; and
• providing our Board of Directors with exclusive authority to adopt or amend our by-laws.
These provisions may make it difficult for stockholders to replace Directors and could have the
effect of discouraging a future takeover attempt that is not approved by our Board of Directors, but
which stockholders might consider favorable. Additionally, these provisions could limit the price that
investors are willing to pay in the future for shares of our common stock.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our principal executive offices are 79,533 square feet located in leased premises in Reno, Nevada.
As of February 1, 2012, we leased 293,641 square feet of total office space in 10 states. We believe that
our existing office space is adequate for our current needs. We will continue to enter into or exit lease
agreements to address future space requirements, as necessary.
Item 3. Legal Proceedings
From time to time, we are 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 result of operations, liquidity, or financial position.
Item 4. Mine Safety Disclosures
Not applicable.
28
93000
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities
Market Information, Holders, and Stockholder Dividends
Our common stock has been listed on the New York Stock Exchange (NYSE) under the symbol
“EIG” since our IPO on January 31, 2007. Prior to that time, there was no public market for our
common stock. There were 1,474 holders of record as of February 23, 2012. High and low stock prices
and cash dividends declared for the last two fiscal years were as follows:
2011
2010
Quarter Ended
Stock Price
High
Low
Cash
Dividends
Declared
March 31. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
June 30 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
September 30 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$20.91
21.00
17.02
18.69
$16.34
15.51
10.73
12.00
$0.06
0.06
0.06
0.06
Stock Price
High
Low
$15.75
17.27
16.87
17.75
$12.31
14.09
13.92
15.16
Cash
Dividends
Declared
$0.06
0.06
0.06
0.06
We currently expect that cash dividends will continue to be paid in the future; however, any
determination to pay additional or future dividends will be at the discretion of our Board of Directors
and will be dependent upon:
• the surplus and earnings of our subsidiaries and their ability to pay dividends and/or other
statutorily permissible payments to us, in particular the ability of EICN and EPIC to pay
dividends to EGI and, in turn, the ability of EGI to pay dividends to EHI;
• our results of operations and cash flows;
• our financial position and capital requirements;
• general business conditions;
• any legal, tax, regulatory, and/or contractual restrictions on the payment of dividends; and
• any other factors our Board of Directors deems relevant.
There were no unregistered sales of equity securities during the fiscal year that ended
December 31, 2011.
Issuer Purchases of Equity Securities
The following table summarizes the repurchase of our common stock for the quarter ended
December 31, 2011:
Total
Number of
Shares
Purchased
Average
Price
Paid Per
Share(1)
Total
Number
of Shares
Purchased as
Part of Publicly
Announced
Programs
Period
October 1—October 31, 2011 . . . . . . . . . . . . . . . . . .
November 1—November 30, 2011 . . . . . . . . . . . . . .
December 1—December 31, 2011 . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,365,000
1,365,000
521,805
3,251,805
$14.61
16.73
17.54
15.97
1,365,000
1,365,000
521,805
3,251,805
Approximate
Dollar
Value of
Shares that
May Yet be
Purchased
Under the
Program(2)
(in millions)
$ 25.0
102.1
93.0
(1) Includes fees and commissions paid on stock repurchases.
(2) In November 2010, the Board of Directors authorized a share repurchase program for up to $100 million of the Company’s
common stock from November 8, 2010 through June 30, 2012 (the 2011 Program). In November 2011, the Board of Directors
authorized a $100 million expansion of the 2011 Program, to $200 million, and extended the repurchase authority pursuant to
the 2011 Program through June 30, 2013. We expect 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
29
61113
determined by management. The timing and actual number of shares 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 2011 Program may be commenced, modified, or suspended from time-to-time without prior notice, and the 2011
Program may be suspended or discontinued at any time.
Through December 31, 2011, we repurchased a total of 7,004,790 shares of common stock under
the 2011 Program at an average price of $15.28 per share, including commissions, for a total of $107.0
million.
Performance Graph
The following information compares the cumulative total return on $100 invested in the common
stock of EHI, ticker symbol EIG, for the period commencing on January 31, 2007, the date of our IPO,
and ending on December 31, 2011 with the cumulative total return on $100 invested in each of the
Standard and Poor’s 500 Index (S&P 500) and the Standard and Poor’s 500 Property-Casualty Insurance
Index (S&P P&C Insurance Index). The calculation of cumulative total return assumes the reinvestment
of dividends. The following graph and related information shall not be deemed to be “soliciting
material” or to be “filed” with the SEC, nor shall such information be incorporated by reference into
any filing pursuant to the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the
extent that we specifically incorporate it by reference into such filing.
Employers Holdings, Inc.
Total Return Performance
120
110
100
90
80
70
60
50
e
u
l
a
V
x
e
d
n
I
Employers Holdings, Inc.
S&P 500
S&P 500 P&C Insurance Index
40
1/31/07
12/31/07
12/31/08
12/31/09
12/31/10
12/31/11
Employers Holdings, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
S&P 500 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
S&P 500 P&C Insurance Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100.00
100.00
100.00
84.47
103.92
89.85
84.62
65.47
63.43
80.30
82.80
71.26
92.95
95.27
77.63
97.65
97.28
77.43
1/31/07
12/31/07
12/31/08
12/31/09
12/31/10
12/31/11
Period Ending
30
48715
Item 6. Selected Financial Data
The following selected historical consolidated financial data should be read in conjunction with
“Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations”
and the consolidated financial statements and related notes included elsewhere in this annual report on
Form 10-K.
Income Statement Data
Revenues:
Net premiums earned . . . . . . . . . . . . . . . . . . . . .
Net investment income . . . . . . . . . . . . . . . . . . .
Realized gains (losses) on investments,
net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income before income taxes . . . . . . . . . . . . . .
Income tax expense (benefit). . . . . . . . . . . . . . . . . .
Years Ended December 31,
2011
2010
2007
2009
(in thousands, except per share amounts and ratios)
2008(1)
$363,424
80,117
$321,786
83,032
$404,247
90,484
$328,947
78,062
$346,884
78,623
20,161
452
464,154
46,207
(2,106)
10,137
649
415,604
66,322
3,523
62,799
791
413
495,935
92,298
9,277
(11,524)
1,293
396,778
112,051
10,266
83,021
101,785
180
4,236
429,923
150,886
30,603
120,283
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
48,313
Earnings per common share(2)
Basic. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pro forma earnings per common share—basic
and diluted(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
1.30
1.29
$
1.52
1.51
$
1.81
1.80
$
2.07
2.07
2.19
2.19
2.32
Selected Operating Data
Gross premiums written(3) . . . . . . . . . . . . . . . . . . . . .
Net premiums written(4) . . . . . . . . . . . . . . . . . . . . . . .
Combined ratio(5). . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income before impact of the Deferred
Gain(6)(7)(8). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings per common share before impact of
the Deferred Gain(8)
$418,512
$410,038
$322,277
$313,098
$379,949
$368,290
$318,392
$308,317
$351,847
$339,720
114.0% 106.8%
98.0%
85.9%
80.4%
$ 31,166
$ 44,566
$ 65,014
$ 83,364
$102,249
Basic. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pro forma earnings per common share—basic
and diluted before impact of LPT(2)(8) . . . . . . .
Dividends declared . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
0.84
0.83
$
1.08
1.07
$
1.42
1.41
1.69
1.69
0.24
0.24
0.24
0.24
$
1.98
0.18
31
17232
2007
2011
As of December 31,
2009
(in thousands, except per share amounts and ratios)
2008(1)
2010
Balance Sheet Data
Cash and cash equivalents . . . . . . . . . . . .
Total investments . . . . . . . . . . . . . . . . . . . . .
Reinsurance recoverable on paid and
unpaid losses . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unpaid losses and loss adjustment
expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred reinsurance gain—LPT
Agreement(6)(7). . . . . . . . . . . . . . . . . . . . . .
Notes payable . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities. . . . . . . . . . . . . . . . . . . . . . . .
Total equity . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Financial Data
Total equity including deferred
reinsurance gain—LPT
Agreement(6)(7)(9) . . . . . . . . . . . . . . . . . . . .
$ 252,300
1,950,745
$ 119,825
2,080,494
$ 188,883
2,029,560
$ 197,429
2,042,941
$ 144,384
1,726,280
951,569
3,481,744
970,458
3,480,120
1,064,843
3,676,653
1,087,738
3,825,098
1,061,551
3,191,228
2,272,363
2,279,729
2,425,658
2,506,478
2,269,710
353,194
122,000
3,007,558
474,186
370,341
132,000
2,990,004
490,116
388,574
132,000
3,178,254
498,399
406,581
182,000
3,380,370
444,728
425,002
—
2,811,775
379,453
$ 827,380
$ 860,457
$ 886,973
$ 851,309
$ 804,455
(1) On October 31, 2008, we acquired 100% of the outstanding common stock of AmCOMP Incorporated (AmCOMP). The
income statement data for the year ended December 31, 2008 includes the operating results of AmCOMP from November 1,
2008 through December 31, 2008. The balance sheet data as of December 31, 2008 includes the assets and liabilities acquired
from AmCOMP.
(2) For 2007, the pro forma earnings per common share—basic—was calculated using the net income for the 12 months ended
December 31, 2007. The weighted average shares outstanding was calculated using those shares available to eligible members
in the conversion (50,000,002) for the period prior to the IPO, and the actual weighted average shares outstanding for the
period after the IPO. Earnings per common share—diluted—is based on the pro forma weighted shares outstanding—
basic—adjusted by the number of additional common shares that would have been outstanding had potentially dilutive
common shares been issued and reduced by the number of common shares that could have been purchased from the proceeds
of the potentially dilutive shares. Outstanding options have been excluded from the diluted earnings per share for the pro
forma year ended December 31, 2007, because their inclusion would be anti-dilutive. Although there were 8,665 dilutive
potential common shares at December 31, 2007, they did not impact the pro forma earnings per share number as shown.
(3) Gross premiums written is the sum of direct premiums written and assumed premiums written before the effect of ceded
reinsurance. Direct premiums written are the premiums on all policies our insurance subsidiaries have issued during the year.
Assumed premiums written are premiums that our insurance subsidiaries have received from any authorized state-mandated
pools and a previous fronting facility. (See Note 9 in the Notes to our Consolidated Financial Statements.)
(4) Net premiums written is the sum of direct premiums written and assumed premiums written less ceded premiums written.
Ceded premiums written is the portion of direct premiums written that we cede to our reinsurers under our reinsurance
contracts. (See Note 9 in the Notes to our Consolidated Financial Statements.)
(5) Combined ratio is the sum of the losses and LAE expense, the commission expense, dividends to policyholders, and the
underwriting and other operating expenses, all divided by net earned premiums. Because we only have one operating
segment, holding company expenses are included in the combined ratio.
(6) In connection with our January 1, 2000 assumption of the assets, liabilities and operations of the Fund, our Nevada insurance
subsidiary assumed the Fund’s rights and obligations associated with the LPT Agreement, a retroactive 100% quota share
reinsurance agreement with third party reinsurers, which substantially reduced exposure to losses for pre-July 1, 1995 Nevada
insured risks. Pursuant to the LPT Agreement, the Fund initially ceded $1.5 billion in liabilities for incurred but unpaid losses
and LAE, which represented substantially all of the Fund’s outstanding losses as of June 30, 1999 for claims with original
dates of injury prior to July 1, 1995.
(7) Deferred reinsurance gain—LPT Agreement (Deferred Gain) reflects the unamortized gain from our LPT Agreement. Under
GAAP, this gain is deferred and is being amortized using the recovery method, whereby the amortization is determined by
the proportion of actual reinsurance recoveries to total estimated recoveries, and the amortization is reflected in losses and
LAE. We periodically reevaluate the remaining direct reserves subject to the LPT Agreement. Our reevaluation results in
corresponding adjustments, if needed, to reserves, ceded reserves, reinsurance recoverables and the Deferred Gain, with the
net effect being an increase or decrease, as the case may be, to net income.
(8) We define net income before impact of the Deferred Gain as net income less: (a) amortization of Deferred Gain and (b)
adjustments to LPT Agreement ceded reserves. These are not measurements of financial performance under GAAP, but
rather reflect the difference in accounting treatment between statutory and GAAP, and should not be considered in isolation
or as an alternative to any other measure of performance derived in accordance with GAAP.
We present net income before impact of the Deferred Gain because we believe that it is an important supplemental measure
of operating performance to be used by analysts, investors, and other interested parties in evaluating us. We present pro
forma earnings per share—basic and diluted—before impact of the Deferred Gain because we believe that it is an important
supplemental measure of performance.
The LPT Agreement was a non-recurring transaction which does not result in ongoing cash benefits and consequently we
believe these presentations are useful in providing a meaningful understanding of our operating performance. In addition, we
32
61248
believe these non-GAAP measures, as we have defined them, are helpful to our management in identifying trends in our
performance because the item excluded has limited significance in our current and ongoing operations.
The table below shows the reconciliation of net income to net income before impact of the Deferred Gain for the periods
presented:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less impact of the Deferred Gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$48,313
17,147
$62,799
18,233
(in thousands)
$83,021
18,007
$101,785
18,421
2011
Years Ended December 31,
2008
2009
2010
2007
$120,283
18,034
Net income before impact of the Deferred Gain . . . . . . . . . . . . . . . . . .
$31,166
$44,566
$65,014
$ 83,364
$102,249
(9) We define total equity including the Deferred Gain as total equity plus the Deferred Gain. Total equity including the
Deferred Gain is not a measurement of financial position under GAAP and should not be considered in isolation or as an
alternative to total equity or any other measure of financial health derived in accordance with GAAP.
We present total equity including the Deferred Gain because we believe that it is an important supplemental measure of
financial position to be used by analysts, investors and other interested parties in evaluating us. The LPT Agreement was a
non-recurring transaction and the treatment of the Deferred Gain does not result in ongoing cash benefits or charges to our
current operations and consequently we believe this presentation is useful in providing a meaningful understanding of our
financial position.
The table below shows the reconciliation of total equity to total equity including the Deferred Gain for the periods presented:
2011
2010
2008
2007
As of December 31,
2009
(in thousands)
$498,399
388,574
Total equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred Gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$474,186
353,194
$490,116
370,341
$444,728
406,581
$379,453
425,002
Total equity including the Deferred Gain . . . . . . . . . . . . . . . . . . . . . .
$827,380
$860,457
$886,973
$851,309
$804,455
Item 7. Management’s Discussion and Analysis of Consolidated Financial Condition and Results of
Operations
The following discussion and analysis of our financial condition and results of operations should be
read in conjunction with the consolidated financial statements and the accompanying notes thereto
included in Item 8 and Item 15 of this report. In addition to historical information, the following
discussion contains forward-looking statements that are subject to risks and uncertainties and other factors
described in Item 1A of this report. Our actual results in future periods may differ from those referred to
herein due to a number of factors, including the risks described in the sections entitled “Risk Factors” and
“Forward-Looking Statements” elsewhere in this report.
Overview
We are a Nevada holding company. Through our insurance subsidiaries, we provide workers’
compensation insurance coverage to select, small businesses in low to medium hazard industries.
Workers’ compensation insurance is provided under a statutory system wherein most employers are
required to provide coverage for their employees’ medical, disability, vocational rehabilitation, and/or
death benefit costs for work-related injuries or illnesses. We provide workers’ compensation insurance
in 31 states and the District of Columbia, with a concentration in California. Our revenues are primarily
comprised of net premiums earned, net investment income, and net realized 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 which
are competitive and profitable over the long-term. Our underwriting approach is to consistently
underwrite small business accounts at an appropriate and competitive price without sacrificing long-
term profitability and stability for short-term top-line revenue growth.
33
88456
Results of Operations
Overall, net income was $48.3 million, $62.8 million, and $83.0 million in 2011, 2010, and 2009,
respectively and we recognized underwriting (losses) income of $(50.9) million, $(21.8) million, and $8.0
million for the same periods, respectively. Underwriting (loss) income is determined by deducting losses
and LAE, commission expense, policyholder dividends, and underwriting and other operating expenses
from net premiums earned. Key factors that affected our financial performance over the last three
years, include:
• Gross premiums written declined 15% from 2009 to 2010 and increased 30% from 2010 to 2011;
• Net premiums earned declined 20% from 2009 to 2010 and increased 13% from 2010 to 2011;
• Losses and LAE decreased 9% in 2010 compared to 2009 and increased 36% in 2011 compared
to 2010;
• Current accident year loss estimate increased to 77.2% in 2011, from 70.9% in 2010 and 70.2% in
2009;
• Underwriting and other operating expenses declined 24% from 2009 to 2010 and 5% from 2010
to 2011; and
• Income tax expenses declined from $9.3 million in 2009 to $3.5 million in 2010, while we had an
income tax benefit of $2.1 million in 2011.
We measure our performance by our ability to increase stockholders’ equity, including the impact
of the deferred reinsurance gain—LPT Agreement (Deferred Gain), over the long-term. The following
table shows our stockholders’ equity, including the Deferred Gain, stockholders’ equity on a GAAP
basis, and number of common shares outstanding at December 31:
2011
2010
(in thousands, except share data)
2009
Stockholders’ equity including the Deferred Gain(1) . . . . . . . . .
GAAP stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common shares outstanding. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
827,380
474,186
$
32,996,809
$
860,457
490,116
$
38,965,126
$
$
886,973
498,399
42,908,165
(1) Stockholders’ equity, including the Deferred Gain, is a non-GAAP measure that is defined as total stockholders’ equity plus
the Deferred Gain, which we believe is an important supplemental measure of our capital position.
Our goal is to maintain our focus on disciplined underwriting and to continue to pursue profitable
growth opportunities across market cycles; however, we continue to be affected by the impacts of the
most recent economic recession. The pace of recovery remains persistently slow and, although it
appears to us that total employment and payroll have begun to improve, we do not believe the situation
will significantly improve in the near-term.
34
The comparative components of net income are set forth in the following table.
95677
Net premiums earned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Realized gains on investments, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Losses and LAE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commission expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Policyholder dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Underwriting and other operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2009
2011
Years Ended December 31,
2010
(in thousands)
$321,786
83,032
10,137
649
415,604
194,779
38,468
4,316
106,026
5,693
3,523
$363,424
80,117
20,161
452
464,154
264,663
45,502
3,423
100,717
3,642
(2,106)
$404,247
90,484
791
413
495,935
214,461
36,150
6,930
138,687
7,409
9,277
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
415,841
352,805
412,914
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 48,313
$ 62,799
$ 83,021
Less impact of the Deferred Gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income before impact of the Deferred Gain(1). . . . . . . . . . . . . . . . . . .
17,147
$ 31,166
18,233
$ 44,566
18,007
$ 65,014
(1) We define net income before impact of the Deferred Gain as net income less: (a) amortization of Deferred Gain and
(b) adjustments to LPT Agreement ceded reserves. Deferred Gain reflects the unamortized gain from our LPT Agreement.
Under GAAP, this gain is deferred and is being amortized using the recovery method, whereby the amortization is
determined by the proportion of actual reinsurance recoveries to total estimated recoveries, and the amortization is reflected
in losses and LAE. We periodically reevaluate the remaining direct reserves subject to the LPT Agreement. Our reevaluation
results in corresponding adjustments, if needed, to reserves, ceded reserves, reinsurance recoverables and the Deferred Gain,
with the net effect being an increase or decrease, as the case may be, to net income. Net income before impact of the
Deferred Gain is not a measurement of financial performance under GAAP, but rather reflects the difference in accounting
treatment between statutory and GAAP, and should not be considered in isolation or as an alternative to net income before
income taxes or net income or any other measure of performance derived in accordance with GAAP.
We present net income before impact of the Deferred Gain because we believe that it is an important supplemental measure
of operating performance to be used by analysts, investors and other interested parties in evaluating us. The LPT Agreement
was a non-recurring transaction, under which the Deferred Gain does not result in ongoing cash benefits, and, consequently,
we believe this presentation is useful in providing a meaningful understanding of our operating performance. In addition, we
believe this non-GAAP measure, as we have defined it, is helpful to our management in identifying trends in our performance
because the excluded item has limited significance in our current and ongoing operations.
In October 2010, the Financial Accounting Standards Board (FASB) issued guidance that changes
the definition of acquisition costs which may be capitalized beginning in 2012. We currently estimate
that our underwriting and other operating expenses will be increased by approximately $7 million in
2012 as a result of the adoption of this new accounting guidance. Additional information regarding this
change is set forth under “—New Accounting Standards.”
Net Premiums Earned
Net premiums earned increased $41.6 million for the year ended December 31, 2011, compared to
the prior year. This increase is primarily due to increasing policy count as we continue to execute our
growth strategy. The change in the accrual for final audit premiums increased our net premiums earned
by $14.9 million in 2011, compared to 2010. Changes in the accrual for final audit premium are driven
by various factors, including general economic conditions such as unemployment and payroll trends.
The decrease in net premiums earned for the year ended December 31, 2010, compared to the same
period of 2009, was due to the impacts of the recession, including high unemployment and fewer hours
worked, declines in our policyholders’ payroll, lower net rates, and our application of disciplined pricing
objectives and underwriting guidelines in a highly competitive market.
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The following table shows the percentage change in our in-force premium, policy count, average
policy size, and payroll exposure, upon which our premiums are based, and net rate.
As of December 31,
Percentage
Increase (Decrease)
2011 Over 2010
Percentage
Increase (Decrease)
2010 Over 2009
In-force premium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
In-force policy count. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Average in-force policy size . . . . . . . . . . . . . . . . . . . . . . . . . . . .
In-force payroll exposure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net rate(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
22.7%
36.2
(9.9)
24.4
(1.4)
(16.6)%
0.9
(17.4)
(12.1)
(5.1)
(1) Net rate, defined as total premium in-force divided by total insured payroll exposure, is a function of a variety of factors,
including rate changes, underwriting risk profiles and pricing, and changes in business mix related to economic and
competitive pressures.
Over one-half of our business is generated in California, where our policy count increased 26.1%
during the year ended December 31, 2011.
We set our own premium rates in California based upon actuarial analyses of current and
anticipated loss trends with a goal of maintaining underwriting profitability. Due to increasing loss costs,
primarily medical cost inflation, we have increased our filed premium rates by a cumulative 33.3% since
February 1, 2009.
We expect that premiums in 2012 will continue to reflect:
• overall rate increases;
• increasing policy count as we continue to execute our growth strategy;
• increasing average policy size; and
• lessened competitive pressures.
As we have executed our growth strategy, we have increased our network of independent insurance
agencies by approximately 43% in 2011 and continued to deploy technology to make it easier for agents
to do business with us.
Net Investment Income and Realized Gains (Losses) on Investments
We invest our holding company assets, statutory surplus, and the funds supporting our insurance
liabilities, including unearned premiums and unpaid losses and LAE. We invest in fixed maturity
securities, equity securities, short-term investments, and cash equivalents. Net investment income
includes interest and dividends earned on our invested assets and amortization of premiums and
discounts on our fixed maturity securities,
less bank service charges and custodial and portfolio
management fees. We have established a high quality/short duration bias in our investment portfolio.
Net investment income was $80.1 million, $83.0 million, and $90.5 million for the years ended
December 31, 2011, 2010, and 2009, respectively. The decrease in net investment income over the past
three years was primarily related to a decrease in the average pre-tax book yield on invested assets and
a decrease in average invested assets over this period. The decrease in average invested assets was
primarily due to repayment of debt and the return of capital to stockholders through share repurchases
and stockholder dividends. The average pre-tax book yield on invested assets was 4.1%, 4.2%, and
4.5% at December 31, 2011, 2010, and 2009, respectively, while the tax-equivalent yield on invested
assets was 5.0%, 5.3%, and 5.6% as of the same dates, respectively.
Realized gains and losses on our investments are reported separately from our net investment
income. Realized gains and losses on investments include the gain or loss on a security at the time of
sale compared to its original or adjusted cost (equity securities) or amortized cost (fixed maturity
securities). Realized losses are also recognized when securities are written down as a result of an other-
than-temporary impairment.
Realized gains on investments were $20.2 million, $10.1 million, and $0.8 million for the years
ended December 31, 2011, 2010, and 2009, respectively. The increase in realized gains on investments
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for the year ended December 31, 2011 compared to 2010 resulted from a strategic rebalancing of our
investment portfolio in an effort to increase portfolio allocations to taxable fixed income sectors,
shorten portfolio duration following the decline in interest rates in the second half of 2011, and an
increase the allocation to high dividend equity securities. We also evaluated our portfolio allocation
during the fourth quarter of 2010 and elected to shift $20.0 million of our equity securities into a high
dividend yield portfolio, which resulted in a $9.2 million gain.
Additional information regarding our Investments is set forth under “—Liquidity and Capital
Resources—Investments.”
Combined Ratio
The combined ratio, expressed as a percentage, is a key measurement of underwriting profitability.
The combined ratio is the sum of the losses and LAE ratio, the commission expense ratio, policyholder
dividends ratio, and underwriting and other operating expenses ratio. When the combined ratio is below
100%, we have recorded underwriting income, and conversely, when the combined ratio is greater than
100%, we cannot be profitable without investment income. Because we only have one operating
segment, holding company expenses are included in our calculation of the combined ratio.
The following table provides the calculation of our calendar year combined ratios.
Loss and LAE ratio. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Underwriting and other operating expenses ratio . . . . . . . . . . . . . . . . . .
Commission expense ratio. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Policyholder dividends ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Combined ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Years Ended December 31,
2011
2009
2010
72.8% 60.5% 53.1%
33.0
27.8
12.0
12.5
1.3
0.9
114.0% 106.8% 98.0%
34.3
8.9
1.7
Loss and LAE Ratio. Expressed as a percentage, this is the ratio of losses and LAE to net
premiums earned.
We analyze our loss and LAE ratios on both a calendar year and accident year basis. A calendar
year loss and LAE ratio is calculated by dividing the losses and LAE incurred 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. A
calendar year loss and LAE ratio is calculated using premiums and losses and LAE that are net of
amounts ceded to reinsurers. The calendar year loss and LAE ratio for a particular year will not change
in future periods.
The accident year loss and LAE ratio, or losses and LAE for insured events that occurred during a
particular year divided by the premiums earned for the year, is calculated by dividing the losses and
LAE, regardless of when such losses and LAE are incurred, for insured events that occurred during a
particular year by the net premiums earned for that year. The accident year losses and LAE ratio is
calculated using premiums and losses and LAE that are net of amounts ceded to reinsurers. 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; and is an operating ratio 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 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.
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65100
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.
In California, we are experiencing an increase in indemnity claims frequency (the number of
indemnity claims expressed as a percentage of payroll). Our loss experience also indicates an upward
trend in medical and indemnity costs that are reflected in our current accident year loss estimate. We
are seeing increased medical and indemnity costs in many of our other states, partially offset by long-
term favorable loss cost trends in Nevada. We believe our current accident year loss estimate is
adequate; however, ultimate losses will not be known with any certainty for several years. We assume
that increasing medical and indemnity cost trends will continue to impact our long-term claims costs
and current accident year loss estimate. Additional information regarding our reserves for losses and
LAE is set forth under “—Critical Accounting Policies—Reserves for Losses and LAE.”
Overall, losses and LAE were $264.7 million, $194.8 million, and $214.5 million for the years ended
December 31, 2011, 2010, and 2009, respectively. The increase from 2010 to 2011 was primarily due to
an increase in the current accident year loss estimate, an increase in net earned premiums, and the
impact of favorable prior accident year loss development in 2010. Prior accident year loss development
in 2011 is entirely related to our assigned risk business. The decrease in losses and LAE from 2009 to
2010 was primarily due to lower payroll exposures. Additionally, favorable prior accident year loss
development decreased $34.8 million to $16.6 million for the year ended December 31, 2010, compared
to the same period of 2009. Our accident year loss estimates were 77.2%, 70.6%, and 70.2% for the
years ended December 31, 2011, 2010, and 2009, respectively. The accident year loss estimate for the
year ended December 31, 2010 excludes a $1.6 million expense related to the commutation of certain
reinsurance treaties and a $0.9 million expense related to the write-off of certain reinsurance
recoverables. The increase in the current accident year loss estimate in 2011 is primarily due to
continuing increases in loss costs in California. The table below reflects losses and LAE reserve
adjustments.
Prior accident year (unfavorable) favorable development, net(1). . .
Years Ended December 31,
2011
2009
2010
(in millions)
$16.6
$ (1.1)
$51.4
LPT amortization of the deferred reinsurance gain . . . . . . . . . . . . . . .
$17.1
$18.2
$18.0
(1) Prior accident year (unfavorable) favorable development, net, excludes a $1.6 million expense related to the commutation of
certain reinsurance treaties and a $0.9 million expense related to the write-off of certain reinsurance recoverables, which are
included in losses and LAE for the year ended December 31, 2010.
Excluding the impact from the LPT Agreement, losses and LAE would have been $281.8 million,
$213.0 million, and $232.5 million, or 77.5%, 66.2%, and 57.5% of net premiums earned, for the years
ended December 31, 2011, 2010, and 2009, respectively.
Underwriting and Other Operating Expenses Ratio. The underwriting and other operating expenses
ratio is the ratio (expressed as a percentage) of underwriting and other operating expenses to net
premiums earned and measures an insurance company’s operational efficiency in producing,
underwriting, and administering its insurance business.
Underwriting and other operating expenses are those costs that we incur to underwrite and
maintain the insurance policies we issue, excluding commission. These expenses include premium taxes
and certain other general expenses that vary with, and are primarily related to, producing new or
renewal business. Other underwriting expenses include changes in estimates of future write-offs of
premiums receivable, general administrative expenses such as salaries and benefits, rent, office supplies,
depreciation, and all other operating expenses not otherwise classified separately. Policy acquisition
costs are variable based on premiums earned; however, other operating costs are more fixed in nature
and become a smaller percentage of net premiums earned as premiums increase.
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In January 2009, we restructured our operations as a result of the acquisition of AmCOMP
Incorporated in 2008 (the Acquisition) and incurred one-time pre-tax integration and restructuring
charges of approximately $5.7 million, including $2.8 million of severance benefits, for the year ended
December 31, 2009. In the first quarter of 2010, we incurred charges of $0.9 million related to staffing
reductions to adjust our insurance operations to reflect activity levels at that time.
In July 2010, we announced the reorganization of our operations to eliminate duplicative services
and better align resources with business activity and growth opportunities at that time. In connection
with those efforts and with general cost control efforts, we eliminated approximately 160 positions. In
conjunction with that reorganization, we recorded restructuring charges of $5.2 million in 2010,
including $3.0 million related to workforce reductions and $2.2 million related to leases for facilities that
were vacated during the year.
Underwriting and other operating expenses were $100.7 million, $106.0 million, and $138.7 million
for the years ended December 31, 2011, 2010, and 2009, respectively, reflecting efforts to manage our
expenses. During the year ended December 31, 2011, compensation and facilities related expenses
declined $8.9 million and $3.3 million, respectively, partially offset by a $5.2 million increase in
premium taxes and assessments, compared to the same period of 2010. Underwriting and other
operating expenses also included one-time charges totaling $1.2 million during 2011 for professional
service fees related to acquisition due diligence activity. Excluding total restructuring items incurred in
2010 and the one-time professional services fees incurred in 2011, underwriting and other operating
expenses decreased $0.4 million for the year ended December 31, 2011 compared to 2010.
The $32.7 million decrease in underwriting and other operating expense for the year ended
December 31, 2010, compared to the same period of 2009, includes restructuring items for both years.
Excluding these restructuring charges, underwriting and other operating expenses decreased $33.1
million for the year ended December 31, 2010, compared to 2009. The decrease reflects efforts to
manage our expenses during a period of declining premiums. During the year ended December 31,
2010, information technology expenses declined $3.5 million and compensation expenses declined $16.5
million, compared to the same period of 2009. Additionally, there was a $5.8 million decrease in
premium taxes and a $3.6 million decrease in bad debt expense.
Commission Expense Ratio. The commission expense ratio is the ratio (expressed as a percentage)
of commission expense to net premiums earned and measures the cost of compensating agents and
brokers for the business we have underwritten.
Commission expense includes direct commissions to our agents and brokers for the premiums that
they produce for us, as well as incentive payments, other marketing costs, and fees. Commission
expense is net of contingent profit commission income related to the LPT Agreement. The contingent
profit is an amount based on the favorable difference between actual paid losses and LAE and expected
paid losses and LAE under the LPT Agreement. Loss expenses are deemed to be 7% of total losses
paid and are paid to us as compensation for management of the LPT claims. The calculation of actual
amounts paid versus expected amounts is determined every five years beginning June 30, 2004 for the
first twenty-five years of the agreement. The reinsurers pay us 30% of any favorable difference between
the actual and expected amounts paid at each calculation point. Conversely, we could be required to
return any previously paid contingent profit commission, plus interest, in the event of unfavorable
differences.
We accrue the estimated ultimate contingent profit commission through June 30, 2024. Increases or
decreases in the estimated contingent profit commission are reflected in commission expense in the
period that the estimate is revised. We increased the estimated contingent profit commission by $1.8
million and $0.8 million in 2011 and 2010, respectively, resulting in a decrease in the commission
expense for those years. For the year ended December 31, 2009, we decreased commission expenses by
$15.0 million as a result of an increase in contingent profit commissions and received cash payment of
$10.3 million from the reinsurers. At December 31, 2011, expected amounts to be paid for losses under
the LPT Agreement for the period July 1, 1999 through June 30, 2014, were $673.4 million, compared to
contractually expected losses and LAE of approximately $775.0 million.
Our commission expense was $45.5 million, $38.5 million, and $36.2 million for the years ended
December 31, 2011, 2010, and 2009, respectively. The increase from 2010 to 2011 was primarily due to
39
35801
increased net premiums earned. The increase from 2009 to 2010 was primarily due to a $15.0 million
adjustment in the accrual for the LPT contingent profit commission during the year ended December
31, 2009 and re-negotiation of the terms of a separate reinsurance agreement resulting in an additional
$1.8 million in commission expense in the fourth quarter of 2010. This increase was partially offset by
lower net premiums earned and a $3.0 million reduction in the estimate of certain administrative fees
due to Anthem under our joint marketing agreements, which decreased the commission expense in the
fourth quarter of 2010. Excluding the impact of the LPT contingent profit commission, the re-
negotiated reinsurance agreement, and the change in accrual for fees due Anthem, commission expense
would have been 13.0%, 12.6%, and 12.7% of net premiums earned for the years ended December 31,
2011, 2010, and 2009, respectively.
Policyholder Dividends Ratio. The policyholder dividends ratio is the ratio (expressed as a
percentage) of policyholder dividends to net premiums earned and measures the cost of returning
premium to policyholders in the form of dividends.
In administered pricing states such as Florida and Wisconsin, insurance rates are set by state
insurance regulators. Rate competition generally is not permitted and policyholder dividend programs
are an important competitive factor in these states. We offer dividend programs to eligible
policyholders, under which a portion of the policyholders’ premium may be returned in the form of
dividends.
Florida statutes also require the return of the portion of policyholders’ premiums that are deemed
to be excessive profits under Florida law. We account for these payments as policyholder dividends.
Policyholder dividends were $3.4 million, $4.3 million, and $6.9 million for the years ended
December 31, 2011, 2010, and 2009, respectively. Policyholder dividends fluctuate from time to time due
to changes in premium levels on dividend policies and the eligibility of policyholders to receive dividend
payments.
Interest Expense
We incur interest expenses on notes payable. We also had an interest rate swap agreement on our
credit facility with Wells Fargo Bank, National Association (Wells Fargo), which expired on September
30, 2010.
Interest expense was $3.6 million, $5.7 million, and $7.4 million for the years ended December 31,
2011, 2010, and 2009, respectively. The decrease in interest expense from 2010 to 2011 was primarily
due to the expiration of the interest rate swap that was in place in 2010. The decrease in interest
expense from 2009 to 2010 was primarily due to a $50.0 million reduction in the principal balance on
our credit facility with Wells Fargo in the fourth quarter of 2009 and the expiration of the interest rate
swap in the third quarter of 2010.
Income Tax Expense
Income tax expense (benefit) was $(2.1) million, $3.5 million, and $9.3 million for the years ended
December 31, 2011, 2010, and 2009, respectively. The effective tax rates for the years ended December
31, 2011, 2010, and 2009 were (4.6)%, 5.3%, and 10.1%, respectively. The decreased tax expense from
2009 through 2011 is primarily due to increases in tax exempt income as a percentage of pre-tax net
income, which was 68.2%, 50.6%, and 36.8% for the years ended December 31, 2011, 2010, and 2009,
respectively.
The increases in tax exempt income as a percentage of pre-tax net income for the year ended
December 31, 2011, compared to the same period of 2010, and for the year ended December 31, 2010,
compared to the same period of 2009, were primarily due to decreases in pre-tax income of $21.0
million and $26.0 million, respectively.
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Liquidity and Capital Resources
Parent Company
Operating Cash and Cash Equivalents and Short-Term Investments. We are a holding company and
our ability to fund our operations is contingent upon our insurance subsidiaries and their ability to pay
dividends up to the holding company. Payment of dividends by our insurance subsidiaries is restricted
by state insurance laws, including laws establishing minimum solvency and liquidity thresholds. We
require cash to pay stockholder dividends, repurchase common stock, make interest and principal
payments on our outstanding debt obligations, fund our operating expenses, and support our growth
strategy.
During 2011, EICN and EPIC paid dividends of $51.9 million and $15.5 million, respectively, to
Employers Group, Inc. (EGI), their immediate holding company, which were subsequently paid from
EGI to EHI.
Based on reported capital, surplus, and dividends paid within the last 12 months, the maximum
dividends that may be paid by EICN and EPIC in 2012 without prior approval by the respective state
insurance regulator are $26.3 million and $13.6 million, respectively.
As of December 31, 2011, the holding company had $188.4 million of cash and cash equivalents and
fixed maturity securities maturing within the next 24 months. Ten million dollars of our line of credit is
payable on each of December 31, 2012 and December 31, 2013. We believe that the liquidity needs of
the holding company over the next 24 months will be met with cash, maturing investments, and
dividends from our insurance subsidiaries.
Share Repurchases. In November 2010,
the EHI Board of Directors (Board of Directors)
authorized a share repurchase program of up to $100 million of the Company’s common stock from
November 8, 2010 through June 30, 2012 (the 2011 Program). In November 2011, the Board of
Directors authorized a $100 million expansion of the 2011 Program, to $200 million, and extended the
repurchase authority pursuant to the 2011 Program through June 30, 2013. Repurchases under the 2011
Program may be commenced or suspended from time-to-time without prior notice, and the 2011
Program may be suspended or discontinued at any time. From inception of the 2011 Program through
December 31, 2011, we repurchased a total of 7,004,790 shares of common stock under the 2011
Program at an average price of $15.28 per share, including commissions, for a total of $107.0 million.
Outstanding Debt. In December 2010, we entered into the Third Amended and Restated Credit
Agreement with Wells Fargo (Amended Credit Facility) under which we were provided with: (a) $100.0
million line of credit through December 31, 2011; (b) $90.0 million line of credit from January 1, 2012
through December 31, 2012; (c) $80.0 million line of credit from January 1, 2013 through December 31,
2013; (d) $70 million line of credit from January 1, 2014 through December 31, 2014; and (e) $60 million
line of credit from January 1, 2015 through December 31, 2015. Amounts outstanding bear interest at a
rate equal to, at our option: (a) a fluctuating rate of 1.75% above prime rate or (b) a fixed rate that is
1.75% above the LIBOR rate then in effect. The Amended Credit Facility is secured by fixed maturity
securities and restricted cash and cash equivalents that had a fair value of $126.7 million and $131.0
million at December 31, 2011 and 2010, respectively. The Amended Credit Facility contains customary
non-financial covenants and requires us to maintain $5.0 million of cash and cash equivalents at all
times at the holding company. We are currently in compliance with all applicable covenants. In
accordance with the terms of the contract, we repaid $10.0 million of the line of credit provided by the
Amended Credit Facility on December 31, 2011.
Our total outstanding debt was $122.0 million and $132.0 million as of December 31, 2011 and
2010, respectively. Interest and fees on debt obligations and an interest rate swap totaled $3.6 million
and $5.7 million in 2011 and 2010, respectively.
Our capital structure is comprised of outstanding debt and stockholders’ equity. As of December
31, 2011, our capital structure consisted of a $90.0 million principal balance on our Amended Credit
Facility, $32.0 million in surplus notes maturing in 2034, and $827.4 million of stockholders’ equity,
including the Deferred Gain. Outstanding debt was 12.9% of total capitalization, including the Deferred
Gain, as of December 31, 2011.
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28494
Operating Subsidiaries
Operating Cash and Cash Equivalents and Short-Term Investments. The primary sources of cash for
our insurance operating subsidiaries are funds generated from underwriting operations, investment
income, and maturities and sales of investments. The primary uses of cash are payments of claims and
operating expenses, purchases of investments, and payments of dividends to the parent holding
company, which are subject to state insurance laws and regulations.
Our insurance subsidiaries had total cash and cash equivalents and fixed maturity securities of
$305.1 million maturing within the next 24 months at December 31, 2011. We believe that our
subsidiaries’ liquidity needs over the next 24 months will be met with cash from operations, investment
income, and maturing investments.
We purchase reinsurance to protect us against the costs of severe claims and catastrophic events.
On July 1, 2011, we entered into a new reinsurance program that is effective through June 30, 2012. The
reinsurance program consists of one treaty covering excess of loss and catastrophic loss events in five
layers of coverage. Our reinsurance coverage is $195.0 million in excess of our $5.0 million retention on
a per occurrence basis, subject to a $2.0 million annual aggregate deductible and certain exclusions. We
believe that our reinsurance program meets our needs and that we are sufficiently capitalized.
Our insurance subsidiaries are required by law to maintain a certain minimum level of surplus on a
statutory basis. Surplus is calculated by subtracting total liabilities from total admitted assets. The
amount of capital in our insurance subsidiaries is maintained relative to standardized capital adequacy
measures such as risk-based capital (RBC), as established by the National Association of Insurance
Commissioners. The RBC standard was designed to provide a measure by which regulators can assess
the adequacy of an insurance company’s capital and surplus relative to its operations. An insurance
company must maintain capital and surplus of at least 200% of RBC. Each of our insurance subsidiaries
had total adjusted capital in excess of the minimum RBC requirements that correspond to any level of
regulatory action at December 31, 2011.
Various state regulations require us to keep securities or letters of credit on deposit with the states
in which we do business. Securities having a fair market value of $522.6 million and $558.6 million were
on deposit at December 31, 2011 and 2010, respectively. These laws and regulations govern both the
amount and type of fixed maturity security that is eligible for deposit. Additionally, certain reinsurance
contracts require us to hold funds in trust for the benefit of the ceding reinsurer to secure the
outstanding liabilities we assumed. The fair value of securities held in trust for reinsurance was $40.3
million and $52.9 million at December 31, 2011 and 2010, respectively.
Cash Flows
We monitor cash flows at both the consolidated and subsidiary levels. 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.
2011
Years Ended December 31,
2010
(in thousands)
2009
Cash and cash equivalents provided by (used in):
Operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase (decrease) in cash and cash equivalents . . . . . . . . . . . . .
$ 43,215
199,159
(109,899)
$ 132,475
$ 56,981
(51,327)
(74,662)
$(69,008)
$ 40,751
85,992
(135,339)
(8,596)
$
Operating Activities. Major components of net cash provided by operating activities in 2011
included: net premiums received of $358.4 million; investment income received of $90.8 million; and
amounts recovered from reinsurers of $46.1 million. These were partially offset by: claims payments of
$316.4 million; underwriting and other operating expenses paid of $86.1 million; commissions paid of
$36.3 million; premium taxes paid of $7.6 million; and policyholder dividends paid of $4.8 million.
42
93376
Major components of net cash provided by operating activities in 2010 were net premiums received
of $321.3 million and investment income received of $89.2 million, partially offset by claims payments of
$263.2 (net of reinsurance recoverables), underwriting and other operating expenses paid of $91.5
million, and federal income taxes paid of $1.2 million.
Major components of net cash provided by operating activities in 2009 were net premiums received
of $398.0 million and investment income received of $96.0 million, partially offset by claims payments of
$284.6 million (net of reinsurance recoverables), underwriting and other operating expenses paid of
$177.3 million, and federal income taxes paid of $8.7 million.
Investing Activities. The major sources of net cash provided by investing activities in 2011 were the
sale of certain fixed maturity securities and from maturities and redemptions of other investments
during the year. In 2010, net cash used in investing activities was primarily related to the reinvestment
of funds from maturities and redemptions. Net cash provided by investing activities in 2009 was
primarily due to maturities and redemptions of investments during the year.
Financing Activities. The majority of cash used in financing activities in 2011 and 2010 was to
repurchase $92.0 million and $63.6 million of our common stock, respectively, and to pay dividends to
stockholders. Additionally, cash was used to pay down $10 million on the line of credit provided by the
Amended Credit Facility in 2011. In 2009, the majority of cash used in financing activities was to
repurchase $74.2 million of our common stock and to pay down $50 million of the line of credit
provided by the Amended Credit Facility.
Investments
The amortized cost of our investment portfolio was $1.77 billion and the fair value was $1.95 billion
as of December 31, 2011.
We employ an investment strategy that emphasizes asset quality and considers the durations of
fixed maturity securities against anticipated claim payments and expenditures, other liabilities, and
capital needs. Our investment portfolio is structured so that investments mature periodically in
reasonable relation to current expectations of future claim payments. Currently, we make claim
payments from positive cash flow from operations and use excess cash to invest in operations, invest in
marketable securities, return capital to our stockholders, and fund our growth strategy.
As of December 31, 2011, our investment portfolio, which is classified as available-for-sale,
consisted of 95.0% fixed maturity securities whose fair values may fluctuate due to interest rate
changes. We strive to limit interest rate risk by managing the duration of our fixed maturity securities.
Our fixed maturity securities (excluding cash and cash equivalents) had a duration of 4.2 at December
31, 2011. 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 shall be “AA.” During the third quarter of 2011, U.S. Treasuries, U.S. Agencies, and
U.S. Agency backed securities were downgraded to “AA+” by Standard & Poor’s (S&P), from “AAA.”
The percentage of our fixed maturity portfolio that was rated “AAA” declined by 26.9 percentage
points, to 10.8%, year-over-year as of December 31, 2011 primarily due to this downgrade; however,
our fixed maturity securities portfolio continued to have a weighted average quality of “AA” as of
December 31, 2011, with 70.5% of the market value rated “AA” or better.
We carry our portfolio of equity securities on our balance sheet at fair value. 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. Equity securities
represented 5.0% of our investment portfolio at December 31, 2011.
Given the economic uncertainty and continued market volatility, we believe that our asset
allocation best meets our strategy to preserve capital for policyholders, to provide sufficient income to
support insurance operations, and to effectively grow book value over a long-term investment horizon.
We seek to maximize total
investment returns within the constraints of prudent portfolio
management. The asset allocation is reevaluated by the Finance Committee of the Board of Directors
on a quarterly basis. We employ Conning Asset Management (Conning) to act as our independent
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06545
investment manager. Conning follows our written investment guidelines based upon strategies approved
by the Board of Directors. In addition to the construction and management of the portfolio, we utilize
the investment advisory services of Conning. These services include investment accounting and
company modeling using Dynamic Financial Analysis (DFA). The DFA tool is utilized to develop
portfolio targets and objectives, which in turn are used in constructing an optimal portfolio.
The following table shows the estimated fair value, the percentage of the fair value to total invested
assets, and the average tax equivalent yield based on the fair value of each category of invested assets as
of December 31, 2011.
Category
Estimated
Fair Value
Percentage of Total
Yield
(in thousands, except percentages)
U.S. Treasuries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. Agencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
States and municipalities . . . . . . . . . . . . . . . . . . . . . . . .
Corporate securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential mortgaged-backed securities. . . . . . . . .
Commercial mortgaged-backed securities. . . . . . . .
Asset-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average yield . . . . . . . . . . . . . . . . . . . . . . . . .
$ 137,365
108,448
789,636
501,669
281,511
21,665
12,405
98,046
$1,950,745
7.0%
5.7
40.5
25.7
14.4
1.1
0.6
5.0
100.0%
3.2%
3.4
5.9
4.7
4.8
5.0
4.0
4.7
5.0%
The following table shows the percentage of total estimated fair value of our fixed maturity
securities as of December 31, 2011 by credit rating category, using the lower of ratings assigned by
Moody’s Investor Service and/or S&P.
Rating
Percentage of Total
Estimated Fair Value
“AAA” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
“AA” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
“A” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
“BBB” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Below Investment Grade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10.8%
59.7
18.7
10.7
0.1
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100.0%
Investments that we currently own could be subject to default by the issuer or could suffer declines
in fair value that become other-than-temporary. We regularly assess individual securities as part of our
ongoing portfolio management, including the identification of other-than-temporary declines in fair
value. Our other-than-temporary assessment includes reviewing the extent and duration of declines in
fair value of investments below amortized cost, historical and projected financial performance and near-
term prospects of the issuer, the outlook for industry sectors, credit rating, and macro-economic
changes. We also make a determination as to whether it is not more likely than not that we will be
required to sell the security before its fair value recovers above cost, or to maturity.
Based on our review of fixed maturity and equity securities, we believe that we appropriately
identified the declines in the fair values of our unrealized losses at December 31, 2011 and 2010. We
determined that the unrealized losses on fixed maturity securities were primarily the result of prevailing
interest rates and not the credit quality of the issuers. The fixed maturity securities whose fair value was
less than amortized cost were not determined to be other-than-temporarily impaired given the severity
and duration of the impairment, the credit quality of the issuers, the Company’s intent on not selling the
securities, and a determination that it is not more likely than not that the Company will be required to
sell the securities until fair value recovers to above cost, or to maturity.
Based on reviews of the equity securities as of December 31, 2011, the Company recognized total
impairments of $0.1 million in the fair values of four equity securities as a result of the severity and
duration of the change in fair values of those securities. We also determined that the unrealized losses
44
25348
on equity securities at December 31, 2010 were not considered to be other-than-temporary due to the
financial condition and the near term prospects of the issuers.
The cost or amortized cost, gross unrealized gains, gross unrealized losses, and estimated fair value
of our investments were as follows:
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(in thousands)
Estimated
Fair Value
At December 31, 2011
Fixed maturity securities
U.S. Treasuries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. Agencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
States and municipalities . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential mortgage-backed securities . . . . . . . . . . .
Commercial mortgage-backed securities . . . . . . . . . .
Asset-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total fixed maturity securities . . . . . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 122,144
101,520
719,431
467,470
262,961
20,756
11,934
1,706,216
64,962
$ 15,222
6,942
70,391
35,745
19,154
910
471
148,835
34,639
$
(1)
(14)
(186)
(1,546)
(604)
(1)
—
(2,352)
(1,555)
$ 137,365
108,448
789,636
501,669
281,511
21,665
12,405
1,852,699
98,046
$1,771,178
$183,474
$(3,907)
$1,950,745
At December 31, 2010
Fixed maturity securities
U.S. Treasuries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. Agencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
States and municipalities . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential mortgage-backed securities . . . . . . . . . . .
Commercial mortgage-backed securities . . . . . . . . . .
Asset-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total fixed maturity securities . . . . . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 135,265
116,747
927,668
453,851
230,518
23,877
13,852
1,901,778
49,281
$1,951,059
$
9,619
7,142
43,054
28,655
16,926
1,201
727
107,324
30,967
$138,291
$ (159)
(87)
(4,720)
(3,082)
(688)
(1)
(1)
(8,738)
(118)
$(8,856)
$ 144,725
123,802
966,002
479,424
246,756
25,077
14,578
2,000,364
80,130
$2,080,494
The amortized cost and estimated fair value of fixed maturity securities at December 31, 2011, 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.
Due in one year or less . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due after one year through five years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due after five years through ten years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due after ten years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage and asset-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortized Cost
Estimated
Fair Value
(in thousands)
$ 114,877
535,800
554,960
204,928
295,651
$ 116,654
573,508
617,280
229,676
315,581
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,706,216
$1,852,699
45
Net realized and unrealized investment gains (losses) on fixed maturity and equity securities were
90389
as follows:
Net realized gains (losses):
Fixed maturity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term investments and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in unrealized gains (losses):
Fixed maturity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net investment income was as follows:
Fixed maturity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term investments and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011
December 31,
2010
(in thousands)
2009
$19,315
846
—
$20,161
$47,897
2,235
—
$50,132
$
710
9,427
—
$10,137
$ (855)
1,820
(174)
791
$
$ (2,632) $62,054
13,820
(72)
$ (1,115) $75,802
1,517
—
December 31,
2010
(in thousands)
$83,730
1,399
327
2011
$79,600
1,885
1,040
2009
$89,522
1,402
1,910
Investment expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
82,525
(2,408)
$80,117
85,456
(2,424)
$83,032
92,834
(2,350)
$90,484
Contractual Obligations and Commitments
The following table identifies our long-term debt and contractual obligations as of December 31,
2011.
Operating leases . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchased liabilities . . . . . . . . . . . . . . . . . . . . . .
Notes payable(1) . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital leases. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Losses and LAE reserves(2)(3) . . . . . . . . . . . . .
Total contractual obligations. . . . . . . . . . . . . .
Payment Due By Period
Total
Less Than
1-Year
$
30,714
84
160,641
1,126
2,272,363
$
7,145
84
12,918
1,019
254,333
1-3 Years
(in thousands)
$ 13,199
—
25,359
107
317,565
4-5 Years
More Than
5-Years
$
7,885
—
63,948
—
217,919
$
2,485
—
58,416
—
1,482,546
$2,464,928
$275,499
$356,230
$289,752
$1,543,447
(1) Notes payable obligations reflect payments for the principal and estimated interest expense based on LIBOR rates plus a
margin. The estimated interest expense was based on the contractual obligations of the debt outstanding as of December 31,
2011. The interest rates range from 1.55% to 4.76%.
(2) The 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
Reinsurance recoverables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(940,840)
$(44,590)
Total
Less Than
1 Year
1-3 Years
(in thousands)
$(87,284)
4-5 Years
More Than
5 Years
$(84,360)
$(724,606)
(3) 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. For a discussion of our reserving process, see “—Critical Accounting Policies—
Reserves for Losses and LAE.” Actual payments of losses and LAE by period will vary, perhaps materially, from the above
46
70448
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.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Critical Accounting Policies
The preparation of financial statements in accordance with GAAP requires both the use of
estimates and judgment relative to the application of appropriate accounting policies. Our accounting
policies are described in the Notes to our Consolidated Financial Statements, but we believe that the
following matters are particularly important to an understanding of our financial statements because
changes in these estimates or changes in the assumptions used to make them could have a material
impact on our results of operations, financial condition, and cash flows.
Reserves for Losses and LAE
Accounting for workers’ compensation insurance requires us to estimate the liability for the
expected ultimate cost of unpaid losses and LAE (loss reserves) as of a balance sheet date. Loss reserve
estimates are inherently uncertain because the ultimate amount we pay for many of the claims we have
incurred as of the balance sheet date will not be known for many years. Our estimate of loss reserves is
intended to equal the difference between the expected ultimate losses and LAE of all claims that have
occurred as of a balance sheet date and amounts already paid. We establish loss reserves based on our
own analysis of emerging claims experience and environmental conditions in our markets and review of
the results of various actuarial projections. Our aggregate carried reserve for unpaid losses and LAE is
the sum of our reserves for each accident year (point estimate) and represents our best estimate of
outstanding loss reserves.
The amount by which estimated losses in the aggregate differ from those previously estimated for a
specific time period is known as reserve “development.” Reserve development is unfavorable when
losses ultimately settle for more than the amount reserved or subsequent estimates indicate a basis for
reserve increases on open claims, causing the previously estimated loss reserves to be “deficient.”
Reserve development is favorable when estimates of ultimate losses indicate a decrease in established
reserves, causing the previously estimated loss reserves to be “redundant.” Development is reflected in
our operating results through an adjustment to incurred losses and LAE during the period in which it is
recognized.
Although claims for which reserves are established may not be paid for several years or more, we
do not discount loss reserves in our financial statements for the time value of money.
The three main components of our reserves for unpaid losses and LAE are case reserves, incurred
but not reported (IBNR) reserves, and LAE reserves.
When losses are reported to us, we establish, individually, estimates of the ultimate cost of the
claims (case reserves). These case reserves are continually monitored and revised in response to new
information and for amounts paid.
IBNR is an actuarial estimate of future payments on claims that have occurred but have not yet
been reported to us. In addition to this provision for late reported claims, we also estimate, and make a
provision for, the extent to which the case reserves on known claims may develop and for additional
payments on closed claims, known as “reopening.” IBNR reserves apply to the entire body of claims
arising from a specific time period, rather than a specific claim. Most of our IBNR reserves relate to
estimated future claim payments on recorded open claims.
LAE reserves are our estimate of the future expenses of investigating, administering, and settling
claims, including legal expenses that will be paid to manage claims that have occurred. LAE reserves
are established in the aggregate, rather than on a claim-by-claim basis.
A portion of our obligations for losses and LAE are ceded to unaffiliated reinsurers. The amount
of reinsurance that will be recoverable on our losses and LAE reserves includes both the reinsurance
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recoverable from our excess of loss reinsurance policies, as well as reinsurance recoverable under the
terms of the LPT Agreement.
Our reserve for unpaid losses and LAE (gross and net of reinsurance),
including the main
components of such reserves, were as follows:
Case reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
IBNR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
LAE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 935,263
1,047,220
289,880
2011
2009
As of December 31,
2010
(in thousands)
$ 897,401
1,089,498
292,830
$ 915,378
1,198,019
312,261
Gross unpaid losses and LAE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less reinsurance recoverables on unpaid losses and LAE, gross
Net unpaid losses and LAE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,272,363
940,840
$1,331,523
2,279,729
956,043
$1,323,686
2,425,658
1,052,505
$1,373,153
We use actuarial methodologies to analyze and estimate the aggregate amount of unpaid losses and
LAE. Management considers the results of various actuarial projection methods and their underlying
assumptions, among other factors, in establishing reserves for unpaid losses and LAE.
Judgment is required in the actuarial estimation of loss reserves, including the selection of various
actuarial methodologies to project the following: the ultimate cost of claims; the selection of projection
parameters based on historical company data, industry data, and other benchmarks; the identification
and quantification of potential changes in parameters from historical levels to current and future levels
due to changes in future claims development expectations; and the weighting of differing reserve
indications resulting from alternative methods and assumptions. The adequacy of our ultimate loss
reserves is inherently uncertain and represents a significant risk to our business. We attempt to mitigate
this risk through our claims management process and by monitoring and reacting to statistics relating to
the cost and duration of claims.
We retain an independent actuarial consulting firm (Consulting Actuary) to perform comprehen-
sive studies of our liability for losses and LAE on a semi-annual basis. The role of the Consulting
Actuary is to conduct sufficient analyses to produce a range of reasonable estimates, as well as a point
estimate, of our liability for unpaid losses and LAE, and to present those results to our actuarial staff
and to management.
In 2009, we changed our Consulting Actuary. Prior to this change, the Consulting Actuary based its
point estimate for EICN strictly on the basis of paid loss development methods. Beginning in 2009, our
new Consulting Actuary determined its point estimate for EICN based on a combination of
methodologies, similar to those utilized for our other insurance subsidiaries, as described below. While
such a determination, based on a combination of methodologies is valid, this change in methodologies
prevents direct year-over-year comparison of the Consulting Actuaries’ point estimates. The new
Consulting Actuary has provided us with a separate calculation for EICN that is based strictly on the
historically utilized paid loss methods. This calculation in combination with the new Consulting
Actuary’s point estimate for our other insurance subsidiaries allows for comparability of our overall
carried reserves, relative to the previous Consulting Actuary’s calculations. Management believes that
using strictly paid loss methods for Nevada losses is the preferred approach given our depth of
knowledge of Nevada losses and the consistency of paid data over time resulting from and related to the
statutory prohibition of entering into full and final settlements of Nevada claims.
We compile and aggregate our claims data by grouping the claims according to the year or quarter
in which the claim occurred (“accident year” or “accident quarter”) when analyzing claim payment and
emergence patterns and trends over time. Additionally, claims data is aggregated and compiled
separately for different types of claims or claimant benefits, or for different states or groups of states in
which we do business, or both.
Our internal actuaries and the Consulting Actuary prepare reserve estimates for all accident years
using our own historical claims data and many of the generally accepted actuarial methodologies for
estimating loss reserves, such as paid loss development methods, incurred loss development methods,
to different
and Bornhuetter-Ferguson methods. These methods vary in their
responsiveness
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information, characteristics and dynamics in the data, and the results assist the actuary in considering
these characteristics and dynamics in the historical data. The methods employed for each segment of
claims data, and the relative weight accorded to each method, vary depending on the nature of the
claims segment and on the age of the claims.
Each actuarial methodology requires the selection and application of various parameters and
assumptions. The key parameters and assumptions include: the pattern with which our aggregate claims
data will be paid or will emerge over time; claims cost inflation rates; the effects of legislative benefit
changes and/or judicial changes; and trends in the frequency of claims, both overall and by severity of
claim. We believe the pattern with which our aggregate claims data will be paid or emerge over time
and claims cost inflation rates are the most important parameters and assumptions.
In Nevada, one method involves adjusting historical data for inflation. The inflation rates used in
the analysis are judgmentally selected based on historical year-to-year movements in the cost of claims
observed in our insurance subsidiaries’ data and industry-wide data, as well as on broader inflation
indices. The results of this method would differ if different inflation rates were selected.
In projections using December 31, 2011 data, the method that uses explicit medical cost inflation
assumptions included medical cost inflation assumptions ranging from 4.5% to 6.5%. The selection of
medical cost inflation assumptions used has been based on observed recent and longer-term historical
medical cost inflation in our claims data and in the U.S. economy more generally. The rate of medical
cost inflation, as reflected in our historical medical payments per claim, has averaged approximately
4.5% over the past ten years. The rate of medical cost inflation in the general U.S. economy, as
measured by the consumer price index-medical care, has averaged approximately 3.9% over the past
ten years.
Management along with internal actuarial staff and the Consulting Actuary separately analyze
LAE and estimate unpaid LAE. These analyses rely primarily on examining the relationship between
the aggregate amounts that have been spent on LAE historically, compared with the volume of claims
activity for the corresponding historical calendar periods. The portion of unpaid LAE that will be
recoverable from reinsurers is estimated based on the contractual reinsurance terms.
The range of estimates of loss reserves produced by the Consulting Actuary is intended to
represent the range in which it is most likely that the ultimate losses will fall. This range is narrower
than the range of indications produced by the individual methods applied because it is not likely that
the high or low result will emerge for every claim segment and accident year. The Consulting Actuary’s
point estimate of loss reserves is based on a judgmental selection for each claim segment from within
the range of results indicated by the different actuarial methods.
Management formally establishes loss reserves for financial statement purposes on a quarterly
basis. In doing so, we make reference to the most current analyses of our Consulting Actuary, including
a review of the assumptions and the results of the various actuarial methods used. Comprehensive
studies are conducted as of June 30 and December 31 by both internal actuarial staff and the Consulting
Actuary. On the alternate quarters, the results of the preceding quarter’s studies are updated for actual
claim payment activity by internal actuarial staff.
The aggregate carried reserve calculated by management represents our best estimate of our
outstanding unpaid losses and LAE. We believe that we should be conservative in our reserving
practices due to the “long-tail” nature of workers’ compensation claims payouts, the susceptibility of
those future payments to unpredictable external forces such as medical cost inflation and other
economic conditions, and the actual variability of loss reserve adequacy that we have observed in the
workers’ compensation insurance industry.
In establishing management’s best estimate of unpaid losses and LAE at December 31 for the last
three years, management and internal actuarial staff reviewed and considered the following: (a) the
Consulting Actuary’s assumptions, point estimate, and range; (b) the inherent uncertainty of workers’
compensation liabilities for unpaid losses and LAE; and (c) the potential for legislative and/or judicial
reversal of California workers’ compensation reforms. Management did not quantify a specific loss
reserve increment for each uncertainty, but rather established an overall provision for loss reserves that
represented management’s best estimate of unpaid losses and LAE in light of the historical data,
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actuarial assumptions, point estimate and range, and current facts and circumstances. Management
continued to use a range and point estimate for EICN based on paid loss methods, which our
experience in Nevada indicates is more appropriate.
Management’s best estimate of unpaid losses and LAE, net of reinsurance, was $8.4 million, $13.8
million, and $54.6 million above the value calculated based on the historically utilized paid loss methods
for EICN and a combination of methodologies for our other insurance subsidiaries at December 31,
2011, 2010, and 2009, respectively.
The table below provides the actuarial range of estimated liabilities for net unpaid losses and LAE
and our carried reserves.
Low end of actuarial range . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Carried reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
High end of actuarial range . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,227,199
1,331,523
1,471,971
2011
2009
As of December 31,
2010
(in thousands)
$1,244,038
1,323,686
1,499,042
$1,234,222
1,373,153
1,523,983
The following table reconciles the changes in loss reserves.
Unpaid losses and LAE, gross of reinsurance, at beginning of
period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less reinsurance recoverable, excluding bad debt allowance, on
unpaid losses and LAE unpaid losses and LAE . . . . . . . . . . . . . .
Net unpaid losses and LAE at beginning of period . . . . . . . . . . . . .
Losses and LAE, net of reinsurance, incurred in:
Current year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total net losses and LAE incurred during the period. . . . . . . . . . .
Deduct payments for losses and LAE, net of reinsurance,
related to:
Current year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total net payments for losses and LAE during the period. . . . . .
Ending unpaid losses and LAE, net of reinsurance . . . . . . . . . . . . .
Reinsurance recoverable, excluding bad debt allowance, on
unpaid losses and LAE unpaid losses and LAE . . . . . . . . . . . . . .
2011
As of December 31,
2010
(in thousands)
2009
$2,279,729
$2,425,658
$2,506,478
956,043
1,323,686
1,052,505
1,373,153
1,076,350
1,430,128
280,683
1,127
281,810
55,405
218,568
273,973
227,143
(14,130)
213,013
283,827
(51,359)
232,468
55,827
206,653
262,480
74,944
214,499
289,443
1,331,523
1,323,686
1,373,153
940,840
956,043
1,052,505
Unpaid losses and LAE, gross of reinsurance, at end of period
$2,272,363
$2,279,729
$2,425,658
Total net losses and LAE included in the above table excludes the impact of the amortization of
the Deferred Gain.
The increase in the estimate of incurred losses and LAE attributable to insured events of prior
years in 2011 was related to the Company’s assigned risk business, while the decreases in 2010 and 2009
were due to favorable development in those prior accident years. The sources of favorable development
include actual paid losses that were less than expected and the impact of new information on selected
patterns of claims emergence and payment used in the projection of future loss payments. New
information includes our own data regarding patterns of claims emergence, development and payment
that have been observed in the most recent periods, and external information regarding the workers’
compensation environments in the states in which we operate.
As of December 31, 2011, California and Nevada represented approximately 78% of our reserves
for unpaid losses and LAE on our consolidated balance sheet.
In California, where our operations began in 2002, the actuaries and management’s initial
expectations of ultimate losses and patterns of loss emergence and payment were based on benchmarks
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derived from analyses of historical insurance industry data in California. No historical data from our
California insurance subsidiary existed prior to July 1, 2002; however, some historical data was available
for the prior years for some of the market segments we entered in California, but was limited as to the
number of loss reserve evaluation points available. The industry-based benchmarks were judgmentally
adjusted for the anticipated impact of significant environmental changes, specifically the enactment of
major changes to the statutory workers’ compensation benefit structure and the manner in which claims
are administered and adjudicated in California. The actual emergence and payment of claims by our
California insurance subsidiary has been more favorable than those initial expectations through 2009,
due at least in part to the impact of enactment of the major changes in the California workers’
compensation environment; however, our recent loss experience, beginning in 2010, indicates an upward
trend in medical costs that is reflected in our loss reserves. We assume that increasing medical cost
trends will continue and will impact our long-term claims costs and loss reserves.
In Nevada, we have compiled a lengthy history of workers’ compensation claims payment patterns
based on the business of the Nevada State Industrial Insurance System (the Fund) and EICN, but the
emergence and payment of claims in recent years has been more favorable than in the long-term history
in Nevada with the Fund. The expected patterns of claim payments and emergence used in the
projection of our ultimate claim payments are based on both long and short-term historical data. In
recent evaluations, claim patterns have continued to emerge in a manner consistent with short-term
historical data. Consequently, our selection of claim projection patterns has relied more heavily on
patterns observed in recent years.
Our
insurance subsidiaries have been operating in a period characterized by changing
environmental conditions in our major markets, entry into new markets, and operational changes.
During periods characterized by such changes, at each evaluation, the actuaries and management must
make judgments as to the relative weight to accord to long-term historical and recent company data,
external data, evaluations of environmental and operational changes, and other factors in selecting the
methods to use in projecting ultimate losses and LAE, the parameters to incorporate in those methods,
and the relative weights to accord to the different projection indications. At each evaluation,
management has given weight to new data, recent indications, and evaluations of environmental
conditions and changes that implicitly reflect management’s expectation as to the degree to which the
future will resemble the most recent information and most recent changes, compared with long-term
claim payment, claims emergence, and claim cost inflation patterns.
More than 59% of our claims payments during the three years ended December 31, 2011 related to
medical care for injured workers. The utilization and cost of medical services in the future is a
significant source of uncertainty in the establishment of loss reserves for workers’ compensation. Our
loss reserves are established based on reviewing the results of actuarial methods, some of which do not
contain explicit medical claim cost inflation rates, however, because medical care may be provided to an
injured worker over many years, and in some cases decades, the pace of medical claim cost inflation has
a significant impact on our ultimate claim payments. For example, if the rate of medical claim cost
inflation increases by 1% above the inflation rate that is implicitly included in the loss reserves at
December 31, 2011, we estimate that future medical costs over the lifetime of current claims would
increase by approximately $81 million on a net-of-reinsurance basis.
The range of estimates of unpaid losses and LAE produced by our actuarial reviews of medical cost
inflation data provide some indication of the potential variability of future losses and LAE payments;
however, the full range of potential variation is difficult to estimate because our insurance subsidiaries
do not have a lengthy operating history in many of the states in which we now operate.
Our reserve estimates reflect expected increases in the costs of contested claims, but do not assume
any losses resulting from significant new legal liability theories. Our reserve estimates also assume that
there will not be significant future changes in the regulatory and legislative environment. In the event of
significant new legal liability theories or new regulation or legislation, we will attempt to quantify its
impact on our business.
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If the actual unpaid losses and LAE were at the high or the low end of the actuarial range, the
impact on our financial results would have been as follows:
2011
December 31,
2010
(in thousands)
2009
Increase (decrease) in reserves
At low end of range . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
At high end of range . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(104,324) $ (79,648) $(138,931)
150,830
175,356
140,448
Increase (decrease) in equity and net income, net of income tax
effect
At low end of range . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
At high end of range . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 67,811
(91,291)
$ 51,771
(113,981)
$ 90,305
(98,040)
Actual losses are affected by a more complex combination of forces and dynamics than any one
model or actuarial methodology can represent, and each methodology is an approximation of these
complex forces and dynamics. None of the methods are designed or intended to produce an indication
that is systematically higher or lower than the other methods. At any given evaluation date, some of the
actuarial projection methods produce indications outside the Consulting Actuary’s selected range.
Accordingly, we believe that the range of potential outcomes is considerably wider than the actuarially
estimated range of the most likely outcomes. We increased our prior years’ reserves for unpaid losses
and LAE by $1.1 million as of December 31, 2011, while we decreased our prior years’ reserves for
unpaid losses and LAE by $14.1 million and $51.4 million as of December 31, 2010 and 2009,
respectively, illustrating that changes in estimates of loss reserves can be significant from year-to-year.
We have no basis for anticipating whether actual future payments of losses and LAE may be either
greater than or less than the reserve for unpaid losses and LAE currently on our balance sheet.
Reinsurance Recoverables
Reinsurance recoverables represent: (a) amounts currently due from reinsurers on paid losses and
LAE; (b) amounts recoverable from reinsurers on case basis estimates of reported losses; and (c)
amounts recoverable from reinsurers on actuarial estimates of IBNR for losses and LAE. These
recoverables are based on our current estimates of the underlying losses and LAE, and are reported on
our consolidated balance sheets separately as assets, as reinsurance does not relieve us of our legal
liability to policyholders. We bear credit risk with respect to the reinsurers, which can be significant
considering that some of the unpaid losses and LAE remain outstanding for an extended period of time.
Reinsurers may refuse or fail to pay losses that we cede to them, or they might delay payment. We are
required to pay losses even if a reinsurer refuses or fails to meet its obligations under the applicable
reinsurance agreement. We continually monitor the financial condition and rating agency ratings of our
reinsurers. No material amounts due from reinsurers have been written-off as uncollectible since our
inception in 2000, and we believe that amounts currently reflected in our consolidated financial
statements will similarly not require any material prospective adjustment.
Under the LPT Agreement, the Fund initially ceded $1.5 billion in liabilities for the incurred but
unpaid losses and LAE related to claims incurred prior to July 1, 1995 for consideration of $775.0
million in cash. The estimated remaining liabilities subject to the LPT Agreement were $807.5 million
as of December 31, 2011. Losses and LAE paid with respect to the LPT Agreement totaled $569.9
million at December 31, 2011. We account for the LPT Agreement as retroactive reinsurance. Entry
into the LPT Agreement resulted in a deferred reinsurance gain that was recorded on our consolidated
balance sheet as a liability. This deferred gain is being amortized using the recovery method, whereby
the amortization is determined by the proportion of actual reinsurance recoveries to total estimated
recoveries, and the amortization is reflected in losses and LAE. In addition, we are entitled to receive a
contingent commission under the LPT Agreement. The contingent profit is an amount based on the
favorable difference between actual paid losses and LAE and expected paid losses and LAE as
established in the LPT Agreement. The calculation of actual amounts paid versus expected amounts is
determined every five years beginning June 30, 2004 for the first twenty-five years of the agreement.
We are paid 30% of the favorable difference between the actual and expected losses and LAE paid at
each calculation point. Each quarter, management records its best estimate of the estimated ultimate
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contingent profit commission through June 30, 2024, which is impacted by estimates for ceded loss and
LAE reserves (see–Reserves for Losses and LAE). Changes in estimates of the reserves ceded under
the LPT Agreement may significantly impact the accrued contingent profit commission on our
consolidated balance sheet and commission expense in our consolidated statement of comprehensive
income. Any changes in the estimated contingent profit commission are reflected in commission
expense in the period that the estimate is revised.
Recognition of Premium Revenue
Premium revenue is recognized over the period of the contract in proportion to the amount of
insurance protection provided. At the end of the policy term, payroll-based premium audits are
performed on substantially all policyholder accounts to determine net premiums earned for the policy
year. Earned but unbilled premiums include estimated future audit premiums based on our historical
experience. These estimates are subject to changes in policyholders’ payrolls, economic conditions, and
seasonality, and are continually reviewed and adjusted as experience develops or new information
becomes known. Any such adjustments are included in current operations; however, they are partially
offset by the resulting changes in losses and LAE, commission expenses, and premium taxes. Although
considerable variability is inherent in such estimates, we believe that amounts currently reflected in our
consolidated financial statements will similarly not require any material prospective adjustment.
Income Taxes
Our accounting for income taxes considers the current and deferred tax consequences of all
transactions that have been recognized in our consolidated financial statements using the provisions of
enacted tax laws. Deferred tax assets and liabilities are determined based on differences between the
financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates
and laws that will be in effect when the differences are expected to reverse. The effect on deferred tax
assets and liabilities resulting from a tax rate change affects our net income or loss in the period that
includes the enactment date of the tax rate change. Our income tax returns are subject to audit by the
Internal Revenue Service and various state tax authorities. Significant disputes may arise with these tax
authorities involving issues of the timing and amount of deductions and allocations of income among
various tax jurisdictions because of differing interpretations of tax laws and regulations. We periodically
evaluate our exposures associated with tax filing positions. Although we believe our positions comply
with applicable laws, we record liabilities based upon estimates of the ultimate outcomes of these
matters.
In assessing whether our deferred tax assets will be realized, we consider whether it is more likely
than not that we will generate future taxable income during the periods in which those temporary
differences become deductible. We consider the scheduled reversal of deferred tax liabilities, tax
planning strategies, and projected future taxable income in making this assessment. If necessary, we
establish a valuation allowance to reduce the deferred tax assets to the amounts that are more likely
than not to be realized.
Valuation of Investments
Our investments in fixed maturity and equity securities are classified as available-for-sale and are
reported at fair value with unrealized gains and losses excluded from earnings and reported as a
separate component of equity, net of deferred taxes, in accumulated other comprehensive income, net.
investments are recognized in operations on a specific-
Realized gains and losses on sales of
identification basis.
Fair values of our available-for-sale fixed maturity and equity securities are based on quoted
market prices, where available. These fair values are obtained primarily from third party pricing
services, which generally use Level 1 or Level 2 inputs in accordance with FASB guidance. The
Company obtains a quoted price for each security from third party pricing services, which are derived
through recently reported trades for identical or similar securities. For securities not actively traded, the
third party pricing services may use quoted market prices of similar instruments or discounted cash flow
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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 speeds. The Company also performs
quarterly analysis on the prices received 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. If unusual fluctuations are noted in this
review, the Company may obtain additional information from other pricing services to validate the
quoted price.
Impairment of Investment Securities. When, in the opinion of management, a decline in the fair
value of an equity security below its cost is considered to be “other-than-temporary,” the equity
security’s cost is written down to its fair value at the time the other-than-temporary decline is identified.
The determination of an other-than-temporary decline for debt securities includes, in addition to other
relevant factors, a presumption that if the fair value is below cost by a significant amount for a period of
time, a bifurcation of the write-down may be necessary. If management has the intent to sell the debt
security or more likely than not will be required to sell the debt security before its anticipated recovery,
the investment is written down to its fair value and the entire impairment is recorded as a realized loss
due to credit in the accompanying consolidated statements of comprehensive income. If management
does not have the intent to sell or will not be required to sell the debt security but does not expect to
recover the amortized cost basis of the debt security, the amount of the other-than-temporary
impairment is bifurcated between credit loss and other loss and recorded as a component of realized
gains and losses and in other comprehensive income, respectively, in the consolidated statements of
comprehensive income. The amount of any write-down is determined by the difference between the
cost or amortized cost of the debt security and its fair value at the time the other-than-temporary
decline is identified.
Goodwill and Other Intangible Assets
We prepare a valuation analysis for goodwill and other intangible assets, whereby we identify
whether events have occurred that may impact the carrying value of these assets and make assumptions
regarding future events, such as cash flows and profitability. Differences between the assumptions used
to prepare these valuations and actual results could materially impact the carrying amount of these
assets and our operating results.
New Accounting Standards
Deferred Policy Acquisition Costs
In October 2010, the FASB issued Accounting Standards Update (ASU) Number 2010-26,
Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts, which is expected to
have a material impact on our consolidated financial condition and results of operations. This update
changes the definition of acquisition costs which may be capitalized to specify costs which relate directly
to the successful acquisition of new or renewal insurance contracts; adds to the definition the concept of
incremental costs; further restricts costs to be capitalized by identifying only those costs which may be
capitalized; and requires additional granularity in the disclosures related to the type of acquisition costs
capitalized during the period. This guidance became effective for interim and annual reporting periods
beginning after December 15, 2011. We expect to adopt this standard on a prospective basis and
currently estimate that adoption of ASU 2010-06 will increase our underwriting and other operating
expenses by approximately $7 million in 2012.
Other Recent Accounting Guidance
Prior to December 31, 2011, additional accounting guidance had been issued that we either
implemented during 2011 or will implement in future periods. None of this guidance had or is expected
to have a material effect on our consolidated financial condition or results of operations. See Note 3 in
the Notes to our Consolidated Financial Statements.
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Item 7A. 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 portfolio is 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 in our investment portfolio, as well as restrictions on
investments in fixed maturity securities of a single issuer.
We also bear credit risk with respect to the reinsurers, which can be significant considering that
some of the unpaid losses and LAE 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 under the applicable
reinsurance agreement. We continually monitor the financial condition and rating agency ratings of our
reinsurers.
Interest Rate Risk
Investments
The fair value of our fixed maturity securities portfolio is exposed to interest rate risk, the risk of
loss in fair value resulting from changes in prevailing interest rates, which we strive to limit by
managing duration. Our investments (excluding cash and cash equivalents) had a duration of 4.2 at
December 31, 2011. 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 impact of interest rate changes on our liquidity 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 rates or prices. Our sensitivity
analysis model uses a hypothetical change in market rates that 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 December 31, 2011. The estimated changes
in fair values on our fixed maturity securities including short-term investments, valued at $2.0 billion as
of December 31, 2011, based on specific changes in interest rates are as follows:
Changes in Interest Rates
300 basis point rise. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
200 basis point rise. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100 basis point rise. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
50 basis point decline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100 basis point decline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Estimated
Increase (Decrease)
in Fair Value
(in thousands, except percentages)
$(230,350)
(150,159)
(72,824)
33,081
58,445
(12.4)%
(8.1)
(3.9)
1.8
3.2
The most significant assessment of the effects of hypothetical changes in interest rates on
investment income would be based on FASB guidance related to “Accounting for Nonrefundable Fees
55
00338
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 residential mortgage-backed securities were purchased
at significant discounts or premiums to par value. As of December 31, 2011, the par value of our
mortgage-backed securities holdings was $261.7 million. Amortized cost is 100.5% 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; however,
given the current economic conditions and prevailing interest rate environment, the rate of prepayments
is unlikely to accelerate. The mortgage-backed securities portion of the portfolio totaled 14.4% of total
investments as of December 31, 2011. Agency-backed residential mortgage pass-throughs totaled $278.8
million, or 99.0%, of the residential mortgage-backed securities portion of the portfolio, and 14.3% of
the total portfolio as of December 31, 2011.
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 available-for-sale 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. We minimize our exposure to equity price risk by investing primarily in the equity securities of
industry
mid-to-large capitalization issuers and by diversifying our equity holdings across several
sectors.
The table below shows the sensitivity of our equity securities to price changes as of December 31,
2011:
Cost
Fair Value
10% Fair
Value
Decrease
Pre-tax
Impact on
Total Equity
Securities
(in thousands)
10% Fair
Value
Increase
Pre-tax
Impact on
Total Equity
Securities
Total domestic equities . . . .
$64,962
$98,046
$88,241
$(9,805)
$107,851
$9,805
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.
56
91510
Item 8. Financial Statements and Supplementary Data
Audited Financial Statements as of December 31, 2011 and 2010 and for each of the three years in
the period ended December 31, 2011:
Management’s Report on Internal Control Over Financial Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . .
Report of Independent Registered Public Accounting Firm on Internal Control over Financial
Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheets as of December 31, 2011 and 2010. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Page
58
59
60
61
Consolidated Statements of Comprehensive Income for each of the three years ended
December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
62
Consolidated Statements of Stockholders’ Equity for each of the three years ended
December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows for each of the three years ended December 31, 2011 .
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
63
64
65
The following financial statement schedules are filed in Item 15 of Part III of this report:
Financial Statement Schedules:
Schedule II. Condensed Financial Information of Registrant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
96
Schedule VI. Supplemental Information Concerning Property-Casualty Insurance Operations . . .
101
Pursuant to Rule 7-05 of Regulation S-X, Schedules I, III, IV and V have been omitted as the
information to be set forth therein is included in the notes to the audited consolidated
financial statements.
57
42755
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of Employers Holdings, Inc. and Subsidiaries (the Company) is responsible for
establishing and maintaining adequate internal control over financial reporting and for the assessment
of the effectiveness of internal control over financial reporting. As defined by the Securities and
Exchange Commission, internal control over financial reporting is a process designed by, or under the
supervision of, the Company’s principal executive officer and principal financial officer, and effected by
the Company’s Board of Directors, management and other personnel, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements in accordance
with U.S. generally accepted accounting principles (GAAP).
The Company’s internal control over financial reporting includes policies and procedures that: (a)
in reasonable detail, accurately and fairly reflect the
pertain to the maintenance of records that,
transactions and dispositions of
(b) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with GAAP, and that receipts and expenditures of the Company are being made only in accordance
with authorizations of its management and Board of Directors; and (c) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use or disposition of
the
Company’s assets that could have a material effect on the financial statements.
the Company’s assets;
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect all misstatements. Projections of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
Management conducted an assessment of the effectiveness of the Company’s internal control over
financial reporting as of December 31, 2011 based on criteria established in Internal Control–Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO Framework).
Based on this assessment, management did not identify any material weaknesses in the internal
control over financial reporting and management has concluded that the Company’s internal control
over financial reporting was effective as of December 31, 2011.
The Company’s independent registered public accounting firm, Ernst & Young LLP, has
independently assessed the effectiveness of the Company’s internal control over financial reporting.
A copy of their report is included in Item 8 of this Annual Report on Form 10-K.
March 1, 2012
58
99314
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL
CONTROL OVER FINANCIAL REPORTING
The Board of Directors and Stockholders
Employers Holdings, Inc. and Subsidiaries
We have audited Employers Holdings, Inc. and Subsidiaries’ (the Company) internal control over
financial reporting as of December 31, 2011, based on criteria established in Internal Control—
Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway
Commission (the COSO criteria). The Company’s management is responsible for maintaining effective
internal control over financial reporting, and for its assessment of the effectiveness of internal control
over financial reporting included in the accompanying Management’s Report on Internal Control over
Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was maintained
in all material respects. Our audit included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with U.S. generally accepted accounting principles. A company’s
internal control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only
in accordance with authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject
to the risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In our opinion, Employers Holdings, Inc. and Subsidiaries maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2011, based on the COSO criteria.
We also have audited,
in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Employers Holdings. Inc. and
Subsidiaries as of December 31, 2011 and 2010, and the related consolidated statements of
comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period
ended December 31, 2011 and our report dated March 1, 2012 expressed an unqualified opinion
thereon.
/s/ Ernst & Young LLP
Los Angeles, California
March 1, 2012
59
12829
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Employers Holdings, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Employers Holdings, Inc. and
Subsidiaries (the Company) as of December 31, 2011 and 2010, and the related consolidated statements
of comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period
ended December 31, 2011. Our audits also included the financial statement schedules listed in the Index
at Item 15(a). These financial statements and schedules are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these financial statements and schedules
based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the
consolidated financial position of Employers Holdings, Inc. and Subsidiaries at December 31, 2011 and
2010, and the consolidated results of their operations and their cash flows for each of the three years in
the period ended December 31, 2011, in conformity with U.S. generally accepted accounting principles.
Also, in our opinion, the related financial statement schedules, when considered in relation to the basic
financial statements taken as a whole, present fairly in all material respects the information set forth
therein.
We also have audited,
in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Employers Holdings, Inc. and Subsidiaries’ internal control over
financial reporting as of December 31, 2011, based on criteria established in Internal Control—
Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway
Commission and our report dated March 1, 2012 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Los Angeles, California
March 1, 2012
60
05861
Employers Holdings, Inc. and Subsidiaries
Consolidated Balance Sheets
As of December 31,
2011
2010
(in thousands, except share data)
Assets
Available for sale:
Fixed maturity securities at fair value (amortized cost $1,706,216 at
December 31, 2011 and $1,901,778 at December 31, 2010) . . . . . . . . . . . . . . . $1,852,699
Equity securities at fair value (amortized cost $64,962 at December 31,
2011 and $49,281 at December 31, 2010) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Premiums receivable, less bad debt allowance of $5,546 at December 31,
2011 and $7,603 at December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
98,046
1,950,745
252,300
6,299
19,537
160,443
Reinsurance recoverable for:
10,729
Paid losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
940,840
Unpaid losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,102
Funds held by or deposited with reinsureds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
37,524
Deferred policy acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,993
Federal income taxes recoverable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
22,140
Deferred income taxes, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11,360
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11,728
Intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
36,192
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
18,812
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,481,744
Liabilities and stockholders’ equity
Claims and policy liabilities:
Unpaid losses and loss adjustment expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,272,363
194,933
Unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,838
Policyholders’ dividends accrued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,471,134
Total claims and policy liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
28,905
Commissions and premium taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
16,446
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
353,194
Deferred reinsurance gain—LPT Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
122,000
Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
15,879
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,007,558
Commitments and contingencies (Note 11)
Stockholders’ equity:
Common stock, $0.01 par value; 150,000,000 shares authorized; 53,948,442
and 53,779,118 shares issued and 32,996,809 and 38,965,126 shares
outstanding at December 31, 2011 and 2010, respectively. . . . . . . . . . . . . . . . . $
Preferred stock, $0.01 par value; 25,000,000 shares authorized; none issued .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock, at cost (20,951,633 shares at December 31, 2011 and
540
—
318,989
358,693
116,719
(320,755)
14,813,992 shares at December 31, 2010) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
474,186
Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,481,744
$2,000,364
80,130
2,080,494
119,825
16,949
23,022
109,987
14,415
956,043
3,701
32,239
4,048
38,078
11,712
13,279
36,192
20,136
$3,480,120
$2,279,729
149,485
5,218
2,434,432
17,313
18,601
370,341
132,000
17,317
$2,990,004
$
538
—
314,212
319,341
84,133
(228,108)
490,116
$3,480,120
See accompanying notes.
61
69961
Employers Holdings, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
Years Ended December 31,
2010
(in thousands, except per share data)
2011
2009
Revenues
Net premiums earned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Realized gains on investments, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$363,424
80,117
20,161
452
$321,786
83,032
10,137
649
$404,247
90,484
791
413
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
464,154
415,604
495,935
Expenses
Losses and loss adjustment expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commission expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Policyholder dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Underwriting and other operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
264,663
45,502
3,423
100,717
3,642
417,947
194,779
38,468
4,316
106,026
5,693
349,282
214,461
36,150
6,930
138,687
7,409
403,637
Net income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
46,207
(2,106)
$ 48,313
66,322
3,523
$ 62,799
92,298
9,277
$ 83,021
Comprehensive income
Unrealized gains during the period (net of taxes of $24,602, $4,292,
and $26,759 for the years ended December 31, 2011, 2010, and
2009, respectively) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: reclassification adjustment for realized gains in net income
(net of taxes of $7,056, $3,548, and $277 for the years ended
December 31, 2011, 2010, and 2009, respectively) . . . . . . . . . . . . . . . . .
Other comprehensive income, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 45,691
$ 6,910
$ 51,522
13,105
32,586
6,589
321
514
51,008
Total comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 80,899
$ 63,120
$134,029
Earnings per common share (Note 17):
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends declared per common share . . . . . . . . . . . . . . . . . . . . .
$
$
$
1.30
1.29
0.24
$
$
$
1.52
1.51
0.24
$
$
$
1.81
1.80
0.24
Realized gains on investments, net
Net realized gains on investments before credit related impairments
on fixed maturity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other than temporary impairment, credit losses recognized in
earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Portion of impairment recognized in other comprehensive income . . .
Realized gains on investments, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 20,255
$ 10,182
$ 2,712
(94)
—
$ 20,161
(45)
—
$ 10,137
(1,921)
—
791
$
See accompanying notes.
62
Employers Holdings, Inc. and Subsidiaries
Consolidated Statements of Stockholders’ Equity
Common Stock
Shares
Amount
Additional
Paid In
Capital
Accumulated
Other
Comprehensive
Income, Net
(in thousands, except share data)
Retained
Earnings
13698
Treasury
Stock
at Cost
Total
Stockholders’
Equity
Balance, January 1, 2009 . . . . . . . . . . . . . . . . .
Stock-based compensation (Note 13) . . . . .
Vesting of restricted stock units, net of
shares withheld to satisfy minimum tax
withholding (Note 13) . . . . . . . . . . . . . . . . . .
Acquisition of treasury stock (Note 12). . .
Dividend to common stockholders . . . . . . . .
Net income for the period . . . . . . . . . . . . . . . .
Change in net unrealized gains on
investments, net of taxes . . . . . . . . . . . . . . .
53,528,207
—
$535
—
$306,032
5,366
$194,509
—
$ 32,804
—
$ (89,152)
—
$444,728
5,366
35,092
—
—
1
—
—
—
—
(124)
—
8
—
—
—
(11,039)
83,021
—
—
—
—
—
(74,570)
—
—
(123)
(74,570)
(11,031)
83,021
—
—
51,008
—
51,008
Balance, December 31, 2009 . . . . . . . . . . . . . .
53,563,299
$536
$311,282
$266,491
$ 83,812
$(163,722)
$498,399
Balance, January 1, 2010 . . . . . . . . . . . . . . . . .
Stock-based compensation (Note 13) . . . . .
Stock options exercised . . . . . . . . . . . . . . . . . . .
Vesting of restricted stock units, net of
shares withheld to satisfy minimum tax
withholding (Note 13) . . . . . . . . . . . . . . . . . .
Acquisition of treasury stock (Note 12). . .
Dividend to common stockholders . . . . . . . .
Net income for the period . . . . . . . . . . . . . . . .
Change in net unrealized gains on
investments, net of taxes . . . . . . . . . . . . . . .
53,563,299
—
7,783
$536
—
—
$311,282
4,053
94
$266,491
—
—
$ 83,812
—
—
$(163,722)
—
—
$498,399
4,053
94
208,036
—
—
2
—
—
—
—
(1,231)
—
14
—
—
—
(9,949)
62,799
—
—
—
—
—
(64,386)
—
—
(1,229)
(64,386)
(9,935)
62,799
—
—
321
—
321
Balance, December 31, 2010 . . . . . . . . . . . . . .
53,779,118
$538
$314,212
$319,341
$ 84,133
$(228,108)
$490,116
Balance, January 1, 2011 . . . . . . . . . . . . . . . . .
Stock-based compensation (Note 13) . . . . .
Stock options exercised . . . . . . . . . . . . . . . . . . .
Vesting of restricted stock units, net of
shares withheld to satisfy minimum tax
withholding (Note 13) . . . . . . . . . . . . . . . . . .
Acquisition of treasury stock (Note 12). . .
Dividend to common stockholders . . . . . . . .
Net income for the period . . . . . . . . . . . . . . . .
Change in net unrealized gains on
investments, net of taxes . . . . . . . . . . . . . . .
53,779,118
—
92,646
$538
—
1
$314,212
3,742
1,530
$319,341
—
—
$ 84,133
—
—
$(228,108)
—
—
$490,116
3,742
1,531
76,678
—
—
1
—
—
—
—
(513)
—
18
—
—
—
(8,961)
48,313
—
—
—
—
—
(92,647)
—
—
(512)
(92,647)
(8,943)
48,313
—
—
32,586
—
32,586
Balance, December 31, 2011 . . . . . . . . . . . . . .
53,948,442
$540
$318,989
$358,693
$116,719
$(320,755)
$474,186
See accompanying notes.
63
10190
Employers Holdings, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31,
2010
2011
2009
Operating activities
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of premium on investments, net . . . . . . . . . . . . . . . . . . . . .
Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income tax (benefit) expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Realized gains on investments, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Realized (gains) losses on retirement of assets . . . . . . . . . . . . . . . . . . . . .
Change in operating assets and liabilities:
Accrued investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Premiums receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reinsurance recoverable on paid and unpaid losses . . . . . . . . . . .
Funds held by or deposited with reinsureds . . . . . . . . . . . . . . . . . . .
Federal income taxes recoverable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unpaid losses and loss adjustment expenses . . . . . . . . . . . . . . . . . . .
Unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable, accrued expenses and other liabilities . . . . . .
Deferred reinsurance gain–LPT Agreement . . . . . . . . . . . . . . . . . . .
Restricted cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investing activities
Purchase of fixed maturity securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of fixed maturity securities . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from maturities and redemptions of investments . . . . . . . . . . . . . .
Proceeds from sale of fixed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash paid for acquisition, net of cash and cash equivalents acquired . . .
Capital expenditures and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted cash and cash equivalents provided by (used in) investing
activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by (used in) investing activities. . . . . . . . . . . . . . . . . . . . . .
Financing activities
Acquisition of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash transactions related to stock-based compensation . . . . . . . . . . . . . . . . .
Dividends paid to stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments on notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at the beginning of the period . . . . . . . . . . . . . .
Cash and cash equivalents at the end of the period . . . . . . . . . . . . . . . . . . . .
Cash paid (received) for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash paid for interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Schedule of non-cash transactions
Financed property and equipment purchases. . . . . . . . . . . . . . . . . . . . . . . . . . . .
(in thousands)
$ 48,313
$ 62,799
$ 83,021
6,388
3,742
7,242
(2,057)
(1,608)
(20,161)
(155)
3,485
(48,399)
18,889
2,599
2,055
(7,366)
45,448
(4,265)
(17,147)
—
6,212
43,215
(236,633)
(21,310)
317,365
6,476
126,902
396
—
(4,687)
7,098
4,053
6,105
(3,611)
4,680
(10,137)
420
33
12,265
95,720
78,638
44
(145,929)
(9,092)
(10,455)
(18,233)
(12,210)
(5,207)
56,981
(273,833)
(17,673)
102,659
17,753
123,672
—
—
(1,905)
9,899
5,366
5,047
1,968
10,991
(791)
69
1,146
28,558
22,895
5,824
6,950
(80,820)
(38,118)
(13,188)
(18,007)
—
9,941
40,751
(175,790)
(12,614)
85,541
20,634
170,278
—
(100)
(4,682)
10,650
199,159
(2,000)
(51,327)
2,725
85,992
(91,975)
1,019
(8,943)
(10,000)
(109,899)
132,475
119,825
$ 252,300
(63,592)
(1,135)
(9,935)
—
(74,662)
(69,008)
188,833
$ 119,825
$ (2,697) $
$
3,561
$
1,007
6,000
$
— $
2,009
(74,185)
(123)
(11,031)
(50,000)
(135,339)
(8,596)
197,429
$ 188,833
$
$
$
(8,581)
7,514
1,283
See accompanying notes.
64
74700
Employers Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2011
1. Basis of Presentation and Summary of Operations
Nature of Operations and Organization
Employers Holdings, Inc. (EHI) is a Nevada holding company. Through its wholly owned
insurance subsidiaries, Employers Insurance Company of Nevada (EICN), Employers Compensation
Insurance Company (ECIC), Employers Preferred Insurance Company (EPIC), and Employers
Assurance Company (EAC), EHI is engaged in the commercial property and casualty insurance
industry, specializing in workers’ compensation products and services. Unless otherwise indicated, all
references to the “Company” refer to EHI, together with its subsidiaries.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with U.S.
generally accepted accounting principles (GAAP). All intercompany transactions and balances have
been eliminated in consolidation.
The Company considers an operating segment to be any component of its business whose operating
results are regularly reviewed by the Company’s chief operating decision makers to make decisions
about resources to be allocated to the segment and assess its performance based on discrete financial
information. Currently, the Company has one operating segment, workers’ compensation insurance and
related services.
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, deferred income taxes, investments, and the
valuation of goodwill and intangible assets.
Reclassifications
Certain prior period information has been reclassified to conform to the current period
presentation.
2. Summary of Significant Accounting Policies
Cash and Cash Equivalents
The Company considers all highly liquid investments with an initial maturity of three months or
less at the date of purchase to be cash equivalents.
Restricted Cash and Cash Equivalents
Restricted cash and cash equivalents is primarily related to funds held in trust to secure the
Company’s line of credit and for Clarendon National Insurance Company (Clarendon). See Note 9.
65
83392
Investments
The Company’s investments in fixed maturity securities and equity securities are classified as
available-for-sale and are reported at fair value with unrealized gains and losses excluded from earnings
and reported as a separate component of equity, net of deferred taxes,
in accumulated other
comprehensive income, net.
Investment income consists primarily of interest and dividends. Interest is recognized on an accrual
basis, and dividends are recorded as earned at the ex-dividend date. Interest income on mortgage-
backed and asset-backed securities is determined using the effective-yield method based on estimated
principal repayments.
Realized capital gains and losses on investments are determined on a specific-identification basis.
When, in the opinion of management, a decline in the fair value of an equity security below its cost
is considered to be “other-than-temporary,” the equity security’s cost is written down to its fair value at
the time the other-than-temporary decline is identified. The determination of an other-than-temporary
decline for debt securities includes, in addition to other relevant factors, a presumption that if the
market value is below cost by a significant amount for a period of time, a bifurcation of the write-down
may be necessary. If management has the intent to sell the debt security or more likely than not will be
required to sell the debt security before its anticipated recovery, the investment is written down to its
fair value and the entire impairment is recorded as a realized loss due to credit in the accompanying
consolidated statements of comprehensive income. If management does not have the intent to sell or
will not be required to sell the debt security but does not expect to recover the amortized cost basis of
the debt security, the amount of the other-than-temporary impairment is bifurcated between credit loss
and other loss and recorded as a component of realized gains and losses and to other comprehensive
income, respectively, in the consolidated statements of comprehensive income. The amount of any
write-down is determined by the difference between the cost or amortized cost of the debt security and
its fair value at the time the other-than-temporary decline is identified (see Note 5).
Recognition of Revenue and Expense
Revenue Recognition
Premium revenue is recognized over the period of the contract in proportion to the amount of time
insurance protection is provided. At the end of the policy term, payroll-based premium audits are
performed on substantially all policyholder accounts to determine net premiums earned for the policy
year. Earned but unbilled premiums include estimated future audit premiums based on the Company’s
historical experience. These estimates are subject to changes in policyholders’ payrolls, economic
conditions, and seasonality, and are continually reviewed and adjusted as experience develops or new
information becomes known. Any such adjustments are included in current operations; however, they
are partially offset by the resulting changes in losses and LAE, commission expenses, and premium
taxes. At December 31, 2011, premiums receivable on the consolidated balance sheet included $6.9
million of additional premiums expected to be received from policyholders for final audits. At
December 31, 2010, premiums receivable are net of $4.0 million to be returned to policyholders for final
audits.
The Company establishes a bad debt allowance on its premiums receivable through a charge
included in underwriting and other operating expenses in the accompanying consolidated statements of
comprehensive income. This bad debt allowance is determined based on estimates and assumptions to
project future experience. After all collection efforts have been exhausted, the Company reduces the
bad debt allowance for write-offs of premiums receivable that have been deemed uncollectible. The
Company had write-offs, net of recoveries of amounts previously written off, of $0.2 million, $0.8
million, and $1.2 million for the years ended December 31, 2011, 2010, and 2009, respectively.
Deferred Policy Acquisition Costs
Policy acquisition costs, consisting of commissions, premium taxes, and certain other underwriting
costs that vary with, and are primarily related to, the production of new or renewal business are
66
64588
deferred and amortized as the related premiums are earned. Amortization of deferred policy acquisition
costs for the years ended December 31, 2011, 2010, and 2009, was $74.5 million, $72.1 million, and $87.6
million, respectively.
A premium deficiency would exist if expected future losses and LAE, expected policyholder
dividends, deferred policy acquisition costs, and expected policy maintenance costs, offset by
anticipated investment income, exceed the related unearned premiums. A premium deficiency would
reduce the value of deferred policy acquisition costs. If the deficiency exceeded the deferred policy
acquisition costs, a separate liability would be accrued for the excess deficiency. There was no premium
deficiency at December 31, 2011 or 2010.
Unpaid Loss and LAE Reserves
Loss and LAE reserves represent management’s best estimate of the ultimate net cost of all
reported and unreported losses incurred for the applicable periods. The estimated reserves for losses
and LAE include the accumulation of estimates for all claims reported prior to the balance sheet date,
estimates (based on projections of relevant historical data) of claims incurred but not reported, and
estimates of expenses for investigating and adjusting all incurred and unadjusted claims. Amounts
reported are necessarily subject to the impact of future changes in economic, regulatory and social
conditions. Management believes that, subject to the inherent variability in any such estimate, the
reserves are within a reasonable and acceptable range of adequacy. Estimates for claims reported prior
to the balance sheet date are continually monitored and reviewed, and as settlements are made or
reserves adjusted, the differences are reported in current operations. Salvage and subrogation recoveries
are estimated based on a review of the level of historical salvage and subrogation recoveries.
Commission Expense
Commission expense includes direct commissions to agents and brokers for the premiums that they
produce for the Company, as well as incentive payments, other marketing costs, and fees. Additionally,
the Company is entitled to receive a contingent profit commission under the Loss Portfolio Transfer
(LPT) Agreement (See “—Reinsurance”).
At December 31, 2010, the Company reduced its estimate of certain administrative fees due under
its joint marketing agreements (Change in Estimate), which reduced its accrual for commission expense
by $3.0 million. This Change in Estimate was the result of new information that materially impacted
conditions that existed as of December 31, 2010 and is reflected in the financial statements for the
period ended December 31, 2010. This Change in Estimate increased net income by $3.0 million, or
$0.07 per basic and diluted share, for the three and twelve months ended December 31, 2010.
Reinsurance
In the ordinary course of business and in accordance with general insurance industry practices, the
Company purchases excess of loss reinsurance to protect the Company against the impact of large
and/or catastrophic losses in its workers’ compensation business. Additionally, the Company is a party
to a 100% quota share retroactive reinsurance agreement, (see Note 9). This reinsurance reduces the
financial impact of such losses on current operations and the equity of the Company. Reinsurance
makes the assuming reinsurer liable to the ceding company to the extent of the reinsurance coverage
provided. It does not, however, discharge the Company from its liability to its policyholders in the event
the reinsurer is unable or unwilling to meet its obligations under its reinsurance agreement with the
Company.
Net premiums earned and losses and LAE incurred are stated in the accompanying consolidated
statements of comprehensive income after deduction of amounts ceded to reinsurers. Balances due from
reinsurers on unpaid losses, including an estimate of such recoverables related to reserves for incurred
but not reported losses, are reported as assets and are included in reinsurance recoverables even though
amounts due on unpaid losses and LAE are not recoverable from the reinsurer until such losses are
paid. Recoverables from reinsurers on unpaid losses and LAE amounted to $0.9 billion and $1.0 billion
at December 31, 2011 and 2010, respectively.
67
41569
Ceded losses and LAE are accounted for on a basis consistent with those used in accounting for the
original policies issued and the terms of the relevant reinsurance agreement.
The 100% quota share retroactive reinsurance agreement was entered into in 1999 by the Nevada
State Industrial Insurance System (the Fund) and assumed by EICN, which the Company refers to as
the LPT Agreement (see Note 9). The Company accounts for this transaction as retroactive
reinsurance, whereby the initial deferred gain was recorded as a liability in the accompanying
consolidated balance sheets as Deferred reinsurance gain—LPT Agreement. This gain is amortized
using the recovery method, whereby the amortization is determined by the proportion of actual
reinsurance recoveries to total estimated recoveries, and is recorded in losses and LAE incurred in the
accompanying consolidated statements of comprehensive income. Any adjustment to the estimated
reserves ceded under the LPT Agreement is recognized in earnings in the period of change with a
corresponding change to reinsurance recoverables for unpaid losses and deferred reinsurance gain. A
cumulative amortization adjustment is also then recognized in earnings so that the deferred reinsurance
gain reflects the balance that would have existed had the revised reserves been available at the
inception of the LPT Agreement.
In addition, the Company is entitled to receive a contingent profit commission under the LPT
Agreement. The contingent profit is an amount based on the favorable difference between actual paid
losses and LAE and expected paid losses and LAE as established in the LPT Agreement. The
calculation of actual amounts paid versus expected amounts is determined every five years beginning
June 30, 2004 for the first twenty-five years of the agreement. The Company is paid 30% of the
favorable difference between the actual and expected losses and LAE paid at each calculation point.
Loss expenses are deemed to be 7% of total losses paid and are paid to the Company as compensation
for management of the LPT claims. Conversely, the Company could be required to return any
previously paid contingent profit commission, plus interest, in the event of unfavorable differences. The
Company accrues the estimated ultimate contingent profit commission through June 30, 2024. Increases
or decreases in the estimated contingent profit commission are reflected in commission expense in the
period that the estimate is revised.
Property and Equipment
Property and equipment are stated at cost
less accumulated depreciation (see Note 6).
Expenditures for maintenance and repairs are charged against operations as incurred.
Electronic data processing equipment, software, furniture and equipment, and automobiles are
depreciated using the straight-line method over three to seven years. Leasehold improvements are
carried at cost less accumulated amortization. The Company amortizes leasehold improvements using
the straight-line method over the lesser of the useful life of the asset or the remaining original lease
term, excluding options or renewal periods. Leasehold improvements are generally amortized over
three to five years.
Obligations Held Under Capital Leases
Leased property and equipment meeting capital lease criteria are capitalized at the lower of the
present value of the related lease payments or the fair value of the leased asset at the inception of the
lease. Amortization is calculated using the straight-line method based on the term of the lease and is
included in the depreciation expense of property and equipment. See Note 11 for additional disclosures
related to capital leases.
Restructuring
The Company accounts for its restructuring plans by recording a loss when it is probable that a
liability has been incurred. The amount of the loss is estimated and recorded at fair value using the
Company’s incremental interest rate.
68
08455
Policyholder Dividends
Certain policyholders may qualify for policyholder dividends. Dividends are accrued on such
policies based on specific dividend provisions and the policies’ earned premiums and loss ratios.
Additionally, dividend plans also allow the Company to reduce the amount to be paid at the Company’s
discretion. Should management choose to reduce the ultimate dividends to be paid, once the amount of
the total dividend that will be paid for a policy year is determined, the dividend accrued would be
reduced to the level determined by the Company. The reduced dividend amount would be allocated
ratably to the participating policies, based on the dividend amount calculated prior to the reduction.
Approximately 4.3%, 5.2% and 9.6% of direct written premiums were subject to dividend participation
during the years ended December 31, 2011, 2010, and 2009, respectively. Policyholder dividends are
ultimately paid at the sole discretion of the Board of Directors and must be approved by the Board
prior to payment. Board-approved dividends accrued for 2011, 2010, and 2009 policies reflect the full
potential amount allowed under the respective policies.
Income Taxes
The Company’s accounting for income taxes considers the current and deferred tax consequences
of all transactions that have been recognized in its consolidated financial statements using the provisions
of enacted tax laws. Deferred tax assets and liabilities are determined based on differences between the
financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates
and laws that will be in effect when the differences are expected to reverse. The effect on deferred tax
assets and liabilities resulting from a tax rate change affects net income or loss in the period that
includes the enactment date of the tax rate change. The Company’s income tax returns are subject to
audit by the Internal Revenue Service and various state tax authorities. Significant disputes may arise
with these tax authorities involving issues of the timing and amount of deductions and allocations of
income among various tax jurisdictions because of differing interpretations of tax laws and regulations.
The Company periodically evaluates exposures associated with tax filing positions. Although we believe
our positions comply with applicable laws, liabilities are recorded based upon estimates of the ultimate
outcomes of these matters.
In assessing whether our deferred tax assets will be realized, the Company considers whether it is
more likely than not that it will generate future taxable income during the periods in which those
temporary differences become deductible. The Company considers the scheduled reversal of deferred
tax liabilities, tax planning strategies, and projected future taxable income in making this assessment. If
necessary, a valuation allowance is established to reduce the deferred tax assets to the amounts that are
more likely than not to be realized.
Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk are
primarily cash and cash equivalents, investments, premiums receivable, and reinsurance recoverable
balances.
Cash equivalents include investments in commercial paper of companies with high credit ratings,
investments in money market securities and securities backed by the U.S. government. Investments are
diversified throughout many industries and geographic regions. The Company limits the amount of
credit exposure with any one financial institution and believes that no significant concentration of credit
risk exists with respect to cash and cash equivalents and investments.
At December 31, 2011 and 2010, the outstanding premiums receivable balance was generally
diversified due to the large number of entities composing the Company’s policyholder base and their
dispersion across many different industries. The Company also has recoverables from its reinsurers.
Reinsurance contracts do not relieve the Company of its obligations to claimants or policyholders.
Failure of reinsurers to honor their obligations could result in losses to the Company. The Company
evaluates the financial condition of its reinsurers to minimize its exposure to significant losses from
reinsurer insolvencies. The Company obtains collateral to mitigate the risks related to reinsurance
69
07190
insolvencies. At December 31, 2011, $11.6 million was collateralized by cash or letter of credit and an
additional $896.1 million was in trust accounts for reinsurance related to the LPT Agreement.
Fair Value of Financial Instruments
Estimated fair value amounts have been determined using available market information and other
appropriate valuation methodologies. Judgment is required in developing the estimates of fair value
where quoted market prices are not available. Accordingly, these estimates are not necessarily
indicative of the amounts that could be realized in a current market exchange. The use of different
market assumptions or estimating methodologies may have an effect on the estimated fair value
amounts.
The following methods and assumptions were used by the Company in estimating the fair value
disclosures for financial investments in the accompanying consolidated financial statements and in these
notes for the years ended 2011 and 2010:
Cash and cash equivalents, premiums receivable, and accrued expenses and other liabilities. The
carrying amounts for these financial instruments as reported in the accompanying consolidated balance
sheets approximate their fair values.
Investments. The estimated fair values for available-for-sale securities generally represent quoted
market prices for securities traded in the public marketplace or estimated values for securities not
traded in the public marketplace. Additional data with respect to fair values of the Company’s
investment securities is disclosed in Note 4. The fair values reported in the accompanying consolidated
balance sheets equal the carrying amounts for these investments.
Goodwill and Other Intangible Assets
The Company tests for impairment of goodwill and non-amortizable intangible assets in the fourth
quarter of each year. At the end of each quarter, management considers the results of the previous
analysis as well as any recent developments that may constitute triggering events requiring the
impairment analysis of goodwill and other intangible assets to be updated. The Company has assessed
the continuing effects of current economic conditions on the Company’s gross premiums written and
changes in the Company’s stock price and determined that there were no impairments as of December
31, 2011 and 2010.
Intangible assets related to state licenses are not subject to amortization. Intangibles related to
insurance relationships will be amortized over the next seven years.
The gross carrying value, accumulated amortization, and net carrying value for the Company’s
intangible assets, by major class, as of December 31, were as follows:
2011
Gross
Carrying
Value
Accumulated
Amortization
State licenses. . . . . . . . . . . . $ 7,700
9,400
Insurance relationships . .
—
Other . . . . . . . . . . . . . . . . . . .
$ —
(5,372)
—
Net
Carrying
Value
Gross
Carrying
Value
(in thousands)
$ 7,700
4,028
—
$ 7,700
9,400
1,700
Total . . . . . . . . . . . . . . . . . . . . $17,100
$(5,372)
$11,728
$18,800
2010
Accumulated
Amortization
$ —
(3,821)
(1,700)
$(5,521)
Net
Carrying
Value
$ 7,700
5,579
—
$13,279
70
17311
During the years ended December 31, 2011, 2010, and 2009, the Company recognized $1.6 million,
$2.2 million, and $2.8 million in amortization expenses, respectively. These amortization expenses are
included in the accompanying consolidated statements of comprehensive income in underwriting and
other operating expenses. Amortization expense is expected to be as follows:
Year
2012. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amount
(in thousands)
$1,170
873
651
489
371
474
$4,028
Stock-Based Compensation
The Company issues stock-based payments, which are recognized in the consolidated statements of
comprehensive income based on their fair values over the employees’ service period (see Note 13).
3. New Accounting Standards
In October 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standard
Update (ASU) Number 2010-26, Accounting for Costs Associated with Acquiring or Renewing
Insurance Contracts. This update changes the definition of acquisition costs which may be capitalized to
specify costs which relate directly to the successful acquisition of new or renewal insurance contracts;
adds to the definition the concept of incremental costs; further restricts costs to be capitalized by
identifying only those costs which may be capitalized; and requires additional granularity in the
disclosures related to type of acquisition costs capitalized during the period. This guidance became
effective for interim and annual reporting periods beginning after December 15, 2011. The Company
expects to adopt this standard on a prospective basis and currently estimates that adoption will increase
its underwriting and other operating expenses by approximately $7 million in 2012 and decrease total
assets on the consolidated balance sheet by the same amount.
In May 2011, the FASB issued ASU Number 2011-04, Fair Value Measurement. This update is a
result of efforts by the FASB and the International Accounting Standards Board (IASB) to develop
common requirements for measuring fair value and for disclosing information about fair value
measurements in GAAP and International Financial Reporting Standards (IFRS). This update changes
the wording used to describe many of the requirements in GAAP for measuring fair value and for
disclosing information about fair value measurements. The intent was to clarify existing fair value
measurement and disclosure requirements and to ensure that GAAP and IFRS fair value measurements
and disclosures are described in the same way. This update also requires additional disclosures related
to valuation processes and the sensitivity of Level 3 financial assets and liabilities. It does not require
additional fair value measures, nor does the FASB expect the amendment to affect current practice.
This guidance becomes effective for interim and annual periods beginning after December 15, 2011 and
early adoption is not permitted. The Company does not expect the adoption to have a material impact,
if any, on its consolidated financial condition and results of operations.
In September 2011, the FASB issued ASU Number 2011-08, Intangibles - Goodwill and Other. This
update will permit an entity to first assess qualitative factors to determine whether it is necessary to
perform the two-step goodwill impairment test described in Accounting Standard Codification Topic
350. If an entity determines it is not more likely than not that the fair value of a reporting unit is less
than its carrying amount, then performing the two-step impairment test is unnecessary. This guidance
became effective for interim and annual periods beginning after December 15, 2011, and early adoption
is permitted. The Company will adopt this update for interim and annual periods beginning after
December 15, 2011. The Company does not expect the adoption to have a material impact, if any, on its
consolidated financial condition and results of operations.
71
46210
4. Fair Value of Financial Instruments
The carrying value and the estimated fair value of the Company’s financial instruments as of
December 31, were as follows:
2011
2010
Carrying
Value
Estimated
Fair Value
Carrying
Value
Estimated
Fair Value
(in thousands)
Financial assets
Investments (Note 5) . . . . . . . . . . . . . . . . . . . . . . $1,950,745 $1,950,745 $2,080,494 $2,080,494
119,825
Cash and cash equivalents . . . . . . . . . . . . . . . . .
Restricted cash and cash equivalents . . . . . .
16,949
Financial liabilities
Notes payable (Note 10). . . . . . . . . . . . . . . . . . .
252,300
6,299
252,300
6,299
119,825
16,949
122,000
130,447
138,565
132,000
The Company’s estimates of fair value for financial liabilities are based on the variable interest rate
for the Company’s existing line of credit to discount future payments on notes payable, and have been
determined to be Level 2 fair value measurements, as defined below.
Assets and liabilities recorded at fair value on the 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 market
participants would use in pricing the assets or liabilities at the measurement date.
The following methods and assumptions were used to determine the fair value of each class of
assets and liabilities recorded at fair value in the consolidated balance sheets:
Fair values of available-for-sale fixed maturity and equity securities are based on quoted market
prices, where available. These fair values are obtained primarily from third party pricing services, which
generally use Level 1 or Level 2 inputs. The Company obtains a quoted price for each security from
third party pricing services, which are derived through recently reported trades for identical or similar
securities. For securities not actively traded, the 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 speeds. The Company also performs quarterly analysis on the prices received
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. If unusual fluctuations are noted in this review, the Company may obtain additional
information from other pricing services to validate the quoted price. There were no adjustments to
prices obtained from third party pricing services during the years ended December 31, 2011, 2010 and
2009 that were material to the consolidated financial statements.
If quoted market prices and an estimate determined by using objectively verifiable information are
unavailable, the Company produces an estimate of fair value based on internally developed valuation
techniques, which, depending on the level of observable market inputs, will render the fair value
estimate as Level 2 or Level 3. The Company bases all of its estimates of fair value for assets on the bid
price as it represents what a third party market participant would be willing to pay in an arm’s length
transaction.
These methods of valuation will only produce an estimate of fair value if there is objectively
verifiable information to produce a valuation. If objectively verifiable information is not available, the
72
67524
Company would be required to produce an estimate of
methodologies, making assumptions for market based inputs that are unavailable.
fair value using some of
the same
Most estimates of fair value for fixed maturity securities are based on estimates using objectively
verifiable information and are included in the amount disclosed in Level 2 of the hierarchy. The fair
value estimates for determining Level 3 fair value include the Company’s assumptions about risk
assessments and market participant assumptions based on the best information available, including
quotes from market makers and other broker/dealers recognized as market participants, using standard
or trade derived inputs, new issue data, monthly payment
information, cash flow generation,
prepayment speeds, spread adjustments, or rating updates.
The following table presents the items in the accompanying consolidated balance sheets that are
stated at fair value and the fair value measurements.
Level 1
Level 2
(in thousands)
Level 3
At December 31, 2011
Fixed maturity securities
U.S. Treasuries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. Agencies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
States and municipalities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential mortgage-backed securities . . . . . . . . . . . . . . . . . .
Commercial mortgage-backed securities. . . . . . . . . . . . . . . . . .
Asset-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ — $ 137,365
108,448
789,636
501,669
281,511
21,665
12,405
—
—
—
—
—
—
Total fixed maturity securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ — $1,852,699
$—
—
—
—
—
—
—
$—
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$98,046
$
— $—
Level 1
Level 2
(in thousands)
Level 3
At December 31, 2010
Fixed maturity securities
U.S. Treasuries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. Agencies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
States and municipalities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential mortgage-backed securities . . . . . . . . . . . . . . . . . .
Commercial mortgage-backed securities. . . . . . . . . . . . . . . . . .
Asset-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total fixed maturity securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ — $ 144,725
123,802
966,002
479,424
246,756
25,077
14,578
$ — $2,000,364
—
—
—
—
—
—
$—
—
—
—
—
—
—
$—
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$80,130
$
— $—
The Company had no Level 3 investment activity during the years ended December 31, 2011 and
2010.
73
56990
5. Investments
The amortized cost, gross unrealized gains, gross unrealized losses, and estimated fair value of the
Company’s investments were as follows:
At December 31, 2011
Fixed maturity securities
U.S. Treasuries . . . . . . . . . . . . . . . . . . . . . . . .
U.S. Agencies . . . . . . . . . . . . . . . . . . . . . . . . .
States and municipalities . . . . . . . . . . . . . .
Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential mortgage-backed
securities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial mortgage-backed
securities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asset-backed securities . . . . . . . . . . . . . . . .
Total fixed maturity securities . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . .
Total investments. . . . . . . . . . . . . . . . . . . . . . . .
At December 31, 2010
Fixed maturity securities
U.S. Treasuries . . . . . . . . . . . . . . . . . . . . . . . .
U.S. Agencies . . . . . . . . . . . . . . . . . . . . . . . . .
States and municipalities . . . . . . . . . . . . . .
Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential mortgage-backed
securities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial mortgage-backed
securities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asset-backed securities . . . . . . . . . . . . . . . .
Total fixed maturity securities . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . .
Total investments. . . . . . . . . . . . . . . . . . . . . . . .
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(in thousands)
Estimated
Fair Value
$ 122,144
101,520
719,431
467,470
$ 15,222
6,942
70,391
35,745
$
(1)
(14)
(186)
(1,546)
$ 137,365
108,448
789,636
501,669
262,961
19,154
(604)
281,511
20,756
11,934
1,706,216
64,962
910
471
148,835
34,639
(1)
—
(2,352)
(1,555)
21,665
12,405
1,852,699
98,046
$1,771,178
$183,474
$(3,907)
$1,950,745
$ 135,265
116,747
927,668
453,851
$
9,619
7,142
43,054
28,655
$ (159)
(87)
(4,720)
(3,082)
$ 144,725
123,802
966,002
479,424
230,518
16,926
(688)
246,756
23,877
13,852
1,901,778
1,201
727
107,324
(1)
(1)
(8,738)
25,077
14,578
2,000,364
49,281
$1,951,059
30,967
$138,291
(118)
$(8,856)
80,130
$2,080,494
The amortized cost and estimated fair value of fixed maturity securities at December 31, 2011, 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.
Due in one year or less. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due after one year through five years . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due after five years through ten years. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due after ten years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage and asset-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortized
Cost
Estimated
Fair Value
(in thousands)
$ 114,877
535,800
554,960
204,928
295,651
$ 116,654
573,508
617,280
229,676
315,581
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,706,216
$1,852,699
74
82550
The following is a summary of 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 December 31, 2011 and 2010.
December 31, 2011
Gross
Unrealized
Losses
Estimated
Fair
Value
Estimated
Fair
Value
Number
of Issues
(dollars in thousands)
December 31, 2010
Gross
Unrealized
Losses
Number
of Issues
Less than 12 months:
Fixed maturity securities
U.S. Treasuries . . . . . . . . . . . . . . . . .
U.S. Agencies . . . . . . . . . . . . . . . . . .
States and municipalities . . . . . . .
Corporate . . . . . . . . . . . . . . . . . . . . . .
Residential mortgage-backed
securities . . . . . . . . . . . . . . . . . . . . .
Commercial mortgage-backed
securities . . . . . . . . . . . . . . . . . . . . .
Asset-backed securities . . . . . . . . .
Total fixed maturity securities . . . .
$ 5,076
11,124
5,094
64,846
$
(1)
(14)
(185)
(1,481)
4,916
(20)
1,464
—
92,520
(1)
—
(1,702)
(1,462)
$(3,164)
Equity securities . . . . . . . . . . . . . . . . . .
Total less than 12 months. . . . . . . . .
12,443
$104,963
Greater than 12 months:
Fixed maturity securities
States and municipalities . . . . . . .
Corporate . . . . . . . . . . . . . . . . . . . . . .
Residential mortgage-backed
securities . . . . . . . . . . . . . . . . . . . . .
Total fixed maturity securities . . . .
$ 1,049
1,024
$
(1)
(65)
$
2,692
4,765
(584)
(650)
Equity securities . . . . . . . . . . . . . . . . . .
Total Greater than 12 months . . . .
452
$ 5,217
(93)
$ (743)
Total available-for-sale:
Fixed maturity securities
U.S. Treasuries . . . . . . . . . . . . . . . . .
U.S. Agencies . . . . . . . . . . . . . . . . . .
States and municipalities . . . . . . .
Corporate . . . . . . . . . . . . . . . . . . . . . .
Residential mortgage-backed
securities . . . . . . . . . . . . . . . . . . . . .
Commercial mortgage-backed
securities . . . . . . . . . . . . . . . . . . . . .
Asset-backed securities . . . . . . . . .
$ 5,076
11,124
6,143
65,870
7,608
1,464
—
Total fixed maturity securities . . . .
97,285
Equity securities . . . . . . . . . . . . . . . . . .
Total available-for-sale. . . . . . . . . . . .
12,895
$110,180
$
(1)
(14)
(186)
(1,546)
(604)
(1)
—
(2,352)
(1,555)
$(3,907)
2
3
1
30
14
1
—
51
57
108
1
1
5
7
4
11
2
3
2
31
19
1
—
58
61
119
$ 4,548
14,500
124,245
123,216
$ (159)
(87)
(4,720)
(3,082)
15,161
(304)
1,365
923
283,958
10,651
$294,609
(1)
(1)
(8,354)
(115)
$(8,469)
3
8
32
61
10
1
1
116
47
163
$
— $ —
—
—
$ —
—
3,465
3,465
(384)
(384)
66
$ 3,531
(3)
$ (387)
$ 4,548
14,500
124,245
123,216
$ (159)
(87)
(4,720)
(3,082)
18,626
(688)
1,365
923
287,423
10,717
$298,140
(1)
(1)
(8,738)
(118)
$(8,856)
2
2
1
3
3
8
32
61
12
1
1
118
48
166
Based on reviews of the fixed maturity securities, the Company determined that unrealized losses
as of December 31, 2011 and 2010 were primarily the result of changes in prevailing interest rates and
not the credit quality of the issuers. The fixed maturity securities whose fair value was less than
amortized cost were not determined to be other-than-temporarily impaired given the severity and
duration of the impairment, the credit quality of the issuers, the Company’s intent on not selling the
securities, and a determination that it is not more likely than not that the Company will be required to
sell the securities until fair value recovers to above cost, or to maturity.
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Based on reviews of the equity securities as of December 31, 2011, the Company recognized total
impairments of $0.1 million in the fair values of four equity securities as a result of the severity and
duration of the change in fair values of those securities. The Company also determined that the
unrealized losses on equity securities as of December 31, 2010 were not considered to be other-than-
temporary due to the financial condition and near-term prospects of the issuers.
Realized gains on investments, net and the change in unrealized gains (losses) on fixed maturity
and equity securities are determined on a specific-identification basis and were as follows:
Years Ended December 31,
2011
2009
2010
(in thousands)
Realized gains on investments, net
Fixed maturity securities
Gross gains. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Realized gains (losses) on fixed maturity securities, net . . . . . . . . . . . . . . . . .
$19,463
(148)
$19,315
$
$
756
(46)
710
$
123
(978)
$ (855)
Equity securities
Gross gains. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Realized gains on equity securities, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 1,169
(323)
846
$
$ 9,448
(21)
$ 9,427
$ 3,913
(2,093)
$ 1,820
Short-term investments
Gross gains. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Realized gains (losses) on short-term investments, net . . . . . . . . . . . . . . . . . .
$ — $ — $ —
(174)
$ — $ — $ (174)
—
—
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in unrealized gains (losses)
Fixed maturity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$20,161
$10,137
$
791
$47,897
2,235
—
$50,132
$ (2,632) $62,054
13,820
(72)
$ (1,115) $75,802
1,517
—
Net investment income was as follows:
Fixed maturity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash equivalents and restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Years Ended December 31,
2011
2009
2010
(in thousands)
$83,730
1,399
327
$79,600
1,885
1,040
$89,522
1,402
1,910
Investment expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
82,525
(2,408)
$80,117
85,456
(2,424)
$83,032
92,834
(2,350)
$90,484
The Company is required by various state laws and regulations to keep securities or letters of credit
in depository accounts with the states in which it does business. As of December 31, 2011 and 2010,
securities having a fair value of $522.6 million and $558.6 million, respectively, were on deposit. These
laws and regulations govern not only the amount, but also the type of security that is eligible for
deposit. The deposits are limited to fixed maturity securities in all states. Additionally, certain
reinsurance contracts require Company 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 securities held in trust
for reinsurance at December 31, 2011 and 2010 was $40.3 million and $52.9 million, respectively. The
Company’s debt was secured by fixed maturity securities and restricted cash and cash equivalents that
had a fair value of $126.7 million and $131.0 million at December 31, 2011 and 2010, respectively.
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00634
6. Property and Equipment
Property and equipment consists of the following:
As of December 31,
2011
2010
Land. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leasehold improvements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Computers and software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Automobiles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
2,327
4,386
29,839
1,727
95
3,917
4,285
25,667
1,900
(in thousands)
— $
Accumulated amortization and depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
38,279
(26,919)
35,864
(24,152)
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 11,360
$ 11,712
Depreciation and amortization expenses related to property and equipment for the years ended
December 31, 2011, 2010 and 2009, were $4.8 million, $4.8 million, and $6.9 million, respectively.
Internally developed software costs of $0.2 million and $0.1 million were capitalized during the years
ended December 31, 2011 and 2010, respectively.
7. Income Taxes
The Company files a consolidated federal
income tax return. The insurance subsidiaries pay
premium taxes on gross premiums written in lieu of some states’ income or franchise taxes.
The provision for income taxes consisted of the following:
Years Ended December 31,
2011
2009
2010
(in thousands)
Current tax (benefit) expense:
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current tax (benefit) expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (652) $(1,228) $ (2,061)
347
(1,714)
71
(1,157)
154
(498)
Deferred federal tax (benefit) expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,608)
4,680
$(2,106) $ 3,523
10,991
$ 9,277
The difference between the statutory federal tax rate of 35% and the Company’s effective tax rate
on net income before income taxes as reflected in the consolidated statements of comprehensive income
was as follows:
Years Ended December 31,
2011
2009
2010
Expense computed at statutory rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends received deduction and tax-exempt interest . . . . . . . . . . . . . . . .
LPT deferred gain amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pre-privatization reserve adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
LPT contingent profit commission . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 16,172
(11,409)
(6,001)
(1,602)
(645)
1,379
$ 23,213
(12,039)
(6,381)
(1,358)
(284)
372
$ 32,304
(12,176)
(6,302)
(576)
(5,259)
1,286
Income tax expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (2,106) $ 3,523
$ 9,277
On January 1, 2000, EICN assumed the assets, liabilities, and operations of the Fund pursuant to
legislation passed in the 1999 Nevada Legislature (the Privatization). Prior to the Privatization, the
Fund was a part of the State of Nevada and therefore was not subject to federal
income tax;
accordingly, it did not take an income tax deduction with respect to the establishment of its unpaid loss
and LAE reserves. Due to favorable loss experience after the Privatization, it was determined that
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certain of the pre-Privatization unpaid loss and LAE reserves assumed by EICN as part of the
Privatization were no longer necessary and the unpaid loss and LAE reserves were reduced accordingly.
Such downward adjustments of pre-Privatization unpaid loss reserves increases GAAP net income, but
does not increase taxable income. For the years ended December 31, 2011, 2010, and 2009 there were
downward adjustments of pre-Privatization unpaid loss reserves of $4.6 million, $3.9 million, and $1.6
million, respectively.
For the years ended December 31, 2011 and 2010, the Company increased the estimated ultimate
contingent profit commission related to the LPT Agreement by $1.8 million and $0.8 million,
respectively. Such increases to the estimated ultimate contingent profit commission increases GAAP
net income but does not increase taxable income. There was no change to the estimate during the year
ended December 31, 2009.
As of December 31, 2011 and 2010, the Company had no unrecognized tax benefits.
Tax years 2007 through 2011 are subject to full examination by the federal taxing authority. Tax
year 2006 is open to examination by the federal taxing authority only to the extent of benefits from the
carry-back of certain capital losses from tax years 2008 and 2009. Currently, tax years 2006 through 2010
are under review.
The significant components of deferred income taxes, net, were as follows as of December 31:
2011
Deferred Tax
2010
Deferred Tax
Assets
Liabilities
Assets
Liabilities
(in thousands)
Unrealized capital gains, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred policy acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss reserve discounting for tax reporting . . . . . . . . . . . . . . .
Unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for bad debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Minimum tax credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net operating loss carry forward . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
— $62,848
13,244
—
4,105
—
—
59,860
—
13,331
—
1,943
—
3,310
—
5,253
—
12,015
—
9,289
4,316
1,652
$84,513
$106,653
$
— $45,302
11,430
—
4,648
—
—
65,353
—
10,257
—
2,661
—
2,834
—
5,216
—
13,055
—
—
2,638
2,720
$64,018
$102,096
Deferred income taxes, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 22,140
$ 38,078
At December 31, 2011, the Company had a $26.5 million net operating loss carry forward.
Deferred tax assets are required to be reduced by a valuation allowance if it is more likely than not
that all or some portion of the deferred tax asset will not be realized. Realization of the deferred
income tax asset is dependent on the Company generating sufficient taxable income in future years as
the deferred income tax charges become currently deductible for tax reporting purposes. Although
realization is not assured, management believes that it is more likely than not that the net deferred
income tax asset will be realized.
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45969
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.
2011
Years Ended December 31,
2010
(in thousands)
2009
Unpaid losses and LAE, gross of reinsurance, at beginning of
period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less reinsurance recoverable, excluding bad debt allowance, on
unpaid losses and LAE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net unpaid losses and LAE at beginning of period . . . . . . . . . . . . .
Losses and LAE, net of reinsurance, incurred in:
Current year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total net losses and LAE incurred during the period. . . . . . . . . . .
Deduct payments for losses and LAE, net of reinsurance,
related to:
Current year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total net payments for losses and LAE during the period. . . . . .
Ending unpaid losses and LAE, net of reinsurance . . . . . . . . . . . . .
Reinsurance recoverable, excluding bad debt allowance, on
unpaid losses and LAE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unpaid losses and LAE, gross of reinsurance, at end of period
$2,279,729
$2,425,658
$2,506,478
956,043
1,323,686
1,052,505
1,373,153
1,076,350
1,430,128
280,683
1,127
281,810
55,405
218,568
273,973
227,143
(14,130)
213,013
283,827
(51,359)
232,468
55,827
206,653
262,480
74,944
214,499
289,443
1,331,523
1,323,686
1,373,153
940,840
$2,272,363
956,043
$2,279,729
1,052,505
$2,425,658
Total net losses and LAE included in the above table excludes the impact of the amortization of
the deferred reinsurance gain–LPT Agreement (Deferred Gain) (Note 9).
The increase in the estimate of incurred losses and LAE attributable to insured events of prior
years was related to the Company’s assigned risk business, while the decreases were due to favorable
development in such prior accident years. The major sources of favorable development in the years
presented above include actual paid losses that have been less than expected and the impact of new
information on selected patterns of claims emergence and payment used in the projection of future loss
payments.
In California, where the Company’s operations began on July 1, 2002,
the actuaries and
management’s initial expectations of ultimate losses and patterns of loss emergence and payment were
based on benchmarks derived from analyses of historical insurance industry data in California. No
historical data from the Company’s California insurance subsidiary existed prior to July 1, 2002;
however, some historical data was available for the prior years for some of the market segments the
Company entered in California, but was limited as to the number of loss reserve evaluation points
available. The industry-based benchmarks were judgmentally adjusted for the anticipated impact of
significant environmental changes, specifically the enactment of major changes to the statutory workers’
compensation benefit structure and the manner in which claims are administered and adjudicated in
California. The actual emergence and payment of claims by the Company’s California insurance
subsidiary has been more favorable than those initial expectations thorough 2009, due at least in part to
the enactment of the major changes in the California workers’ compensation environment; however, our
recent loss experience, beginning in 2010, indicates an upward trend in medical costs that is reflected in
our loss reserves. The Company’s estimates assume that increasing medical cost trends will continue and
will impact our long-term claims costs and loss reserves.
In Nevada, the Company has compiled a lengthy history of workers’ compensation claims payment
patterns based on the business of the Fund and EICN, but the emergence and payment of claims in
recent years has been more favorable than in the long-term history in Nevada with the Fund. The
expected patterns of claim payments and emergence used in the projection of the Company’s ultimate
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07346
claim payments are based on both the long and short-term historical paid data. In recent evaluations,
claim patterns have continued to emerge in a manner consistent with short-term historical data.
Consequently, the Company’s selection of claim projection patterns has relied more heavily on
patterns observed in recent years.
The Company continues to develop its own loss experience and will rely more on its experience
industry data in projecting its reserve requirements as such data becomes
it will continue to evaluate prior
and less on historical
available. As the actual experience of the Company emerges,
estimates, which may result in additional adjustments in reserves.
A $1.6 million expense related to the commutation of certain reinsurance treaties, and a $0.9
million expense related to the write-off of certain reinsurance recoverables that had previously been
accounted for as an allowance for bad debt, increased losses and LAE incurred in prior periods for the
year ended December 31, 2010, which are included in the $(14.1) million prior period development.
Loss reserves shown in the consolidated balance sheets are net of $18.1 million and $18.2 million
for anticipated subrogation recoveries as of December 31, 2011 and 2010, respectively.
9. Reinsurance
The Company is involved in the cession and assumption of reinsurance with non-affiliated
companies. Risks are reinsured with other companies on both a quota share and excess of loss basis.
Reinsurance transactions reflected in the accompanying consolidated statements of comprehensive
income were as follows:
2011
Years Ended December 31,
2010
2009
Written
Earned
Written
Earned
Written
Earned
(in thousands)
Direct premiums . . . . . . . . . . . . . . . . . . .
Assumed premiums . . . . . . . . . . . . . . . .
$416,106
2,406
$369,365
2,533
$319,773
2,504
$328,165
2,800
$376,651
3,298
$411,897
4,009
Gross premiums. . . . . . . . . . . . . . . . . . . .
Ceded premiums . . . . . . . . . . . . . . . . . . .
418,512
(8,474)
371,898
(8,474)
322,277
(9,179)
330,965
(9,179)
379,949
(11,659)
415,906
(11,659)
Net premiums . . . . . . . . . . . . . . . . . . . . . .
$410,038
$363,424
$313,098
$321,786
$368,290
$404,247
Ceded losses and LAE incurred . . .
$ 44,175
$ (15,111)
$ 38,075
Ceded losses and LAE incurred includes the amortization of the Deferred Gain.
Excess of Loss Reinsurance
The Company maintains reinsurance for losses from a single occurrence or event in excess of $5.0
million and up to $200.0 million, subject to a $2.0 million annual aggregate deductible and certain
exclusions. The reinsurance coverage includes coverage for acts of terrorism, excluding nuclear,
biological, chemical, and radiological events. Any liability outside the coverage limits of the reinsurance
program is retained by the Company.
LPT Agreement
Recoverables from reinsurers on unpaid losses and LAE amounted to $0.9 billion and $1.0 billion
at December 31, 2011 and 2010, respectively. At each of December 31, 2011 and 2010, $0.8 billion of
those recoverables was related to the LPT Agreement that was entered into in 1999 by the Fund and
assumed by EICN. Under the LPT Agreement, substantially all of the Fund’s losses and LAE on claims
incurred prior to July 1, 1995, have been ceded to three unaffiliated reinsurers on a 100% quota share
basis. Investments have been placed in trust by the three reinsurers as security for payment of the
reinsured claims. Under the LPT Agreement, $1.5 billion in liabilities for the incurred but unpaid losses
and LAE related to claims incurred prior to July 1, 1995, were reinsured for consideration of $775.0
million. The LPT Agreement provides coverage up to $2.0 billion. Through December 31, 2011, the
Company has paid losses and LAE claims totaling $569.9 million related to the LPT Agreement.
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39231
The initial Deferred Gain resulting from the LPT Agreement was recorded as a liability in the
accompanying consolidated balance sheets and is being amortized using the recovery method, whereby
the amortization is determined by the proportion of actual reinsurance recoveries to total estimated
recoveries. The Company amortized $17.1 million, $18.2 million, and $18.0 million of the Deferred Gain
for the years ended December 31, 2011, 2010, and 2009, respectively. There were no adjustments to the
direct reserves ceded under the LPT Agreement or related adjustment to the Deferred Gain for the
years ended December 31, 2011, 2010, and 2009. The amortization of the Deferred Gain and
adjustments due to development in the reserves are recorded in losses and LAE incurred in the
accompanying consolidated statements of income. The remaining Deferred Gain was $353.2 million and
$370.3 million as of December 31, 2011 and 2010, respectively, which is included in the accompanying
consolidated balance sheets.
The Company is also entitled to receive a contingent profit commission under the LPT Agreement.
The Company accrues the estimated ultimate contingent profit commission to be received through June
30, 2024. The estimate was revised to increase the ultimate contingent profit commission by $1.8 million
and $0.8 million, for the years ended December 31, 2011 and 2010, respectively, as a result of actual
paid losses and LAE being lower than expected paid losses and LAE under the LPT Agreement. The
Company recorded no change to the estimate for the year ended December 31, 2009. As of December
31, 2011 and 2010, the Company had a receivable of $3.6 million and $1.7 million related to the
contingent profit commission, respectively.
Funds Held
In the fourth quarter of 2010, the Company re-negotiated the terms of a reinsurance agreement
with Clarendon, which resulted in the release and return of funds held by Clarendon in the amount of
$74.6 million. The Company placed $47.1 million in trust, of which $35.0 million was placed in an
investment trust and $12.1 million was classified as restricted cash and cash equivalents, for the benefit
of Clarendon to support the liabilities under the reinsurance agreement and invested the remaining
$27.5 million.
In the second quarter of 2011, the Company released $12.1 million of the restricted cash from the
trust, based on Clarendon and the Company’s determination the trust was over-collateralized. The
Company still has $35.2 million in the trust, which includes an original amount of $35.0 million plus $0.2
million of interest. Of that amount, $1.7 million is classified as restricted cash and cash equivalents.
10. Notes Payable
Notes payable is comprised of the following:
December 31,
2011
2010
(in thousands)
Amended Credit Facility, due December 31, 2015 with variable interest, as
described below. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 90,000
$100,000
Dekania Surplus Note, due April 30, 2034 with variable interest of 425 basis
points above 90-day LIBOR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10,000
10,000
ICONS Surplus Note, due May 26, 2034 with variable interest of 425 basis
points above 90-day LIBOR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Alesco Surplus Note, due December 15, 2034 with variable interest of 405
12,000
12,000
basis points above 90-day LIBOR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10,000
10,000
Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$122,000
$132,000
On December 28, 2010, the Company entered into the Third Amended and Restated Credit
Agreement (Amended Credit Facility) with Wells Fargo Bank, National Association (Wells Fargo),
under which the Company is provided with: (a) $100.0 million line of credit through December 31, 2011;
(b) $90.0 million line of credit from January 1, 2012 through December 31, 2012; (c) $80.0 million line
of credit from January 1, 2013 through December 31, 2013; (d) $70.0 million line of credit from January
1, 2014 through December 31, 2014; and (e) $60.0 million line of credit from January 1, 2015 through
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09519
December 31, 2015. Amounts outstanding bear interest at a rate equal to, at the Company’s option: (a)
a fluctuating rate of 1.75% above prime rate or (b) a fixed rate that is 1.75% above the LIBOR rate
then in effect. The Amended Credit Facility is secured by fixed maturity securities and cash and cash
equivalents that had a fair value of $126.7 million at December 31, 2011. The Amended Credit Facility
contains customary non-financial covenants and requires EHI to maintain $5.0 million of cash and cash
equivalents at all times. The Company is currently in compliance with all applicable covenants. Interest
paid during the years ended December 31, 2011, 2010, and 2009, totaled $2.0 million, $4.4 million, and
$5.8 million, respectively. In accordance with the terms of the contract, a repayment of $10.0 million
was made toward the Amended Credit Facility on December 31, 2011.
EPIC has a $10.0 million surplus note to Dekania CDO II, Ltd. issued as part of a pooled
transaction. The note matures in 2034 and became callable by the Company in the second quarter of
2009. The terms of the note provide for quarterly interest payments at a rate 425 basis points in excess
of the 90-day LIBOR. Both the payment of interest and repayment of the principal under this note and
the surplus notes described in the succeeding two paragraphs are subject to the prior approval of the
Florida Department of Financial Services. Interest paid during the years ended December 31, 2011,
2010, and 2009 was $0.5 million, $0.5 million, and $0.6 million, respectively. Interest accrued as of
December 31, 2011 and 2010 was $0.1 million.
EPIC has a $12.0 million surplus note to ICONS, Inc. issued as part of a pooled transaction. The
note matures in 2034 and became callable by the Company in the second quarter of 2009. The terms of
the note provide for quarterly interest payments at a rate 425 basis points in excess of the 90-day
LIBOR. Interest paid during the years ended December 31, 2011, 2010, and 2009 was $0.6 million, $0.6
million, and $0.7 million, respectively. Interest accrued as of December 31, 2011 and 2010 was $0.1
million.
EPIC has a $10.0 million surplus note to Alesco Preferred Funding V, LTD issued as part of a
pooled transaction. The note matures in 2034 and became callable by the Company in the fourth
quarter of 2009. The terms of the note provide for quarterly interest payments at a rate 405 basis points
in excess of the 90-day LIBOR. Interest paid during the years ended December 31, 2011, 2010, and 2009
was $0.4 million, $0.4 million, and $0.5 million, respectively. Interest accrued as of December 31, 2011
and 2010 was $0.1 million.
Principal payment obligations on notes payable outstanding at December 31, 2011, were as follows:
Year
2012. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Principal Due
(in thousands)
$ 10,000
10,000
10,000
60,000
—
32,000
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$122,000
11. Commitments and Contingencies
Leases
The Company leases office facilities and certain equipment under operating and capital leases.
Most leases have renewal options, typically with increased rental rates during the option period. Certain
of these leases contain options to purchase the property at amounts that approximate fair market value;
other leases contain options to purchase at a bargain purchase price. At December 31, 2011, the
remaining lease terms expire over the next six years.
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64084
The future lease payments for the next five years and thereafter on these non-cancelable operating
and capital leases at December 31, 2011, were as follows:
Year
Operating
Leases
Capital
Leases
(in thousands)
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 7,145
7,048
6,151
4,595
3,290
2,485
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$30,714
$1,019
107
—
—
—
—
$1,126
Included in the future minimum capital lease payments are future interest charges of $0.1 million.
Facilities rent expense was $5.1 million, $8.9 million, and $7.4 million for the years ended December 31,
2011, 2010, and 2009, respectively.
Property held under capital leases is included in property and equipment as follows:
Asset Class
2010
2011
(in thousands)
Furniture and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Computers and software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Automobiles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
100
1,283
1,480
$
100
1,282
1,880
Accumulated amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,863
(2,020)
843
$
3,262
(1,076)
$ 2,186
Contingencies Surrounding Insurance Assessments
All of the states where the Company’s insurance subsidiaries are licensed to transact business
require property and casualty insurers doing business within the respective state to pay various
insurance assessments. The Company accrues a liability for estimated insurance assessments as direct
premiums are written, losses are recorded, or as other events occur in accordance with various states’
laws and regulations, and defers these costs and recognizes them as an expense as the related premiums
are earned. The Company had an accrued liability for guaranty fund assessments, second injury funds
assessments, and other insurance assessments totaling $7.9 million and $7.0 million as of December 31,
2011 and 2010, respectively. These liabilities are expected to be paid over two to five year periods based
on individual states’ regulations. The Company also recorded an asset of $4.0 million and $6.8 million,
as of December 31, 2011 and 2010, respectively, for prepaid policy charges still to be collected in the
future from policyholders, assessments that may be recovered through a reduction in future premium
taxes in certain states, and for expected refunds of certain prepaid assessments based on a change in the
Company’s premium between the time when the prepayment was made and when the assessment
becomes due. These assets are expected to be realized over two to ten year periods in accordance with
their type and individual states’ regulations.
12. Stockholders’ Equity
Stock Repurchase Programs
On November 3, 2010, the Board of Directors authorized a share repurchase program of up to
$100.0 million of the Company’s common stock from November 8, 2010 through June 30, 2012 (the 2011
Program). In November 2011, the Board of Directors authorized a $100.0 million expansion of the 2011
Program, to $200.0 million, and extended the repurchase authority pursuant to the 2011 Program
through June 30, 2013. The Company expects that shares may be purchased at prevailing market prices
in accordance with
through a variety of methods,
including open market or private transactions,
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applicable laws and regulations. The timing and actual number of shares 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 2011 Program may be commenced or suspended from
time-to-time without prior notice, and the 2011 Program may be suspended or discontinued at any time.
From inception of the 2011 Program through December 31, 2011, the Company repurchased a total of
7,004,790 shares of common stock at an average price of $15.28 per share, including commissions, for a
total of $107.0 million.
Since the Company’s initial public offering in January 2007 through December 31, 2011, the
Company repurchased a total of 20,951,633 shares of common stock at an average cost per share of
$15.31, which is reported as treasury stock, at cost, on the accompanying consolidated balance sheets.
13. Stock-Based Compensation
The Employers Holdings, Inc. Amended and Restated Equity and Incentive Plan (the Plan) is
administered by the Compensation Committee of the Board of Directors, which is authorized to grant,
at its discretion, awards to officers, employees, non-employee directors, consultants, and independent
contractors. The maximum number of common shares reserved for grants of awards under the Plan is
7,105,838 shares. The Plan provides for the grant of stock options (both incentive stock options and
nonqualified stock options), stock appreciation rights, restricted stock, restricted stock units, stock-
based performance awards, and other stock-based awards.
As of December 31, 2011, nonqualified stock options, restricted stock units, and performance share
awards have been granted, but no incentive stock options, stock appreciation rights, or restricted stock
have been granted under the Plan.
Compensation costs are recognized net of any estimated forfeitures on a straight-line basis over the
employee requisite service periods. Forfeiture rates are based on historical experience and are adjusted
in subsequent periods for differences in actual forfeitures from those estimated. Net stock-based
compensation expense recognized in the accompanying consolidated statements of comprehensive
income was as follows:
Stock-based compensation expense related to:
Nonqualified stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted stock units. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Performance shares. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: related tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net stock-based compensation expense . . . . . . . . . . . . . . . . . . . . . .
Years Ended December 31,
2010
2011
2009
(in thousands)
$1,648
2,094
—
3,742
1,220
$2,522
$2,039
2,014
—
4,053
1,116
$2,937
$1,782
1,473
2,111
5,366
1,640
$3,726
Nonqualified Stock Options
The Company awarded “Founders’ grants” to employees, excluding senior officers, in February
2007. The founders’ grants awards vested pro-rata on each of the first three anniversaries of the
effective date of EHI’s IPO. The options expire seven years from the date of grant. Additional grants of
nonqualified stock options awarded to certain officers of the Company have a service vesting periods of
four years after the date awarded and vest 25% on each of the subsequent four anniversaries of such
date. The options are subject to accelerated vesting in certain limited circumstances, such as: death or
disability, or in connection with a change of control of the Company. The options expire seven years
from the date of grant.
The fair value of the stock options granted is estimated using a Black-Scholes option pricing model
that uses the assumptions noted in the following table. During the years ended December 31, 2011,
2010, and 2009, the expected stock price volatility used to value the options granted in 2011, 2010, and
2009 was based on the volatility of the Company’s historical stock price since February 2007. The
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expected term of the options granted in 2011, 2010, and 2009 was calculated using the ’plain-vanilla’
calculation provided in the guidance of the Securities and Exchange Commission’s Staff Accounting
Bulletin No. 107. The dividend yield was calculated using amounts authorized by the Board of
Directors. The risk-free interest rate is the yield on the grant date of the options of U.S. Treasury zero
coupon securities with a maturity comparable to the expected term of the options.
The Company anticipates issuing new shares upon exercise of stock options.
The fair value of the stock options granted during the years ended December 31, 2011, 2010, and
2009 were calculated using the following weighted average assumptions:
Expected volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected life (in years) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011
2010
2009
43.6% 47.3% 51.0%
4.8
4.8
1.2% 1.6% 2.0%
1.9% 2.6% 2.5%
4.8
Weighted average grant date fair values of options granted . . . . . . . . .
$7.01
$5.80
$4.59
Changes in outstanding stock options for the year ended December 31, 2011 were as follows:
Number of
Options
Weighted-Average
Exercise Price
Weighted Average
Remaining
Contractual Life
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options outstanding at December 31, 2008 . . . 1,024,085
531,082
(4,239)
(38,222)
Options outstanding at December 31, 2009 . . . 1,512,706
406,020
(7,783)
(35,441)
(112,399)
Options outstanding at December 31, 2010 . . . 1,763,103
355,063
(92,646)
(49,445)
(187,369)
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options outstanding at December 31, 2011 . . . 1,788,706
Exercisable at December 31, 2011 . . . . . . . . . . . .
951,547
$18.72
11.84
17.82
18.73
16.30
15.31
12.03
17.94
15.03
16.14
19.81
16.53
17.32
15.36
16.90
17.07
5.9
6.4
5.4
6.2
4.8
6.2
4.3
2.9
At December 31, 2011, the Company had yet to recognize $3.7 million in deferred compensation
related to nonqualified stock options grants and expects to recognize these costs on a straight-line basis
over the next 39 months. The fair value of options vested and the intrinsic value of outstanding and
exercisable options as of December 31, were as follows:
Fair value of options vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intrinsic value of outstanding options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intrinsic value of exercisable options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011
2009
2010
(in millions)
$1.5
$1.8
3.5
1.9
0.7 —
$1.4
3.3
1.5
Performance Share Awards
On August 8, 2007, officers of the Company were awarded, in aggregate, 140,311 performance
share awards (PSAs) for a performance period that ended December 31, 2009. These PSAs were subject
to certain performance targets with ultimate payouts of 150% of the target award. The fair value of the
PSAs on the date of grant was $2.6 million. In March 2010, 196,071 PSAs vested.
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Restricted Stock Units
The Company has awarded restricted stock units (RSUs) to non-employee members of the Board
of Directors and certain officers of the Company. The RSUs awarded to non-employee members of the
Board vest on the first anniversary of the award date. RSU grants allow each non-employee Director to
decide whether to defer settlement of the RSUs until six months after termination of Board service or
settle the RSUs at vesting. Dividend equivalents are granted to Directors who elected to defer
settlement of the RSUs after the grants vested. RSUs awarded to officers of the Company have a
service vesting period of four years from the date awarded and vest 25% on each of the subsequent four
anniversaries of such date. These RSUs are subject
to accelerated vesting in certain limited
circumstances, such as: death or disability of the holder, or in connection with a change of control of
the Company.
Changes in outstanding RSUs for the year ended December 31, 2011 were as follows:
RSUs outstanding at December 31, 2008 . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
RSUs outstanding at December 31, 2009 . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
RSUs outstanding at December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Number of
RSUs
199,881
218,039
(7,334)
(45,243)
365,343
195,301
(38,837)
(93,292)
428,515
157,570
(62,618)
(105,278)
RSUs outstanding at December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . .
418,189
Vested but unsettled RSUs at December 31, 2011 . . . . . . . . . . . . . . . .
86,855
Weighted
Average
Grant Date
Fair Value
$18.92
11.84
19.21
19.21
14.66
15.36
14.81
14.60
14.98
19.03
15.29
15.25
16.39
15.31
The fair value of RSUs vested and the intrinsic value of outstanding and vested RSUs as of
December 31, were as follows:
Fair value of RSUs vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intrinsic value of outstanding RSUs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intrinsic value of vested RSUs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2009
2011
2010
(in millions)
$1.4
7.5
1.7
$1.6
7.6
1.9
$0.9
5.6
0.7
14. Statutory Matters
Statutory Financial Data
The combined capital stock, surplus and net income of the Company’s insurance subsidiaries
(EICN, ECIC, EPIC, and EAC), prepared in accordance with the statutory accounting practices (SAP)
of the National Association of Insurance Commissioners (NAIC) as well as SAP permitted by the states
of California, Florida, and Nevada, were as follows:
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38808
December 31,
2011
2010
(in thousands)
Capital stock and unassigned surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Paid in capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Special surplus funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Surplus notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$241,087
64,900
49,932
32,000
$301,590
64,900
55,771
32,000
Total statutory surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$387,919
$454,261
Net income for the Company’s insurance subsidiaries prepared in accordance with SAP for the
years ended December 31, 2011, 2010 and 2009 was $13.8 million, $59.1 million and $89.5 million,
respectively.
Treatment of the LPT Agreement and the surplus notes (see Notes 9 and 10) are the primary
differences in the SAP-basis capital stock and total surplus of the insurance subsidiaries of $387.9
million and $454.3 million, and the GAAP-basis equity of the Company of $474.2 million and $490.1
million as of December 31, 2011 and 2010, respectively. Under SAP accounting, the retroactive
reinsurance gain resulting from the LPT Agreement is recorded as a special component of surplus
(special surplus funds) in the initial year of the contract, and not reported as unassigned surplus until
the Company has recovered amounts in excess of the original consideration paid. The special surplus
funds are also reduced by the amount of extraordinary dividends as approved by the Nevada Division
of Insurance. Under GAAP accounting, the gain is deferred and amortized over the period the
underlying reinsured claims are paid (see Note 9). Under SAP, the surplus notes are recorded as a
separate component of surplus. Under GAAP, the surplus notes are considered debt.
Insurance Company Dividends
The ability of EHI to pay dividends on the Company’s common stock and to pay other expenses
will be dependent to a significant extent upon the ability of the Nevada domiciled insurance company,
EICN, and the Florida domiciled insurance company, EPIC, to pay dividends to their immediate
holding company, Employers Group, Inc. (EGI) and, in turn, the ability of EGI to pay dividends to
EHI. ECIC and EAC have the ability to declare and pay dividends to EICN and EPIC, respectively,
subject to certain restrictions. The amount of dividends each of the Company’s subsidiaries may pay to
their immediate parent is limited by the laws of their respective state of domicile.
Nevada law limits the payment of cash dividends by EICN to its parent by providing that payments
cannot be made except from available and accumulated surplus, otherwise unrestricted (unassigned),
and derived from realized net operating profits and realized and unrealized capital gains. A stock
dividend may be paid out of any available surplus. A cash or stock dividend prohibited by these
restrictions may only be declared and distributed as an extraordinary dividend upon the prior approval
of the Nevada Commissioner of Insurance (Nevada Commissioner). EICN may not pay such an
extraordinary dividend or make an extraordinary distribution until the Nevada Commissioner either
approves or does not disapprove the payment within 30 days after receiving notice of its declaration. An
extraordinary dividend or distribution is defined by statute to include any dividend or distribution of
cash or property whose fair market value, together with that of other dividends or distributions made
within the preceding 12 months, exceeds the greater of: (a) 10% of EICN’s statutory surplus as regards
to policyholders at the next preceding December 31; or (b) EICN’s statutory net income, not including
realized capital gains, for the 12-month period ending at the next preceding December 31. As of
December 31, 2011, EICN had positive unassigned surplus of $200.8 million. During 2011, EICN paid
dividends of $51.9 million to EGI, and subsequently from EGI to EHI. The maximum dividends that
may be paid in 2012 by EICN without prior approval is $26.3 million.
Under Florida law, without regulatory approval, EPIC may pay dividends if they do not exceed the
greater of: the lesser of 10% of surplus or net income, not including realized capital gains, plus a 2-year
carry forward; 10% of surplus, with dividends payable limited to unassigned funds minus 25% of
unrealized capital gains; or, the lesser of 10% of surplus or net investment income plus a 3-year carry
forward with dividends payable limited to unassigned funds minus 25% of unrealized capital gains.
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During 2011, EPIC declared and paid a dividend of $15.5 million to EGI, and in turn from EGI to EHI.
The maximum dividends that may be paid in 2012 by EPIC without prior approval, is $13.6 million.
Regulatory Requirements and Restrictions
ECIC is subject to regulation by the California Department of Insurance (California DOI). The
ability of ECIC to pay dividends was further limited by restrictions imposed by the California DOI in
its approval of the Company’s October 1, 2008 reinsurance pooling agreement. Under that approval: (a)
ECIC must initiate discussions of its business plan with the California DOI if its premium to
policyholder surplus ratio exceeds 1.5 to 1; (b) ECIC will not exceed a ratio of premium to policyholder
surplus of 2 to 1 without approval of the California DOI; (c) if at any time ECIC’s policyholder surplus
decreases to 80% or less than the September 30, 2008 balance, ECIC shall cease issuing new policies in
California, but may continue to renew existing policies until it has (i) received a capital infusion to bring
its surplus position to the same level as that as of September 30, 2008 and (ii) submitted a new business
plan to the California DOI; (d) ECIC will maintain a risk based capital (RBC) level of at least 350%;
(e) should ECIC fail to comply with any commitments listed herein, ECIC will consent to any request
by the California DOI to cease issuing new policies in California, but may continue to renew existing
policies until such time that as ECIC is able to achieve full compliance with each commitment; and (f)
the obligations listed shall only terminate with the written consent of the California DOI.
EPIC and EAC are subject to regulation by the Florida Department of Financial Services (FDFS).
Florida statute Section 624.408 requires EPIC and EAC to maintain minimum capital and surplus of the
greater of $4.0 million or 10% of total liabilities. Florida statute Section 624.4095 requires EPIC and
EAC to maintain a ratio of written premiums times 1.25 to surplus of no greater than 10-to-1 for gross
written premiums and 4-to-1 for net written premiums. During the years ended December 31, 2011,
2010, and 2009, EPIC and EAC were in compliance with these statutes.
Additionally, EICN, ECIC, EPIC, and EAC are required to comply with NAIC RBC
requirements. RBC is a method of measuring the amount of capital appropriate for an insurance
company to support its overall business operations in light of its size and risk profile. NAIC RBC
standards are used by regulators to determine appropriate regulatory actions relating to insurers that
show signs of weak or deteriorating conditions. As of December 31, 2011, 2010, and 2009, EICN, ECIC,
EPIC, and EAC each had total adjusted capital above all regulatory action levels.
ECIC, EPIC, and EAC are subject to Florida statute and applicable regulations related to Florida
excessive profits for workers’ compensation insurance companies. Florida excessive profits are
calculated based upon a complex statutory formula which is applied over a rolling three year period.
Companies are required to file annual excessive profits forms, and they are required to return so-called
“Florida excessive profits” to policyholders in the form of a cash refund or credit toward the future
purchase of insurance. As of December 31, 2011 and 2010, the Company had no amounts accrued for
estimated additional Florida excessive profits based on its statutory underwriting results for the years
ended 2008-2010.
15. Accumulated Other Comprehensive Income, Net
Accumulated other comprehensive income, net, is comprised of unrealized gains on investments
classified as available-for-sale and unrealized losses on an interest rate swap, net of deferred tax
expense. The following table summarizes the components of accumulated other comprehensive income,
net:
Net unrealized gain on investments, before taxes . . . . . . . . . .
Deferred tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total accumulated other comprehensive income, net . . . . . . .
88
Years Ended December 31,
2011
2010
(in thousands)
$179,567
(62,848)
$116,719
$129,435
(45,302)
$ 84,133
30281
16. Employee Benefit and Retirement Plans
The Company maintained two 401(k) defined contribution plans covering all eligible Company
employees until April 2011. One plan covered eligible employees of the Company that existed prior to
the acquisition of AmCOMP Incorporated (AmCOMP) in 2008 (the Employers 401(k) Plan). The
second plan covered all eligible employees of the Company acquired in the AmCOMP acquisition (the
AmCOMP 401(k) Plan). Effective April 1, 2011, the two plans merged and participants of the
AmCOMP 401(k) Plan transferred to the Employers 401(k) Plan. Under the Employers 401(k) Plan,
the Company’s safe harbor matching consists of 100% matching contribution on salary deferrals up to
3% of compensation and then 50% matching contribution on salary deferrals from 3% to 5% of
compensation. The Company’s contribution to the Employers 401(k) Plan was $1.5 million, $1.4 million,
and $1.6 million for the years ended December 31, 2011, 2010, and 2009, respectively. Expenses relating
to the AmCOMP 401(k) Plan were $0.5 million and $0.7 million for the years ended December 31, 2010
and 2009, respectively.
17. Earnings Per Share
Basic earnings per share includes no dilution and is computed by dividing income applicable to
stockholders by the weighted average number of shares outstanding for the period. Diluted earnings per
share reflect the potential dilutive impact of all convertible securities on earnings per share. Diluted
earnings per share includes shares assumed issued under the “treasury stock method,” which reflects the
potential dilution that would occur if outstanding options were to be exercised.
The following table presents the net income and the weighted average shares outstanding used in
the earnings per share calculations.
Years Ended December 31,
2010
(in thousands, except share and per share data)
2009
2011
Net income available to stockholders—basic
and diluted. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
48,313
$
62,799
$
83,021
Weighted average number of shares
outstanding—basic . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of dilutive securities:
Nonqualified stock options . . . . . . . . . . . . . . . . .
Performance share awards . . . . . . . . . . . . . . . . .
Restricted stock units . . . . . . . . . . . . . . . . . . . . . .
Dilutive potential shares. . . . . . . . . . . . . . . . . . . . . .
37,284,425
41,390,984
45,953,868
61,048
—
78,592
139,640
7,490
—
66,768
74,258
—
114,968
21,996
136,964
Weighted average number of shares
outstanding—diluted . . . . . . . . . . . . . . . . . . . . . . .
37,424,065
41,465,242
46,090,832
Diluted earnings per share exclude outstanding options and other common stock equivalents in
periods where the inclusion of such potential common stock instruments would be anti-dilutive. For the
years ended December 31, 2011, 2010, and 2009, 1.1 million, 0.9 million, and 1.0 million stock options,
respectively, were excluded from diluted earnings per share, as the exercise price of the options was
greater than the average market price of the common stock during the period. During the same periods,
0.5 million, 0.4 million, and 0.7 million outstanding RSU’s and stock options, respectively, were
excluded from diluted earnings per share under the treasury method, as the potential proceeds on
settlement or exercise was greater than the value of shares acquired.
18. Strategic Restructuring Plan
On July 2, 2010, the Company announced the reorganization of its operations to eliminate
duplicative services and better align resources with business activity and growth opportunities. The
Company combined its four regional operating units into two units, Eastern and Western, with the
Strategic Partnerships and Alliances unit remaining structurally unchanged. In connection with these
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72892
efforts and with general cost control efforts, the Company eliminated approximately 160 positions and
announced the closure of four offices. The changes to the Company’s workforce were substantially
completed in the third quarter of 2010.
During the year ended December 31, 2010, the Company recorded total restructuring charges of
$6.1 million, including $3.9 million related to workforce reductions and $2.2 million related to leases for
facilities that were vacated during the year. These charges are included in underwriting and other
operating expense in the consolidated statements of comprehensive income. As of December 31, 2010,
the Company had accrued $0.2 million for personnel-related termination costs and $2.3 million related
to leases for facilities that were vacated, which are included in accounts payable and accrued expenses
in the accompanying consolidated balance sheets.
On January 23, 2009, the Company announced a strategic restructuring plan to achieve the
corporate and operational objectives set forth as part of its acquisition and integration of AmCOMP,
and in response to then current economic conditions. The restructuring plan included a staff reduction
of 14% of the Company’s total workforce and consolidation of corporate activities into the Company’s
Reno, Nevada headquarters. During the year ended December 31, 2009, the Company incurred
integration and restructuring charges of $5.7 million,
including $2.8 million in personnel-related
termination costs. These charges are included in underwriting and other operating expenses in the
consolidated statements of comprehensive income. Cash payments relating to the 2009 restructuring
were $0.6 million and $5.1 million during the years ending December 31, 2010 and 2009, respectively.
As of December 31, 2010 and 2009, the Company had zero and $0.6 million accrued, respectively, for
the remaining 2009 restructuring costs that are included in accounts payable and accrued expenses in
the accompanying consolidated balance sheets.
19. Selected Quarterly Financial Data (Unaudited)
Quarterly results for the years ended December 31, 2011 and 2010 were as follows:
2011 Quarters Ended
March 31
June 30
September 30 December 31
(in thousands except per share data)
Net premiums earned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Realized gains on investment, net. . . . . . . . . . . . . . . . . .
Losses and loss adjustment expenses . . . . . . . . . . . . . . .
Commission expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Underwriting and other operating expenses . . . . . . . .
Income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings per common share:
$82,427
234
59,421
10,281
25,678
(2,380)
8,345
$88,128
1,102
64,150
11,119
26,200
(2,003)
8,251
$92,601
647
67,438
10,968
25,334
(4,355)
11,783
Basic. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.22
0.21
0.21
0.21
0.31
0.31
$100,268
18,178
73,654
13,134
23,505
6,632
19,934
0.58
0.58
2010 Quarters Ended
March 31
June 30
September 30 December 31
(in thousands except per share data)
Net premiums earned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Realized gains on investment, net. . . . . . . . . . . . . . . . . .
Losses and loss adjustment expenses . . . . . . . . . . . . . . .
Commission expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Underwriting and other operating expenses . . . . . . . .
Income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings per common share:
$79,291
540
40,288
9,905
32,267
(530)
16,097
$78,235
352
45,045
9,176
25,143
1,636
16,499
Basic. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.38
0.38
0.39
0.39
$80,695
8
52,764
9,971
25,722
58
10,054
0.25
0.25
$83,565
9,237
56,682
9,416
22,894
2,359
20,149
0.51
0.51
90
79640
Fourth Quarter Adjustments
The fourth quarter of 2011 was impacted by two adjustments which consisted of (1) a pretax $849
thousand decrease in underwriting and other operating expenses (after tax of $552 thousand) resulting
from an over-accrual of sales incentives throughout 2011, and (2) a $993 thousand increase in income
tax expense primarily related to the write off a deferred tax asset related to the prior year. These
adjustments were not material to any individual prior period or the current period and, accordingly, the
prior period results have not been adjusted.
Net Premiums Earned
The increase in net premiums earned in 2011was primarily due to increasing policy count as we
executed our growth strategy. The decrease in net premiums earned during the first six months of 2010
was primarily due to the decrease in gross premium written, resulting from lower rates, competitive
pressures, and changes in business conditions due to the economy and its impact on small businesses. In
the third and fourth quarters of 2010 the net premiums earned increased primarily as a result of
favorable adjustments in the final audit accrual.
Realized Gains on Investments, Net
The increase in realized gains on investments, net in the fourth quarter of 2011 resulted from a
strategic rebalancing of our investment portfolio in an effort to increase portfolio allocations to taxable
fixed income sectors, shorten portfolio duration following the decline in interest rates in the second half
of 2011, and increase the allocation in high dividend equity securities.
The Company evaluated its portfolio allocation during the fourth quarter of 2010 and elected to
shift $20.0 million of equity securities into a high-yield dividend portfolio, resulting in a $9.2 million
realized gain.
Losses and LAE
Losses and LAE increased in in each quarter of 2011, primarily due to higher net earned
premiums.
Favorable prior accident year reserve development was recognized in each of the first two quarters
of 2010 in the amounts of $11.1 million and $5.5 million, respectively, and no favorable development
was recognized in the third quarter. Additionally, a $1.6 million expense related to the commutation of
certain reinsurance treaties was included in losses and LAE for the third quarter of 2010. Unfavorable
loss development of $0.9 million was recognized in the fourth quarter of 2010 related to the write-off of
certain reinsurance recoverables that had previously been accounted for as an allowance for bad debt.
Commission Expense
Commission expense increased in the first, second and fourth quarters of 2011, primarily due to
higher net earned premiums. Additionally, in the fourth quarter of 2011 there was a change in the
accrual for agency incentive commissions of $1.2 million, which increased the commission expense in
the quarter.
During the fourth quarter of 2010, the Company reduced its estimate of certain administrative fees
due under its joint marketing agreements by $3.0 million, which decreased the commission expense in
the fourth quarter of 2010. The Company also re-negotiated the terms of certain reinsurance
agreements, which increased commission expense by $1.8 million in the fourth quarter of 2010.
Underwriting and Other Operating Expenses
Underwriting and other operating expenses declined in the first, second, and fourth quarters of
2010 as the Company managed its expenses, primarily through workforce reductions. The first quarter
included charges of a $0.9 million expense related to workforce reductions. In the third quarter of 2010,
the Company recorded a $4.3 million expense related to workforce reductions and leases for facilities
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that were vacated during the quarter. The fourth quarter included a $0.9 million expense related to
leases for facilities that were vacated during that quarter.
Income Taxes
Income tax expense (benefit) for interim periods is measured using an estimated effective tax rate
for the annual period based on projected net income and tax adjustments. On an interim basis, actual
results to date replace the projections and the annual effective tax rate is updated. A cumulative change
is recorded in the quarter the effective tax rate changes.
The increased income tax expense in the fourth quarter of 2011 was primarily related to the
increased realized gains on investments, net during that quarter.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of
the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) designed to provide
reasonable assurance that the information required to be reported in the Exchange Act filings is
recorded, processed, summarized and reported within the time periods specified and pursuant to SEC
regulations, including controls and procedures designed to ensure that this information is accumulated
and communicated to management, including its chief executive officer and chief financial officer, as
appropriate, to allow timely decisions regarding the required disclosure. It should be noted that,
because of inherent limitations, our disclosure controls and procedures, however well designed and
operated, can provide only reasonable, and not absolute, assurance that the objectives of the disclosure
controls and procedures are met.
Our management, with the participation of our Chief Executive Officer and Chief Financial
Officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the
period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief
Financial Officer have concluded that our disclosure controls and procedures were effective at a
reasonable level of assurance as of December 31, 2011.
Management’s Report on Internal Control Over Financial Reporting
Management’s report regarding internal control over financial reporting is set forth in Item 8 of
this Annual Report on Form 10-K under the caption “Management’s Report on Internal Control over
Financial Reporting” and incorporated herein by reference.
Attestation Report of Independent Registered Public Accounting Firm
The attestation report of the Company’s independent registered public accounting firm regarding
internal control over financial reporting is set forth in Item 8 of this Annual Report on Form 10-K
under the caption “Report of Independent Registered Public Accounting Firm” and incorporated
herein by reference.
Changes in Internal Control Over Financial Reporting
There have not been any changes in our internal control over financial reporting (as such term is
defined in Rules 13a-15(f) in the Exchange Act) during the fourth fiscal quarter of the year to which
this report relates that have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
Item 9B. Other Information
None.
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PART III
Item 10. Directors, Executive Officers, and Corporate Governance
The information required by Item 10 with respect to our executive officers and key employees is
included under the caption “Executive Officers of the Registrant” in our Proxy Statement for the 2012
Annual Meeting and is incorporated herein by reference. We plan to file such Proxy Statement within
120 days after December 31, 2011, the end of our fiscal year.
The information required by Item 10 with respect to our Directors is included under the caption
“Election of Directors” in our Proxy Statement for the 2012 Annual Meeting of Stockholders and is
incorporated herein by reference.
The information required by Item 10 with respect to compliance with Section 16 of the Exchange
Act is included under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” in our
Proxy Statement for the 2012 Annual Meeting of Stockholders and is incorporated herein by reference.
The information required by Item 10 with respect to our audit committee and our audit committee
financial expert is included under the caption “The Board of Directors and its Committees - Audit
Committee” in our Proxy Statement for the 2012 Annual Meeting of Stockholders and is incorporated
herein by reference.
The information required by Item 10 with respect to our Code of Business Conduct and Ethics and
our Code of Ethics for Senior Financial Officers is posted on our website at www.employers.com in the
Investors section under “Governance.” We will post information regarding any amendment to, or
waiver from, our Code of Business Conduct and Ethics on our website in the Investor section under
Governance.
Item 11. Executive Compensation
The information required by Item 11 is included under the captions “Compensation Discussion and
Analysis,” “Compensation Committee Report” and “Compensation Committee Interlocks and Insider
Participation” in our Proxy Statement for the 2012 Annual Meeting of Stockholders and is incorporated
herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Certain information required by Item 12 is included under the captions “Security Ownership of
Certain Beneficial Owners and Management” and “Compensation Discussion and Analysis” in our
Proxy Statement for the 2012 Annual Meeting of Stockholders and is incorporated herein by reference.
Equity and Incentive Plan
The following table gives information about our common stock that may be issued upon the
exercise of options, warrants, and rights under all of our existing equity compensation plans as of
December 31, 2011. We do not have any plans not approved by our stockholders. Our equity
compensation plans are discussed further in Note 13 in the Notes to our Consolidated Financial
Statements, which are included herein.
(a)
(b)
Number of securities
to be issued upon
exercise of outstanding
options, warrants, and
rights
Weighted-average
exercised price of
outstanding options,
warrants, and
rights
(c)
Number of securities
remaining available for
further issuance
under compensation plans
(excluding securities
reflected in column (a))
Plan Category
Equity compensation plans approved
by stockholders . . . . . . . . . . . . . . . . . . . . .
Equity compensation plans not
approved by stockholders . . . . . . . . . . .
1,788,706
—
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,788,706
$16.90
—
$16.90
4,478,413
—
4,478,413
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Item 13. Certain Relationships and Related Transactions and Director Independence
The information required by Item 13 is included under the captions “Certain Relationships and
Related Transactions” and “Director Independence” in our Proxy Statement for the 2012 Annual
Meeting of Stockholders and is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
The information required by Item 14 with respect to the fees and services of Ernst & Young LLP,
our independent registered public accounting firm, is included under the caption “Audit Matters” in our
Proxy Statement for the 2012 Annual Meeting of Stockholders and is incorporated herein by reference.
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PART IV
Item 15. Exhibits and Financial Statement Schedules
The following consolidated financial statements are filed in Item 8 of Part II of this report:
Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheets as of December 31, 2011 and 2010. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Comprehensive Income for each of the three years ended
December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Stockholders’ Equity for each of the three years ended
December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows for each of the three years ended December 31, 2011 .
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Page
60
61
62
63
64
65
Financial Statement Schedules:
Schedule II. Condensed Financial Information of Registrant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
96
Schedule VI. Supplemental Information Concerning Property-Casualty Insurance Operations . . .
101
Pursuant to Rule 7-05 of Regulation S-X, Schedules I, III, IV, and V have been omitted as
the information to be set forth therein is included in the notes to the audited consolidated
financial statements.
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Schedule II. Condensed Financial Information of Registrant
Employers Holdings, Inc.
Condensed Balance Sheets
December 31,
2011
2010
(in thousands, except
share data)
Assets
Investments:
Investment in subsidiaries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment in securities available-for-sale (amortized cost $183,017 in
2011 and $339,956 in 2010) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity Securities at fair value (amortized cost $14,990 in 2011 and $0 in
2010) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intercompany receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 200,801
$ 196,714
195,015
345,060
15,275
411,091
140,792
2,018
4,398
8,526
3,613
$ 570,438
—
541,774
27,991
2,017
7,485
7,541
5,739
$ 592,547
Liabilities and stockholders’ equity
Accounts payable and accrued expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
2,239
3,987
90,000
26
96,252
$
2,141
256
100,000
34
102,431
Stockholders’ equity:
Common stock, $0.01 par value; 150,000,000 shares authorized 53,948,442 and
53,779,118 shares issued and 32,996,809 and 38,965,126 shares outstanding
at December 31, 2011 and 2010, respectively. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Preferred stock, $0.01 par value; 25,000,000 shares authorized non-issued . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock, at cost (20,591,633 shares at December 31, 2011 and
14,813,992 shares at December 31, 2010) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
540
—
318,989
358,693
116,719
538
—
314,212
319,341
84,133
(320,755)
(228,108)
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities and stockholders’ equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
474,186
$ 570,438
490,116
$ 592,547
See accompanying notes.
96
55892
Employers Holdings, Inc.
Condensed Statements of Income
Years Ended December 31,
2011
2009
2010
(in thousands, except per share
data)
Revenues
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Realized gains on investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$10,284
7,769
18,053
$ 8,740
—
8,740
$ 7,089
2,682
9,771
Expenses
Other operating expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) before income taxes and equity in earnings of
subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income (loss) before equity in earnings of subsidiaries . . . . . . . . . . .
Equity in net income of subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12,662
2,040
14,702
3,351
279
3,072
45,241
10,597
4,080
14,677
(5,937)
(6,836)
899
61,900
14,036
5,719
19,755
(9,984)
(5,990)
(3,994)
87,015
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$48,313
$62,799
$83,021
Earnings per common share for the stated periods (Note 17):
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 1.30
Diluted. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 1.29
Cash dividends declared per common share . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 0.24
$
$
$
1.52
1.51
0.24
$ 1.81
$ 1.80
$ 0.24
See accompanying notes.
97
Employers Holdings, Inc.
Condensed Statement of Cash Flows
Operating activities
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Equity in net income of subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Realized gains on investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of premium or investments, net. . . . . . . . . . . . . . . . . .
Deferred income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in operating assets and liabilities:
Accounts payable, accrued expense and other liabilities . . .
Federal income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intercompany payable/receivable . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by (used in) operating activities. . . . . . . . . . . . . . . . .
Investing activities
Purchase of fixed maturity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of fixed maturity securities . . . . . . . . . . . . . . . . . . . . .
Proceeds from maturities and redemptions of investments. . . . . . . . . .
Cash dividends received from subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financing activities
Acquisition of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash transactions related to stock-based compensation . . . . . . . . . . . . .
Dividends paid to stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments on notes payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . .
Cash and cash equivalents at the beginning of the period . . . . . . . . . .
09215
Years Ended December 31,
2010
2011
2009
(in thousands)
$ 48,313
$ 62,799
$ 83,021
(45,241)
—
(7,769)
3,742
4,056
(1,803)
(61,900)
94
—
4,053
3,794
(9,930)
(87,015)
188
(2,682)
5,366
1,428
(47)
(1,106)
(5,960)
924
(718)
(6,601)
—
—
59,660
10,000
27,700
(17)
97,343
(1,147)
8,637
(470)
(7,155)
(1,225)
—
—
—
12,319
38,383
(2,000)
48,702
(63,592)
(1,135)
(9,935)
—
(74,662)
(27,185)
55,176
(74,185)
(123)
(11,031)
(50,000)
(135,339)
(44,597)
99,773
(583)
3,731
2,126
3,087
9,659
(9,024)
(14,990)
147,256
22,420
67,380
(1)
213,041
(91,975)
1,019
(8,943)
(10,000)
(109,899)
112,801
27,991
Cash and cash equivalents at the end of the period . . . . . . . . . . . . . . . .
$ 140,792
$ 27,991
$ 55,176
See accompanying notes.
98
52218
1. Nature of Operations and Summary of Significant Accounting Policies
Operations and Basis of Presentation
Employers Holdings, Inc. (EHI) is a Nevada holding company. Through its wholly owned
insurance subsidiaries, Employers Insurance Company of Nevada (EICN), Employers Compensation
Insurance Company (ECIC), Employers Preferred Insurance Company (EPIC), and Employers
Assurance Company (EAC), EHI is engaged in the commercial property and casualty insurance
industry, specializing in workers’ compensation products and services. Unless otherwise indicated, all
references to the “Company” refer to EHI, together with its subsidiaries.
EHI prepares its condensed financial statements in accordance with U.S. generally accepted
accounting principles (GAAP), using the equity method. Under the equity method, the investment in
subsidiaries is stated at cost plus equity in earnings (loss) of its subsidiaries. EHI receives dividends
from its insurance subsidiaries in the form of cash and securities. The book value for these securities is
stated at the fair market value at the date of transfer. These condensed financial statements should be
read in conjunction with EHI’s consolidated financial statements included elsewhere in this Annual
Report on Form 10-K.
Estimates and Assumptions
The preparation of the 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 financial statements, and the reported amounts of
revenue and expenses during the reporting period. As a result, actual results could differ from these
estimates.
2. Income Taxes
EHI files a consolidated federal income tax return with its subsidiaries and has a tax allocation
agreement with its subsidiaries. The equity in the undistributed earnings of subsidiaries included in the
accompanying condensed statements of income is net of income taxes.
3. Investments
EHI holds fixed maturity securities at December 31, 2011 for purposes of securing the Third and
Amended and Restated Secured Revolving Credit Facility (Amended Credit Facility). The amortized
cost and estimated fair value of fixed maturity securities at December 31, 2011, by contractual maturity,
are shown below. Expected maturities differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment penalties.
Amortized
Cost
Estimated
Fair Value
(in thousands)
Due in one year or less. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due after one year through five years . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due after five years through ten years. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due after 10 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 31,589
89,772
27,290
34,366
$183,017
$ 31,886
97,632
29,914
35,583
$195,015
At December 31, 2011, the fixed maturity securities had unrealized gains of $12.0 million which are
included in accumulated comprehensive income, net in the accompanying condensed balance sheets.
During 2011, EHI purchased equity securities and utilized market quotations to determine their
fair values.
4. Notes Payable
On December 28, 2010, EHI and Wells Fargo Bank, National Association (Wells Fargo) entered
into the Amended Credit Facility. See Note 10 of the Consolidated Financial Statements of Employers
Holdings, Inc. and Subsidiaries included herein for a description of the terms of the Amended Credit
99
84048
Facility. Interest paid during the years ended December 31, 2011, 2010, and 2009 totaled $2.0 million,
$4.4 million, and $5.8 million, respectively. In accordance with the terms of the contract, a repayment of
$10.0 million was made toward the Amended Credit Facility on December 31, 2011. The Amended
Credit Facility is secured by fixed maturity securities which had a fair value of $126.7 million at
December 31, 2011.
5. Stock-Based Compensation
During 2011, EHI awarded 157,570 RSUs to non-employee Directors and officers, and 355,063
non-qualified stock options to officers. During 2010, EHI awarded 195,301 RSUs to non-employee
Directors and officers, and 406,020 non-qualified stock options to officers. See Note 13 of the
Consolidated Financial Statements of Employers Holdings, Inc. and Subsidiaries’ included herein for a
detailed description of the stock-based compensation.
100
22018
Schedule VI. Supplemental Information Concerning Property—Casualty Insurance Operations
Employers Holdings, Inc. and Subsidiaries
Consolidated Supplemental Information Concerning Property and Casualty Insurance Operations
Deferred
Policy
Acquisition
Costs
$37,524
32,239
33,695
Year
Ended
2011
2010
2009
Reserves For
Unpaid Losses
And LAE
Unearned
Premiums
Net
Premiums
Earned
Net
Investment
Income
Losses and
LAE
Related to
Current
Years
(in thousands)
Losses and
LAE
Related to
Prior Years
Amortization of
Deferred Policy
Acquisition
Costs
Paid Losses
And LAE
Net
Premiums
Written
$2,272,363 $194,933 $363,424 $80,117 $280,683 $ 1,127
(14,130)
2,279,729
(51,359)
2,425,658
227,143
283,827
321,786
404,247
149,485
158,577
83,032
90,484
$74,500
72,071
87,638
$273,973 $410,038
313,098
262,480
368,290
289,443
Exhibits:
Exhibit
No.
3.1
3.2
4.1
10.1
10.2
10.3
10.4
*10.5
*10.6
*10.7
Description of Exhibit
Amended and Restated Articles of
Incorporation of Employers Holdings,
Inc.
Amended and Restated Bylaws of
Employers Holdings, Inc.
Form of Common Stock Certificate
Quota Share Reinsurance Agreement,
dated as of June 30, 1999, between
State Industrial Insurance System of
Nevada, D.B.A.: Employers Insurance
Company of Nevada and the various
Reinsurers as identified by the
Interests and Liabilities Agreements
attached thereto(1)
Producer Agreement, dated as of
May 1, 2005, between Employers
Compensation Insurance Company
and Automatic Data Processing
Insurance Agency, Inc. (1)
Joint Marketing and Network Access
Agreement, dated as of January 1,
2006, between Employers Insurance
Company of Nevada and Blue Cross
of California, BC Life & Health
Insurance Company, and
Comprehensive Integrated Marketing
Services(1)
Joint Marketing and Network Access
Agreement, dated as of July 1, 2006,
between Employers Insurance
Company of Nevada and Blue Cross
of California, BC Life & Health
Insurance Company, and
Comprehensive Integrated Marketing
Services(1)
Employers Holdings, Inc. Equity and
Incentive Plan Stock Option
Agreement
Employers Holdings, Inc. Equity and
Incentive Plan Performance Share
Agreement
Employers Holdings, Inc. Amended
and Restated Equity Incentive Plan
101
Included
Herewith
Incorporated by Reference Herein
Form Exhibit
Filing Date
10-K
3.1
March 30, 2007
10-Q
3.1
November 5, 2009
S-1/A
S-1/A
4.1
10.1
January 18, 2007
January 18, 2007
S-1/A
10.2
January 18, 2007
S-1/A
10.3
January 18, 2007
S-1/A
10.4
January 18, 2007
8-K
10.1
August 10, 2007
8-K
10.2
August 10, 2007
8-K
10.1 May 28, 2010
64845
Exhibit
No.
*10.8
*10.9
*10.10
*10.11
*10.12
*10.13
*10.14
10.15
10.16
10.17
21.1
23.1
24.1
31.1
31.2
32.1
32.2
**101.INS
Description of Exhibit
Form of Restricted Stock Unit
Agreement
Form of Restricted Stock Unit
Agreement for Non-Employee
Directors
Employment Agreement by and
between Employers Holdings, Inc. and
Douglas D. Dirks, dated December
17, 2008 and effective as of January 1,
2009
Employment Agreement by and
between Employers Holdings, Inc. and
Ann W. Nelson, dated December 5,
2011 and effective as of January 1,
2012
Employment Agreement by and
between Employers Holdings, Inc. and
John P. Nelson, dated December 5,
2011, and effective as of January 1,
2012
Employment Agreement by and
between Employers Holdings, Inc. and
Lenard T. Ormsby, dated December
5, 2011 and effective as of January 1,
2012
Employment Agreement by and
between Employers Holdings, Inc. and
William E. Yocke, dated December 5,
2011 and effective as of January 1,
2012
Third Amended and Restated Credit
Agreement, dated December 30, 2010,
between Employers Holdings, Inc. and
Wells Fargo Bank, National
Association
Third Amended and Restated
Revolving Line of Credit Note, dated
December 30, 2010, between
Employers Holdings Inc. and Wells
Fargo Bank, National Association
Separation and Release Agreement by
and between Employers Insurance
Company of Nevada and Martin J.
Welch, dated January 18, 2011 and
effective February 1, 2011
Subsidiaries of Employers Holdings,
Inc.
Consent of Ernst & Young LLP,
Independent Registered Public
Accounting Firm
Power of Attorney
Certification of Douglas D. Dirks
Pursuant to Section 302
Certification of William E. Yocke
Pursuant to Section 302
Certification of Douglas D. Dirks
Pursuant to Section 906
Certification of William E. Yocke
Pursuant to Section 906
XBRL Instance Document
102
Included
Herewith
Incorporated by Reference Herein
Form Exhibit
Filing Date
8-K
10.1
June 2, 2008
10-Q
10.1
August 7, 2009
8-K
10.1
December 23, 2008
8-K
10.1
December 8, 2011
8-K
10.2
December 8, 2011
8-K
10.3
December 8, 2011
8-K
10.4
December 8, 2011
8-K
10.1
December 30, 2010
8-K
10.2
December 30, 2010
10-K
10.18
February 24, 2011
X
X
X
X
X
X
X
X
56927
Exhibit
No.
Description of Exhibit
Included
Herewith
Incorporated by Reference Herein
Form Exhibit
Filing Date
**101.SCH XBRL Taxonomy Extension Schema
Document
**101.CAL XBRL Taxonomy Extension
Calculation Linkbase Document
**101.DEF XBRL Taxonomy Definition Linkbase
Document
**101.LAB XBRL Taxonomy Extension Label
Linkbase Document
**101.PRE XBRL Taxonomy Extension
Presentation Linkbase Document
X
X
X
X
X
For purposes of the incorporation by reference of documents as Exhibits, all references to Forms S-1
and S-1/A of Employers Holdings, Inc. refer to Forms S-1 and S-1/A filed with the Commission under
Registration Number 333-139092.
* Identify management contracts and compensatory plans or arrangements.
** XBRL (eXtensible Business Reporting Language) information is furnished and not filed for purposes of Sections 11 and 12
of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.
(1) Confidential treatment has been requested for certain confidential portions of this exhibit; these confidential portions have
been omitted from this exhibit and filed separately with the Securities and Exchange Commission.
103
34908
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the Registrant
has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, in
the City of Reno, State of Nevada on March 1, 2012.
SIGNATURES
EMPLOYERS HOLDINGS, INC.
By: /s/ Douglas D. Dirks
Name: Douglas D. Dirks
Title: Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed
by the following persons in the capacities and on the dates indicated:
Signature
Title
Date
/s/ Robert J. Kolesar
Robert J. Kolesar
/s/ Douglas D. Dirks
Douglas D. Dirks
/s/ William E. Yocke
William E. Yocke
/s/ Richard W. Blakey
Richard W. Blakey
/s/ Valerie R. Glenn
Valerie R. Glenn
*
Rose E. McKinney-James
/s/ Ronald F. Mosher
Ronald F. Mosher
/s/ Katherine W. Ong
Katherine W. Ong
/s/ Michael D. Rumbolz
Michael D. Rumbolz
/s/ John P. Sande III
John P. Sande III
Chairman of the Board
March 1, 2012
President and Chief Executive Officer,
Director (Principal Executive Officer)
March 1, 2012
Executive Vice President and Chief
Financial Officer (Principal Financial
and Accounting Officer)
Director
Director
Director
Director
Director
Director
Director
March 1, 2012
March 1, 2012
March 1, 2012
March 1, 2012
March 1, 2012
March 1, 2012
March 1, 2012
March 1, 2012
* The undersigned, by signing his name hereto, does sign and execute this Annual Report on
Form 10-K pursuant to a Power of Attorney executed on behalf of the above-indicated director of the
registrant and filed herewith as Exhibit 24.1 on behalf of the registrant.
By: /s/ Lenard T. Ormsby
(Lenard T. Ormsby, as Attorney-in Fact)
104
24259
Exhibit 21.1
Employers Holdings, Inc.
Subsidiaries As of December 31, 2011
Name
Jurisdiction of Organization
Employers Group, Inc.
Employers Insurance Company of Nevada
Employers Occupational Health, Inc.
Elite Insurance Services, Inc.
Employers Compensation Insurance Company
Employers Preferred Insurance Company
Employers Assurance Company
EIG Services, Inc.
Pinnacle Benefits, Inc.
AmSERV, Inc.
Nevada
Nevada
Nevada
Nevada
California
Florida
Florida
Florida
Florida
Florida
105
72902
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the Registration Statements (Form S-8 Nos. 333-
140395, 333-142135, 333-152900, and 333-168563) of our reports dated March 1, 2012, with respect to the
consolidated financial statements and schedules of Employers Holdings, Inc. and Subsidiaries and the
effectiveness of internal control over financial reporting of Employers Holdings, Inc. and Subsidiaries
included in this Annual Report (Form 10-K) for the year ended December 31, 2011.
/s/ Ernst & Young LLP
Los Angeles, California
March 1, 2012
106
93612
Exhibit 24.1
POWER OF ATTORNEY
that
KNOW ALL MEN BY THESE PRESENTS,
the undersigned director of Employers
Holdings, Inc., a Nevada corporation, constitutes and appoints Douglas D. Dirks, William E. Yocke and
Lenard T. Ormsby, and each of them, her true and lawful attorneys-in-fact and agents, with full power
of substitution and resubstitution for her and in her name, place and stead, in any and all capacities, to
sign the report on Form 10-K for the fiscal year ended December 31, 2011, or any and all amendments
to such report, and to file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents full power and authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully to all intents and purposes as she might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitute or
substitutes, may lawfully do or cause to be done by virtue thereof.
IN WITNESS WHEREOF, the undersigned has executed this power of attorney this 23rd day of
February, 2012.
/s/ Rose E. McKinney-James
Rose E. McKinney-James
107
55210
Exhibit 31.1
I, Douglas D. Dirks, certify that:
1.
I have reviewed this annual report on Form 10-K of Employers Holdings, Inc.;
CERTIFICATIONS
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial information included in this
report, fairly present in all material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of
the registrant’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting
that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal
quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial reporting;
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation
of internal control over financial reporting, to the registrant’s auditors and the audit committee of
the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the registrant’s
ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have
a significant role in the registrant’s internal control over financial reporting.
Date: March 1, 2012
/s/ Douglas D. Dirks
Douglas D. Dirks
President and Chief Executive Officer
Employers Holdings, Inc.
108
57084
Exhibit 31.2
I, William E. Yocke, certify that:
1.
I have reviewed this annual report on Form 10-K of Employers Holdings, Inc.;
CERTIFICATIONS
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial information included in this
report, fairly present in all material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of
the registrant’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting
that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal
quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial reporting;
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation
of internal control over financial reporting, to the registrant’s auditors and the audit committee of
the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the registrant’s
ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have
a significant role in the registrant’s internal control over financial reporting.
Date: March 1, 2012
/s/ WILLIAM E. YOCKE
William E. Yocke
Executive Vice President and
Chief Financial Officer
Employers Holdings, Inc.
109
64235
Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Form 10-K of Employers Holdings, Inc. (the Company) for the year ended
December 31, 2011, as filed with the Securities and Exchange Commission on the date hereof (the
Report), the undersigned hereby, certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial
condition and results of operations of the Company.
Date: March 1, 2012
/s/ Douglas D. Dirks
Douglas D. Dirks
President and Chief Executive Officer
Employers Holdings, Inc.
110
22917
Exhibit 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Form 10-K of Employers Holdings, Inc. (the Company) for the year ended
December 31, 2011, as filed with the Securities and Exchange Commission on the date hereof (the
Report), the undersigned hereby, certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial
condition and results of operations of the Company.
Date: March 1, 2012
/s/ William E. Yocke
William E. Yocke
Executive Vice President and Chief Financial Officer
Employers Holdings, Inc.
111
44413
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Employers Holdings, Inc.
Employers Holdings, Inc.
and Subsidiaries
Douglas D. Dirks
President & Chief Executive Officer
Ann W. Nelson
Executive Vice President, Corporate and
Public Affairs
Directors
Richard W. Blakey
Director
Douglas D. Dirks
President & Chief Executive Officer
Valerie R. Glenn
Director
John P. Nelson
Executive Vice President, Chief Administrative Officer
Robert J. Kolesar
Chairman of the Board
Lenard T. Ormsby
Executive Vice President, General Counsel
Rose E. McKinney-James
Chair – Board Governance Committee
William E. (Ric) Yocke
Executive Vice President, Chief Financial Officer
Ronald F. Mosher
Director
Cecelia M. Abraham
Senior Vice President, Chief Underwriting Officer
Stephen V. Festa
Senior Vice President, Chief Claims Officer
Katherine W. Ong
Chair – Finance Committee
Michael D. Rumbolz
Chair – Audit Committee
Richard P. Hallman
Senior Vice President, Chief Information Officer
John P. Sande, III
Chair – Compensation Committee
Mark R. Hogle
Senior Vice President, Regional Manager,
Eastern Region
T. Hale Johnston
Senior Vice President, Regional Manager,
Western Region
David M. Quezada
Senior Vice President, General Manager, Strategic
Partnerships and Alliances
Shareholder Inquiries
Vicki Erickson Mills
Vice President, Investor Relations
vericksonmills@employers.com
775-327-2794
Company Information
Employers Holdings, Inc.
10375 Professional Circle
Reno, NV 89521-4802
888-682-6671
Transfer Agent
Wells Fargo Shareowner Services
161 North Concord Exchange
So. St. Paul, MN 55075-1139
1-800-468-9716
Independent Auditors
Ernst & Young LLP
725 South Figueroa Street
Los Angeles, CA 90017
Annual Meeting
Thursday, May 24, 2012 10:00 a.m.
Reno-Sparks Convention Center
4590 South Virginia Street
Reno, NV 89502
68789EmployersAR2011.indd 9
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Corporate Headquarters
10375 Professional Circle
Reno, NV 89521-4802
www.employers.com
Employers Holdings, Inc. is a holding company with subsidiaries that are specialty providers of workers’ compensation insurance and services focused on
select, small businesses engaged in low-to-medium hazard industries. The company, through its subsidiaries, operates in 30 states. The company’s insurance
subsidiaries are rated A- (Excellent) by the A.M. Best Company.
Copyright © 2012 EMPLOYERS. All rights reserved. Insurance offered through Employers Compensation Insurance Company, Employers Insurance Company
of Nevada, Employers Preferred Insurance Company and Employers Assurance Company. Coverage not available in all jurisdictions.
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