UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q R QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended March 31, 2019 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____ to ____ Commission file number: 001-33245 EMPLOYERS HOLDINGS, INC. (Exact name of registrant as specified in its charter) Nevada (State or other jurisdiction of incorpo ...

[FORM 10-K Filing Information](index=1&type=section&id=FORM%2010-K) This section details key administrative information for the FORM 10-K filing, including registrant, fiscal year, and stock details - Registrant: **EMPLOYERS HOLDINGS, INC.**[2](index=2&type=chunk) - Fiscal Year Ended: **December 31, 2018**[2](index=2&type=chunk) - Filer Status: **Large accelerated filer**[2](index=2&type=chunk) Key Filing Details | Metric | Value | | :--- | :--- | | Commission File Number | 001-33245 | | Securities Registered (NYSE) | Common Stock, $0.01 par value per share | | Non-Affiliate Common Equity Market Value (as of June 30, 2018) | $1,109,698,729 | | Shares Outstanding (as of Feb 14, 2019) | 32,829,863 | [Forward-Looking Statements](index=3&type=section&id=FORWARD-LOOKING%20STATEMENTS) This section outlines the nature, protection, and disclosure obligations for forward-looking statements - Forward-looking statements are protected by the Private Securities Litigation Reform Act of 1995[12](index=12&type=chunk) - Key topics include expected financial position, business, financing plans, litigation, future premiums, revenues, earnings, pricing, investments, business relationships, expected losses, loss reserves, acquisitions, competition, interest rates, and key business initiatives[12](index=12&type=chunk) - The company undertakes no obligation to update or revise forward-looking statements, except as required by law, and highlights risks and uncertainties detailed in Item 1A[13](index=13&type=chunk) [Note Regarding Reliance on Statements in Our Contracts](index=3&type=section&id=NOTE%20REGARDING%20RELIANCE%20ON%20STATEMENTS%20IN%20OUR%20CONTRACTS) This section clarifies that contractual representations are for parties' benefit, not categorical facts for investors - Representations and warranties in agreements are for the benefit of the parties, not categorical statements of fact for investors[15](index=15&type=chunk) - They may be qualified by disclosures, use different materiality standards, and are made only as of the agreement date[15](index=15&type=chunk) - The company acknowledges responsibility for additional disclosures to prevent misleading statements in the report[16](index=16&type=chunk) PART I [Item 1. Business Overview](index=4&type=section&id=Item%201%20Business) EHI is a Nevada holding company providing workers' compensation insurance to small businesses, emphasizing disciplined underwriting and capital returns - EHI is a Nevada holding company specializing in workers' compensation insurance through its subsidiaries (EICN, ECIC, EPIC, EAC)[19](index=19&type=chunk) - The company had **704** full-time employees at December 31, 2018, and its insurance subsidiaries hold an A.M. Best rating of **'A-' (Excellent)** with a **'positive'** outlook[19](index=19&type=chunk) - The business strategy focuses on profitable growth through disciplined underwriting, claims management, medical provider networks, strong agency relationships, new technologies, and diversified risk exposure[24](index=24&type=chunk)[26](index=26&type=chunk) Key Financial Highlights (2016-2018) | Metric | 2018 (in millions) | 2017 (in millions) | 2016 (in millions) | | :--- | :--- | :--- | :--- | | Net premiums written | $742.8 | $723.7 | $694.6 | | Total revenues | $800.4 | $801.4 | $779.8 | | Net income | $141.3 | $101.2 | $106.7 | | Combined ratio | 86.1% | 90.5% | 91.8% | | Combined ratio before LPT Agreement impact | 88.1% | 92.1% | 94.1% | - The company operates in **44 states and D.C.**, with over half of its business generated in California[29](index=29&type=chunk) - Capital strategy includes maintaining strong capital levels for desired ratings, regulatory compliance, financial flexibility, and returning capital to stockholders via dividends and share repurchases[27](index=27&type=chunk)[28](index=28&type=chunk) Dividends Paid and Stock Repurchases (2016-2018) | Year | Dividends Paid (in millions) | Stock Repurchases (in millions) | | :--- | :--- | :--- | | 2018 | $26.7 | $25.7 (3-year period) | | 2017 | $19.7 | | | 2016 | $11.5 | | - The company launched Cerity Services, Inc. in January 2019, a direct-to-customer digital platform for workers' compensation insurance, initially in Illinois[98](index=98&type=chunk) In-force Premiums by Hazard Group (as of Dec 31) | Hazard Group | 2018 (in millions) | % of 2018 Total | 2017 (in millions) | % of 2017 Total | 2016 (in millions) | % of 2016 Total | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | A | $189.5 | 28.4% | $176.9 | 28.2% | $162.6 | 26.3% | | B | $171.6 | 25.8% | $159.4 | 25.4% | $161.0 | 26.0% | | C | $188.7 | 28.3% | $188.0 | 30.0% | $195.7 | 31.7% | | D | $100.5 | 15.1% | $91.9 | 14.7% | $88.0 | 14.2% | | E | $12.2 | 1.8% | $9.4 | 1.5% | $9.8 | 1.6% | | F | $3.2 | 0.5% | $1.0 | 0.2% | $1.3 | 0.2% | | G | $0.5 | 0.1% | $0.3 | <0.1% | $0.2 | <0.1% | | Total | $666.2 | 100.0% | $626.9 | 100.0% | $618.6 | 100.0% | In-force Premiums and Policies by State (as of Dec 31) | State | 2018 In-force Premiums (in millions) | 2018 Policies In-force | 2017 In-force Premiums (in millions) | 2017 Policies In-force | 2016 In-force Premiums (in millions) | 2016 Policies In-force | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | California | $357.1 | 41,988 | $349.4 | 40,573 | $348.3 | 42,120 | | Florida | $41.0 | 5,833 | $41.8 | 5,625 | $35.2 | 5,263 | | Other (42 states and D.C.) | $268.1 | 43,677 | $235.7 | 39,296 | $235.1 | 37,439 | | Total | $666.2 | 91,498 | $626.9 | 85,494 | $618.6 | 84,822 | - Total in-force premiums increased **7.7%** and policy count increased **7.9%** from 2016 to 2018, with California premiums increasing **2.5%** and policy count decreasing **0.3%** in the same period, reflecting diversification efforts[58](index=58&type=chunk) - Pricing on renewals showed an overall decrease of **11.8%** for 2018, attributed to favorable loss costs and frequency trends, and accelerated claims initiatives[61](index=61&type=chunk) - The company utilizes excess of loss reinsurance to protect against large individual and catastrophic losses, with current coverage of **$190.0 million** in excess of a **$10.0 million** retention[64](index=64&type=chunk)[67](index=67&type=chunk) - The LPT Agreement, assumed in 2000, covers pre-July 1995 claims, with estimated remaining liabilities of **$408.2 million** at December 31, 2018, secured by **$311.6 million** in trust assets[71](index=71&type=chunk)[72](index=72&type=chunk)[73](index=73&type=chunk) - Investment portfolio is structured for optimal risk-adjusted return, liquidity, financial strength, and regulatory compliance, with **92%** in fixed maturity securities and a weighted average quality of **'AA-'** at December 31, 2018[87](index=87&type=chunk)[325](index=325&type=chunk) - Distribution channels include independent agents (**76.7%** of in-force premiums in 2018), alternative channels like ADP (**13.1%** of in-force premiums in 2018), and direct-to-customer via Cerity Services[92](index=92&type=chunk)[94](index=94&type=chunk)[95](index=95&type=chunk)[98](index=98&type=chunk) - The insurance industry is highly competitive, with competition based on price and service quality, and many competitors are larger and multi-line carriers[99](index=99&type=chunk)[155](index=155&type=chunk)[156](index=156&type=chunk) - The company is subject to extensive state insurance regulation, including solvency standards, investment restrictions, rate approvals, and dividend limitations[101](index=101&type=chunk)[104](index=104&type=chunk)[109](index=109&type=chunk)[110](index=110&type=chunk)[111](index=111&type=chunk) [Item 1A. Risk Factors](index=14&type=section&id=Item%201A%20Risk%20Factors) The company faces multiple risks including uncertain loss estimates, regulatory changes, market concentration, and investment volatility - Liability for losses and LAE is based on inherently uncertain estimates, and actual losses may exceed reserves, impacting financial results[120](index=120&type=chunk)[121](index=121&type=chunk) - Extensive state and federal regulation, particularly in California where over half of premiums are generated, can significantly impact operations, costs, and profitability[122](index=122&type=chunk)[123](index=123&type=chunk)[124](index=124&type=chunk)[133](index=133&type=chunk) - Failure to price insurance policies appropriately, due to inaccurate information or models, could adversely affect business competitiveness and financial performance[129](index=129&type=chunk)[130](index=130&type=chunk)[131](index=131&type=chunk) - Reliance on independent agents and a principal distribution partner (ADP), which generated **13.1%** of in-force premiums in 2018, poses risks if these relationships are disrupted or partners fail to market products effectively[135](index=135&type=chunk)[137](index=137&type=chunk)[138](index=138&type=chunk) - A downgrade in the company's **'A-' (Excellent)** A.M. Best financial strength rating could reduce business volume and harm relationships with partners[140](index=140&type=chunk)[141](index=141&type=chunk)[142](index=142&type=chunk) - Inability to obtain or collect on reinsurance, including the LPT Agreement, could increase net liability for large and catastrophic losses[144](index=144&type=chunk)[146](index=146&type=chunk)[147](index=147&type=chunk)[149](index=149&type=chunk)[151](index=151&type=chunk) - The highly competitive and cyclical nature of the single-line workers' compensation market, with larger multi-line competitors, could adversely affect profitability[153](index=153&type=chunk)[154](index=154&type=chunk)[155](index=155&type=chunk)[156](index=156&type=chunk)[157](index=157&type=chunk)[159](index=159&type=chunk) - Investment losses may arise from inability to meet investment objectives, general economic conditions, interest rate fluctuations, and market volatility, with equity securities now measured at fair value through net income[161](index=161&type=chunk)[162](index=162&type=chunk)[163](index=163&type=chunk)[164](index=164&type=chunk) - Dependence on subsidiaries for funds, with state laws restricting dividend payments, and potential need for additional capital on unfavorable terms, are significant financial risks[166](index=166&type=chunk)[169](index=169&type=chunk)[170](index=170&type=chunk)[171](index=171&type=chunk) - Failure to maintain, enhance, or modernize IT systems, or cyber-attacks, could disrupt operations, compromise data, and harm business[172](index=172&type=chunk)[173](index=173&type=chunk)[174](index=174&type=chunk)[175](index=175&type=chunk)[176](index=176&type=chunk) - Acts of terrorism and natural or man-made catastrophes could lead to substantial losses, especially given the inability to exclude coverage for terrorism in workers' compensation[180](index=180&type=chunk)[181](index=181&type=chunk)[182](index=182&type=chunk)[183](index=183&type=chunk) - State insurance laws and charter provisions could prevent or delay a change in control, even if beneficial to stockholders[190](index=190&type=chunk)[191](index=191&type=chunk)[193](index=193&type=chunk)[194](index=194&type=chunk) [Item 1B. Unresolved Staff Comments](index=22&type=section&id=Item%201B%20Unresolved%20Staff%20Comments) The company reports that there are no unresolved staff comments from the SEC - No unresolved staff comments[196](index=196&type=chunk) [Item 2. Properties](index=22&type=section&id=Item%202%20Properties) As of February 1, 2019, the company leased 225,274 square feet of office space across 7 states, including its Reno headquarters, which is adequate - As of February 1, 2019, the company leased **225,274 square feet** of office space in **7 states**[197](index=197&type=chunk) - Principal executive offices are located in Reno, Nevada[197](index=197&type=chunk) - Management believes existing office space is adequate for current needs and will adjust lease agreements as required[197](index=197&type=chunk) [Item 3. Legal Proceedings](index=22&type=section&id=Item%203%20Legal%20Proceedings) The company is involved in various legal actions, primarily workers' compensation claims, with no expected material adverse effect on financial position or operations - The company is involved in pending and threatened litigation in the normal course of business, including claims for monetary damages and insurance/reinsurance coverage disputes[198](index=198&type=chunk) - Management believes the ultimate liability from such proceedings is not expected to have a material effect on results of operations, liquidity, or financial position[200](index=200&type=chunk) - Reductions in reinsurance recoveries due to disputes are factored into net loss and LAE reserves[199](index=199&type=chunk) [Item 4. Mine Safety Disclosures](index=22&type=section&id=Item%204%20Mine%20Safety%20Disclosures) This item is not applicable to the company's operations - Not applicable[201](index=201&type=chunk) PART II [Item 5. Market for Common Equity, Stockholder Matters & Equity Purchases](index=29&type=section&id=Item%205%20Market%20for%20Registrant's%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) The company's common stock is listed on the NYSE under 'EIG', with future dividends determined by the Board and **$45.4 million** remaining in its share repurchase program - Common stock is listed on the NYSE under the symbol **'EIG'**[206](index=206&type=chunk) - As of February 14, 2019, there were **897** registered holders of record[206](index=206&type=chunk) - Future quarterly cash dividends are at the discretion of the Board of Directors, dependent on financial position, capital requirements, and market conditions[206](index=206&type=chunk) Issuer Purchases of Equity Securities (Q4 2018) | Period | Total Number of Shares Purchased | Average Price Per Share | Total Number of Shares Purchased as Part of Publicly Announced Program | Approximate Dollar Value of Shares that May Yet be Purchased Under the Program (in millions) | | :--- | :--- | :--- | :--- | :--- | | December 1 – December 31, 2018 | 102,531 | $41.06 | 102,531 | $45.4 | | Total | 102,531 | $41.06 | 102,531 | | - A share repurchase program authorized up to **$50.0 million** of common stock from February 26, 2018, through February 26, 2020, with **$45.4 million** remaining as of December 31, 2018[207](index=207&type=chunk)[312](index=312&type=chunk) Cumulative Total Return Performance (Dec 31, 2013 - Dec 31, 2018) | Period Ending | Employers Holdings, Inc. | S&P 500 | S&P 500 P&C Insurance Index | | :--- | :--- | :--- | :--- | | 12/31/2013 | $100.00 | $100.00 | $100.00 | | 12/31/2014 | $75.13 | $113.69 | $115.74 | | 12/31/2015 | $88.08 | $115.26 | $126.77 | | 12/31/2016 | $129.35 | $129.05 | $146.68 | | 12/31/2017 | $147.12 | $157.22 | $179.52 | | 12/31/2018 | $141.73 | $150.33 | $171.10 | [Item 6. Selected Financial Data](index=31&type=section&id=Item%206%20Selected%20Financial%20Data) This section provides a five-year summary of selected consolidated financial data, including income statement, balance sheet, and non-GAAP measures Selected Income Statement Data (2014-2018, in millions) | Metric | 2018 | 2017 | 2016 | 2015 | 2014 | | :--- | :--- | :--- | :--- | :--- | :--- | | Net premiums earned | $731.1 | $716.5 | $694.8 | $690.4 | $684.5 | | Net investment income | $81.2 | $74.6 | $73.2 | $72.2 | $72.4 | | Net realized and unrealized (losses) gains on investments | $(13.1) | $7.4 | $11.2 | $(10.7) | $16.3 | | Total revenues | $800.4 | $801.4 | $779.8 | $752.1 | $773.5 | | Total expenses | $630.9 | $657.4 | $639.1 | $652.7 | $666.9 | | Net income before income taxes | $169.5 | $144.0 | $140.7 | $99.4 | $106.6 | | Income tax expense | $28.2 | $42.8 | $34.0 | $5.0 | $5.9 | | Net income | $141.3 | $101.2 | $106.7 | $94.4 | $100.7 | | Basic EPS | $4.30 | $3.11 | $3.29 | $2.94 | $3.19 | | Diluted EPS | $4.24 | $3.06 | $3.24 | $2.90 | $3.14 | | Cash dividends declared per common share | $0.80 | $0.60 | $0.36 | $0.24 | $0.24 | Selected Balance Sheet Data (2014-2018, in millions) | Metric | 2018 | 2017 | 2016 | 2015 | 2014 | | :--- | :--- | :--- | :--- | :--- | :--- | | Cash and cash equivalents | $101.4 | $73.3 | $67.2 | $56.6 | $103.6 | | Total investments | $2,727.7 | $2,677.7 | $2,552.6 | $2,487.2 | $2,448.4 | | Reinsurance recoverable on paid and unpaid losses | $511.1 | $544.2 | $588.7 | $635.9 | $680.2 | | Total assets | $3,919.2 | $3,840.1 | $3,773.4 | $3,755.8 | $3,769.7 | | Unpaid losses and loss adjustment expense | $2,207.9 | $2,266.1 | $2,301.0 | $2,347.5 | $2,369.7 | | Unearned premiums | $336.3 | $318.3 | $310.3 | $308.9 | $310.8 | | Deferred Gain | $149.6 | $163.6 | $174.9 | $189.5 | $207.0 | | Total liabilities | $2,901.0 | $2,892.4 | $2,932.8 | $2,995.0 | $3,082.9 | | Total stockholders' equity | $1,018.2 | $947.7 | $840.6 | $760.8 | $686.8 | | Total stockholders' equity including Deferred Gain | $1,167.8 | $1,111.3 | $1,015.5 | $950.3 | $893.8 | Reconciliation of Net Income to Net Income Before Impact of LPT Agreement (2014-2018, in millions) | Metric | 2018 | 2017 | 2016 | 2015 | 2014 | | :--- | :--- | :--- | :--- | :--- | :--- | | Net income | $141.3 | $101.2 | $106.7 | $94.4 | $100.7 | | Less amortization of the Deferred Gain related to losses | $9.9 | $9.3 | $9.7 | $9.5 | $11.2 | | Less amortization of the Deferred Gain related to contingent commission | $2.0 | $2.0 | $2.0 | $1.9 | $1.9 | | Less impact of LPT Reserve Adjustments | $2.2 | $0.0 | $3.1 | $6.4 | $31.1 | | Less impact of LPT Contingent Commission Adjustments | $0.5 | $0.3 | $1.8 | $2.6 | $10.8 | | Net income before impact of the LPT Agreement | $126.7 | $89.6 | $90.1 | $74.0 | $45.7 | [Item 7. Management's Discussion and Analysis](index=34&type=section&id=Item%207%20Management's%20Discussion%20and%20Analysis%20of%20Consolidated%20Financial%20Condition%20and%20Results%20of%20Operations) This section analyzes the company's financial condition and operations for 2016-2018, covering revenues, expenses, liquidity, capital, and critical accounting policies - The company focuses on providing workers' compensation insurance to select small businesses in low to medium hazard industries across **44 states and D.C.**, with a concentration in California[228](index=228&type=chunk) - Underwriting results have improved due to increased pricing flexibility, multi-company pricing platforms, territorial pricing in California, and ongoing underwriting initiatives[230](index=230&type=chunk) - Pricing on renewals decreased by **11.8%** in 2018, driven by favorable loss costs and frequency trends, and accelerated claims initiatives[231](index=231&type=chunk) - The company is acquiring PartnerRe Insurance Company of New York (PRNY) for approximately **$40.0 million** in statutory capital and surplus plus **$5.8 million**, with PRUS indemnifying all existing liabilities[232](index=232&type=chunk)[233](index=233&type=chunk) Net Income and Underwriting Income (2016-2018, in millions) | Metric | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Net income | $141.3 | $101.2 | $106.7 | | Underwriting income | $101.7 | $68.0 | $57.3 | - Key factors affecting financial performance include decreased losses and LAE in 2018 (down **10%**), increased underwriting and other operating expenses in 2018 (up **13%**), and volatility in net realized and unrealized investment gains/losses[239](index=239&type=chunk) - 2018 results included **$66.2 million** favorable prior year accident loss development, **$2.2 million** favorable LPT Reserve Adjustment, **$0.5 million** LPT Contingent Commission Adjustment, and **$25.6 million** net unrealized losses on equity securities[241](index=241&type=chunk) - The Tax Cuts and Jobs Act favorably impacted income tax expense by reducing the statutory rate from **35% to 21%** starting in 2018[241](index=241&type=chunk) Gross and Net Premiums Written (2016-2018, in millions) | Metric | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Gross premiums written | $748.9 | $729.7 | $701.4 | | Net premiums written | $742.8 | $723.7 | $694.6 | - Gross premiums written increased in 2018 due to higher new business policy counts and payroll exposure, partially offset by lower average rates, while 2017 saw increases from new business and final audit premiums, impacted by California legislation (AB 2883 and SB 189)[250](index=250&type=chunk) Net Investment Income and Realized/Unrealized Gains (2016-2018, in millions) | Metric | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Net investment income | $81.2 | $74.6 | $73.2 | | Net realized and unrealized (losses) gains on investments | $(13.1) | $7.4 | $11.2 | - Net investment income increased in 2018 due to a higher pre-tax yield on invested assets (**3.4%** in 2018 vs. **3.1%** in 2017 and 2016)[256](index=256&type=chunk) - Net realized and unrealized losses in 2018 were **$(13.1) million**, including **$25.6 million** unrealized losses on equity securities due to market volatility, partially offset by **$12.5 million** realized gains[258](index=258&type=chunk) Combined Ratios (2016-2018) | Ratio | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Loss and LAE ratio | 51.5% | 58.2% | 60.1% | | Underwriting and other operating expenses ratio | 21.7% | 19.5% | 19.7% | | Commission expense ratio | 12.9% | 12.8% | 12.0% | | Combined ratio | 86.1% | 90.5% | 91.8% | - Losses and LAE decreased from **$417.2 million** in 2017 to **$376.7 million** in 2018, primarily due to **$66.2 million** favorable prior accident year loss development[271](index=271&type=chunk) - Underwriting and other operating expenses increased by **$18.6 million** in 2018, largely due to aggressive development and implementation of new digital technologies and capabilities[277](index=277&type=chunk)[279](index=279&type=chunk) - Commission expenses increased due to higher agency incentive commissions and increased business from partnerships/alliances[281](index=281&type=chunk) - Holding company liquidity is dependent on existing capital and dividends from subsidiaries, which are restricted by state insurance laws[289](index=289&type=chunk)[290](index=290&type=chunk) Net Cash Flows (2016-2018, in millions) | Activity | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Operating activities | $180.2 | $142.3 | $122.8 | | Investing activities | $(119.6) | $(112.8) | $(87.5) | | Financing activities | $(32.9) | $(26.0) | $(23.6) | | Increase in cash, cash equivalents, and restricted cash | $27.7 | $3.5 | $11.7 | - Operating cash flows increased in 2018, driven by net premiums and investment income, partially offset by claims and operating expenses[305](index=305&type=chunk) - Investing activities primarily involved investment of premiums and reinvestment of funds, with sales used to fund claims, expenses, and shareholder returns[308](index=308&type=chunk) - Financing activities in 2018 included common stock repurchases (**$4.6 million**) and stockholder dividend payments (**$26.7 million**)[309](index=309&type=chunk)[311](index=311&type=chunk)[312](index=312&type=chunk) - Capital resources include **$20.0 million** in surplus notes, **$1,018.2 million** in stockholders' equity, and a **$149.6 million** Deferred Gain as of December 31, 2018[313](index=313&type=chunk) Contractual Obligations and Commitments (as of Dec 31, 2018, in millions) | Obligation Type | Total | Less Than 1 Year | 1-3 Years | 4-5 Years | More Than 5 Years | | :--- | :--- | :--- | :--- | :--- | :--- | | Operating leases | $22.5 | $5.3 | $7.3 | $3.7 | $6.2 | | Non-cancellable contracts | $18.8 | $5.9 | $6.7 | $6.2 | $0.0 | | Notes payable | $41.4 | $1.4 | $2.7 | $2.7 | $34.6 | | Capital leases | $0.9 | $0.3 | $0.5 | $0.1 | $0.0 | | Unpaid losses and LAE reserves | $2,207.9 | $370.4 | $480.2 | $288.7 | $1,068.6 | | Unfunded investments | $50.0 | $50.0 | $0.0 | $0.0 | $0.0 | | Total contractual obligations | $2,341.5 | $433.3 | $497.4 | $301.4 | $1,109.4 | - The investment portfolio is **92%** fixed maturity securities with a weighted average quality of **'AA-'** and a duration of **4.1** at December 31, 2018, aiming to limit interest rate risk[325](index=325&type=chunk) - Loss reserves are inherently uncertain estimates of ultimate costs, not discounted for time value, and are subject to significant judgment and actuarial review[337](index=337&type=chunk)[338](index=338&type=chunk)[340](index=340&type=chunk)[346](index=346&type=chunk) Actuarial Range of Loss Reserves (as of Dec 31) | Metric | 2018 (in millions) | 2017 (in millions) | | :--- | :--- | :--- | | Low end of actuarial range | $1,484.8 | $1,533.1 | | Carried reserves | $1,703.5 | $1,729.1 | | High end of actuarial range | $1,897.3 | $1,916.5 | - Reinsurance recoverables, including **$408.2 million** related to the LPT Agreement at December 31, 2018, are monitored for credit risk, with collateral held to mitigate insolvency risks[375](index=375&type=chunk)[376](index=376&type=chunk) - The company adopted ASU 2016-01 in 2018, requiring equity securities at fair value to be recognized through net income, leading to a **$74.0 million** reclassification adjustment from AOCI to retained earnings[385](index=385&type=chunk)[405](index=405&type=chunk) - The company is evaluating the impact of ASU 2016-13 (Credit Losses) and expects ASU 2016-02 (Leases) to result in **$18.4 million** in lease assets and **$20.2 million** in lease liabilities on the balance sheet upon adoption[395](index=395&type=chunk)[522](index=522&type=chunk) [Item 7A. Quantitative and Qualitative Disclosures About Market Risk](index=60&type=section&id=Item%207A%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) This section details the company's exposure to credit, interest rate, and equity price risks, managed through diversification and duration, including sensitivity analysis and inflation impact - The company is exposed to credit risk in its investment portfolio, reinsurance recoverables, and premiums receivable, managed through issuer/industry diversification and collateral[409](index=409&type=chunk)[410](index=410&type=chunk) - Interest rate risk on the fixed maturity portfolio is managed by maintaining a short-to-intermediate duration (**4.1** at December 31, 2018) and balancing duration, yield, and credit risk[411](index=411&type=chunk) Estimated Pre-tax (Decrease) in Fair Value of Fixed Maturity Securities and Short-Term Investments due to Hypothetical Interest Rate Changes (as of Dec 31, 2018) | Hypothetical Changes in Interest Rates | Estimated Pre-tax (Decrease) in Fair Value (in millions) | Percentage Change | | :--- | :--- | :--- | | 300 basis point rise | $(288.2) | (11.4)% | | 200 basis point rise | $(194.3) | (7.7)% | | 100 basis point rise | $(97.4) | (3.9)% | | 50 basis point decline | $48.0 | 1.9% | | 100 basis point decline | $95.2 | 3.8% | - Equity price risk is minimized by investing in mid-to-large capitalization issuers and diversifying holdings across industry sectors[415](index=415&type=chunk) Sensitivity of Equity Securities to Price Changes (as of Dec 31, 2018, in millions) | Metric | Cost | Fair Value | 10% Fair Value Decrease | Impact on Total Equity Securities | 10% Fair Value Increase | Impact on Total Equity Securities | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Equity securities | $131.9 | $199.9 | $179.9 | $(20.0) | $219.9 | $20.0 | - Inflation could impact financial statements by increasing claims costs (medical, litigation) above reserves, requiring reserve increases and reducing earnings, and also influences interest rates and operating expenses[416](index=416&type=chunk)[417](index=417&type=chunk) [Item 8. Financial Statements and Supplementary Data](index=62&type=section&id=Item%208%20Financial%20Statements%20and%20Supplementary%20Data) This section presents audited consolidated financial statements for 2016-2018, including Balance Sheets, Income, Equity, and Cash Flows, with reports on internal controls and GAAP compliance - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2018, based on the COSO framework[425](index=425&type=chunk) - Ernst & Young LLP, the independent registered public accounting firm, issued an unqualified opinion on the effectiveness of internal control over financial reporting and on the consolidated financial statements[428](index=428&type=chunk)[436](index=436&type=chunk) - The company changed its method of accounting for investments in equity securities in 2018 due to the adoption of ASU No. 2016-01[438](index=438&type=chunk) Consolidated Balance Sheets (as of Dec 31, in millions) | Asset/Liability/Equity | 2018 | 2017 | | :--- | :--- | :--- | | Total investments | $2,727.7 | $2,677.7 | | Cash and cash equivalents | $101.4 | $73.3 | | Total assets | $3,919.2 | $3,840.1 | | Unpaid losses and loss adjustment expenses | $2,207.9 | $2,266.1 | | Total liabilities | $2,901.0 | $2,892.4 | | Total stockholders' equity | $1,018.2 | $947.7 | Consolidated Statements of Comprehensive Income (Years Ended Dec 31, in millions) | Revenue/Expense | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Net premiums earned | $731.1 | $716.5 | $694.8 | | Net investment income | $81.2 | $74.6 | $73.2 | | Net realized and unrealized (losses) gains on investments | $(13.1) | $7.4 | $11.2 | | Total revenues | $800.4 | $801.4 | $779.8 | | Losses and loss adjustment expenses | $376.7 | $417.2 | $417.9 | | Total expenses | $630.9 | $657.4 | $639.1 | | Net income | $141.3 | $101.2 | $106.7 | | Basic EPS | $4.30 | $3.11 | $3.29 | | Diluted EPS | $4.24 | $3.06 | $3.24 | Consolidated Statements of Cash Flows (Years Ended Dec 31, in millions) | Cash Flow Activity | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $180.2 | $142.3 | $122.8 | | Net cash used in investing activities | $(119.6) | $(112.8) | $(87.5) | | Net cash used in financing activities | $(32.9) | $(26.0) | $(23.6) | | Net increase in cash, cash equivalents, and restricted cash | $27.7 | $3.5 | $11.7 | | Cash, cash equivalents, and restricted cash at end of period | $102.0 | $74.3 | $70.8 | Reconciliation of Changes in Liability for Unpaid Losses and LAE (Years Ended Dec 31, in millions) | Metric | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Unpaid losses and LAE at beginning of period | $2,266.1 | $2,301.0 | $2,347.5 | | Net unpaid losses and LAE at beginning of period | $1,729.1 | $1,721.0 | $1,719.3 | | Total net losses and LAE incurred during the period | $391.3 | $428.8 | $434.5 | | Total net paid losses and LAE during the period | $416.9 | $420.7 | $432.8 | | Unpaid losses and LAE at end of period | $2,207.9 | $2,266.1 | $2,301.0 | - The company experienced **$66.2 million** of favorable prior accident year loss development in 2018, **$18.5 million** in 2017, and **$18.4 million** in 2016, primarily due to favorable paid loss trends and accelerated claims settlement activity[593](index=593&type=chunk) - The company's investment portfolio at December 31, 2018, consisted of **92%** fixed maturity securities with a weighted average quality of **'AA-'**[325](index=325&type=chunk) Fixed Maturity Securities by Credit Rating (as of Dec 31, 2018) | Rating | Percentage of Total Estimated Fair Value | | :--- | :--- | | "AAA" | 8.3% | | "AA" | 42.2% | | "A" | 31.3% | | "BBB" | 12.4% | | Below Investment Grade | 5.8% | | Total | 100.0% | - The company recognized impairments on fixed maturity securities of **$3.3 million** in 2018 and **$0.5 million** in 2017 due to intent to sell or severity of fair value changes[333](index=333&type=chunk)[552](index=552&type=chunk) - The Tax Cuts and Jobs Act reduced the corporate statutory income tax rate from **35% to 21%** starting January 1, 2018, impacting deferred tax assets and liabilities[569](index=569&type=chunk) Income Tax Expense (Years Ended Dec 31, in millions) | Tax Component | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Current tax expense | $13.8 | $18.6 | $20.6 | | Deferred federal tax expense | $14.4 | $24.2 | $13.4 | | Income tax expense | $28.2 | $42.8 | $34.0 | - The company had **$20.0 million** in surplus notes outstanding at December 31, 2018, maturing in 2034, with interest and principal payments subject to regulatory approval[612](index=612&type=chunk) - The company's insurance subsidiaries have access to collateralized advances and standby letters of credit from the FHLB, with **$140.0 million** in letters of credit issued as of December 31, 2018[616](index=616&type=chunk)[617](index=617&type=chunk) - The company had an unfunded commitment of **$50.0 million** to a private investment fund as of December 31, 2018[623](index=623&type=chunk) Stock-Based Compensation Expense (Years Ended Dec 31, in millions) | Component | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Stock options | $0.3 | $0.5 | $0.7 | | RSUs | $2.5 | $2.0 | $1.9 | | PSUs | $6.5 | $4.3 | $3.2 | | Total | $9.3 | $6.8 | $5.8 | | Less: related tax benefit | $2.0 | $2.4 | $2.0 | | Net stock-based compensation expense | $7.3 | $4.4 | $3.8 | - As of December 31, 2018, the company had **190,256** stock options outstanding, **250,300** RSUs outstanding, and **291,616** PSUs outstanding (at target rate)[633](index=633&type=chunk)[636](index=636&type=chunk)[638](index=638&type=chunk) - The company's insurance subsidiaries were in compliance with statutory capital and surplus requirements and RBC levels above all regulatory action levels as of December 31, 2018[650](index=650&type=chunk) Selected Quarterly Financial Data (2018, in millions) | Metric | March 31 | June 30 | September 30 | December 31 | | :--- | :--- | :--- | :--- | :--- | | Net premiums earned | $176.6 | $178.0 | $192.9 | $183.6 | | Net realized and unrealized (losses) gains on investments | $(8.0) | $5.7 | $15.6 | $(26.4) | | Losses and loss adjustment expenses | $95.4 | $87.8 | $106.6 | $86.9 | | Net income | $25.6 | $42.5 | $47.6 | $25.6 | | Basic EPS | $0.78 | $1.29 | $1.45 | $0.78 | | Diluted EPS | $0.77 | $1.28 | $1.43 | $0.77 | - Quarterly results in 2018 were impacted by volatility in equity markets affecting net unrealized gains/losses on investments and favorable prior accident year loss development[662](index=662&type=chunk)[663](index=663&type=chunk)[665](index=665&type=chunk)[666](index=666&type=chunk)[667](index=667&type=chunk) [Item 9. Changes in and Disagreements With Accountants](index=85&type=section&id=Item%209%20Changes%20in%20and%20Disagreements%20With%20Accountants%20on%20Accounting%20and%20Financial%20Disclosure) The company reports no changes in or disagreements with accountants on accounting and financial disclosure matters - No changes in or disagreements with accountants on accounting and financial disclosure[670](index=670&type=chunk) [Item 9A. Controls and Procedures](index=85&type=section&id=Item%209A%20Controls%20and%20Procedures) Management concluded that disclosure controls and procedures were effective as of December 31, 2018, with no material weaknesses or changes in internal control - Disclosure controls and procedures were evaluated and deemed effective at a reasonable level of assurance as of December 31, 2018[672](index=672&type=chunk) - Management found no material weaknesses in internal control over financial reporting[425](index=425&type=chunk) - No material changes in internal control over financial reporting occurred during the fourth fiscal quarter[675](index=675&type=chunk) [Item 9B. Other Information](index=85&type=section&id=Item%209B%20Other%20Information) The company reports no other information required by this item - None[676](index=676&type=chunk) PART III [Item 10. Directors, Executive Officers and Corporate Governance](index=86&type=section&id=Item%2010%20Directors%2C%20Executive%20Officers%20and%20Corporate%20Governance) Information on directors, executive officers, corporate governance, and Section 16 compliance is incorporated by reference from the 2019 Proxy Statement - Information on executive officers, directors, corporate governance, and Section 16 compliance is incorporated by reference from the 2019 Annual Meeting Proxy Statement[679](index=679&type=chunk)[680](index=680&type=chunk)[681](index=681&type=chunk)[682](index=682&type=chunk) - Corporate Governance Guidelines, Code of Business Conduct and Ethics, and Code of Ethics for Senior Financial Officers are available on the company's website[20](index=20&type=chunk)[683](index=683&type=chunk) [Item 11. Executive Compensation](index=86&type=section&id=Item%2011%20Executive%20Compensation) Information on executive compensation, including discussion, analysis, and committee reports, is incorporated by reference from the 2019 Proxy Statement - Information on executive compensation is incorporated by reference from the 2019 Annual Meeting Proxy Statement[684](index=684&type=chunk) [Item 12. Security Ownership & Related Stockholder Matters](index=86&type=section&id=Item%2012%20Security%20Ownership%20of%20Certain%20Beneficial%20Owners%20and%20Management%20and%20Related%20Stockholder%20Matters) Information on security ownership is incorporated by reference from the 2019 Proxy Statement, detailing equity compensation plans with **732,172** securities outstanding and **2,734,274** shares available - Information on security ownership is incorporated by reference from the 2019 Annual Meeting Proxy Statement[685](index=685&type=chunk) Equity Compensation Plan Information (as of Dec 31, 2018) | Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants, rights | Weighted-average exercise price of outstanding options, warrants, and rights | Number of securities remaining available for further issuance under compensation plans | | :--- | :--- | :--- | :--- | | Stock options | 190,256 | $23.71 | 3,276,190 | | RSUs | 250,300 | N/A | 3,025,890 | | PSUs | 291,616 | N/A | 2,734,274 | | Total | 732,172 | $23.71 | 2,734,274 | - RSUs and PSUs do not have voting rights and do not require an exercise price, with dividend equivalents for eligible RSUs and PSUs payable in cash upon vesting[692](index=692&type=chunk) [Item 13. Certain Relationships & Director Independence](index=87&type=section&id=Item%2013%20Certain%20Relationships%20and%20Related%20Transactions%2C%20and%20Director%20Independence) Information on certain relationships, related transactions, and director independence is incorporated by reference from the 2019 Proxy Statement - Information on certain relationships, related transactions, and director independence is incorporated by reference from the 2019 Annual Meeting Proxy Statement[693](index=693&type=chunk) [Item 14. Principal Accountant Fees and Services](index=87&type=section&id=Item%2014%20Principal%20Accountant%20Fees%20and%20Services) Information on fees and services provided by Ernst & Young LLP is incorporated by reference from the company's 2019 Annual Meeting Proxy Statement - Information on principal accountant fees and services is incorporated by reference from the 2019 Annual Meeting Proxy Statement[694](index=694&type=chunk) PART IV [Item 15. Exhibits and Financial Statement Schedules](index=88&type=section&id=Item%2015%20Exhibits%20and%20Financial%20Statement%20Schedules) This section lists consolidated financial statements filed in Item 8 and provides a schedule of exhibits, including corporate documents, agreements, and Schedule II - Consolidated financial statements are filed in Item 8[697](index=697&type=chunk) - Schedule II, Condensed Financial Information of Registrant, is included[697](index=697&type=chunk) - Financial Statement Schedules I, III, IV, V, and VI have been omitted as the information is included in the Notes to Consolidated Financial Statements[697](index=697&type=chunk) Condensed Balance Sheets (Employers Holdings, Inc. only, as of Dec 31, in millions) | Asset/Liability/Equity | 2018 | 2017 | | :--- | :--- | :--- | | Investment in subsidiaries | $873.8 | $849.6 | | Total investments | $962.1 | $894.7 | | Cash and cash equivalents | $41.3 | $39.6 | | Total assets | $1,027.6 | $954.1 | | Total liabilities | $9.4 | $6.4 | | Total stockholders' equity | $1,018.2 | $947.7 | Condensed Statements of Income (Employers Holdings, Inc. only, Years Ended Dec 31, in millions) | Revenue/Expense | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Net investment income | $2.5 | $1.3 | $1.9 | | Total revenues | $3.3 | $1.3 | $9.9 | | Other operating expenses | $17.5 | $15.2 | $13.8 | | Net loss before equity in earnings of subsidiaries | $(9.9) | $(8.1) | $(0.4) | | Equity in earnings of subsidiaries | $151.2 | $109.3 | $107.1 | | Net income | $141.3 | $101.2 | $106.7 | | Basic EPS | $4.30 | $3.11 | $3.29 | | Diluted EPS | $4.24 | $3.06 | $3.24 | Condensed Statement of Cash Flows (Employers Holdings, Inc. only, Years Ended Dec 31, in millions) | Cash Flow Activity | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $77.5 | $48.7 | $(7.2) | | Net cash (used in) provided by investing activities | $(43.1) | $(34.6) | $70.8 | | Net cash used in financing activities | $(32.7) | $(15.9) | $(23.6) | | Net increase (decrease) in cash and cash equivalents | $1.7 | $(1.8) | $40.0 | | Cash and cash equivalents at the end of the period | $41.3 | $39.6 | $41.4 | [Signatures](index=95&type=section&id=SIGNATURES) The report is signed by Michael S. Paquette, EVP and CFO, and certified by the Chairman, President and CEO, and other Directors as of February 28, 2019 - Report signed by Michael S. Paquette, Executive Vice President and Chief Financial Officer, on February 28, 2019[716](index=716&type=chunk)[717](index=717&type=chunk) - Certified by Michael D. Rumbolz (Chairman), Douglas D. Dirks (President and CEO), and other Directors[718](index=718&type=chunk)

Employers Holdings, Inc. (NYSE:EIG) Q4 2018 Earnings Conference Call February 21, 2019 11:30 AM ET Company Participants Doug Dirks - Chief Executive Officer Mike Paquette - Chief Financial Officer Steve Festa - Chief Operating Officer Conference Call Participants Mark Hughes - SunTrust Bob Farnam - Boenning & Scattergood Operator Good day, ladies and gentlemen, and welcome to the Q4 2018 Employers Holdings, Incorporated Earnings Conference Call. At this time, all participants are in a listen-only mode. Foll ...