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, ~~2016~~2017

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

ACT OF 1934

For the transition period from ____ to ____

Commission file number: 001-33245

EMPLOYERS HOLDINGS, INC.

(Exact name of registrant as specified in its charter)



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

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

(888) 682-6671

(Registrant’s telephone number, including area code)

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

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

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



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

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

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



Class		April ~~21, 2016~~20, 2017
Common Stock, $0.01 par value per share		~~32,441,521~~32,278,012 shares outstanding

TABLE OF CONTENTS



		Page No.
PART 1 – FINANCIAL INFORMATION

Item 1	Consolidated Financial Statements
	Consolidated Balance Sheets as of March 31, ~~2016~~2017 (Unaudited) and December 31, ~~2015~~2016	3
	~~Unaudited~~ Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2017 and 2016 ~~and 2015~~(Unaudited)	4
	~~Unaudited~~ Consolidated Statements of Stockholders' Equity for the Three Months Ended March 31, 2017 and 2016 (Unaudited)	5
	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2017 and 2016 ~~and 2015~~(Unaudited)	56
	~~Unaudited~~ Notes to Consolidated Financial Statements (Unaudited)	67
Item 2	Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations	1416
Item 3	Quantitative and Qualitative Disclosures About Market Risk	2224
Item 4	Controls and Procedures	2324

	PART II – OTHER INFORMATION

Item 1	Legal Proceedings	2425
Item 1A	Risk Factors	2425
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	2425
Item 3	Defaults Upon Senior Securities	2425
Item 4	Mine Safety Disclosures	2425
Item 5	Other Information	2425
Item 6	Exhibits	2526

Signatures		27

PART I – FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements



Employers Holdings, Inc. and Subsidiaries
Consolidated Balance Sheets
(in millions, except share data)
	As of			As of
	March 31, 2017			December 31, 2016
Assets	(unaudited)
Available for sale:
Fixed maturity securities at fair value (amortized cost $2,350.6 at March 31, 2017 and $2,305.9 at December 31, 2016)	$	2,395.3		$	2,344.4
Equity securities at fair value (cost $117.6 at March 31, 2017 and $116.1 at December 31, 2016)	199.8			192.2
Short-term investments at fair value (amortized cost $15.4 at March 31, 2017 and $16.0 at December 31, 2016)	15.4			16.0
Total investments	2,610.5			2,552.6
Cash and cash equivalents	58.6			67.2
Restricted cash and cash equivalents	4.1			3.6
Accrued investment income	20.1			20.6
Premiums receivable (less bad debt allowance of $9.4 at March 31, 2017 and $9.8 at December 31, 2016)	323.8			304.7
Reinsurance recoverable for:
Paid losses	8.1			8.7
Unpaid losses	572.9			580.0
Deferred policy acquisition costs	48.1			44.3
Deferred income taxes, net	52.1			59.4
Property and equipment, net	23.9			22.2
Intangible assets, net	8.1			8.2
Goodwill	36.2			36.2
Contingent commission receivable—LPT Agreement	31.1			31.1
Other assets	36.0			34.6
Total assets	$	3,833.6		$	3,773.4

Liabilities and stockholders’ equity
Claims and policy liabilities:
Unpaid losses and loss adjustment expenses	$	2,298.2		$	2,301.0
Unearned premiums	330.8			310.3
Total claims and policy liabilities	2,629.0			2,611.3
Commissions and premium taxes payable	49.3			48.8
Accounts payable and accrued expenses	21.0			24.2
Unsettled purchases of investments	18.0			—
Deferred reinsurance gain—LPT Agreement	171.9			174.9
Notes payable	32.0			32.0
Other liabilities	44.9			41.6
Total liabilities	$	2,966.1		$	2,932.8
Commitments and contingencies
Stockholders’ equity:
Common stock, $0.01 par value; 150,000,000 shares authorized; 56,373,568 and 56,226,277 shares issued and 32,276,213 and 32,128,922 shares outstanding at March 31, 2017 and December 31, 2016, respectively	$	0.6		$	0.6
Preferred stock, $0.01 par value; 25,000,000 shares authorized; none issued	—			—
Additional paid-in capital	372.7			372.0
Retained earnings	795.4			777.2
Accumulated other comprehensive income, net of tax	82.5			74.5
Treasury stock, at cost (24,097,355 shares at March 31, 2017 and December 31, 2016)	(383.7		)	(383.7		)
Total stockholders’ equity	867.5			840.6
Total liabilities and stockholders’ equity	$	3,833.6		$	3,773.4

See accompanying unaudited notes to the consolidated financial statements.

Employers Holdings, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share data)
As of As of
March 31,
2016 December 31,
2015
Assets (unaudited)
Available for sale:
Fixed maturity securities at fair value (amortized cost $2,215,900 at March 31, 2016 and $2,221,100 at December 31, 2015) $ 2,312,600
$ 2,288,500
Equity securities at fair value (cost $145,200 at March 31, 2016 and $137,500 at December 31, 2015) 207,600
198,700
Total investments 2,520,200

2,487,200
Cash and cash equivalents 70,800
56,600
Restricted cash and cash equivalents 4,200
2,500
Accrued investment income 19,600
20,600
Premiums receivable (less bad debt allowance of $9,600 at March 31, 2016 and $12,200 at December 31, 2015) 315,100
301,100
Reinsurance recoverable for:
Paid losses 7,900
7,700
Unpaid losses 621,400
628,200
Deferred policy acquisition costs 47,000
44,300
Deferred income taxes, net 55,500
67,900
Property and equipment, net 23,000
24,900
Intangible assets, net 8,400
8,500
Goodwill 36,200
36,200
Contingent commission receivable—LPT Agreement 29,200
29,200
Other assets 38,300
40,900
Total assets $ 3,796,800
$ 3,755,800

Liabilities and stockholders’ equity

Claims and policy liabilities:

Unpaid losses and loss adjustment expenses $ 2,341,900
$ 2,347,500
Unearned premiums 323,700
308,900
Total claims and policy liabilities 2,665,600
2,656,400
Commissions and premium taxes payable 47,500
52,500
Accounts payable and accrued expenses 19,700
24,100
Deferred reinsurance gain—LPT Agreement 186,400
189,500
Notes payable 32,000
32,000
Other liabilities 41,900
40,500
Total liabilities $ 2,993,100
$ 2,995,000
Commitments and contingencies

Stockholders’ equity:

Common stock, $0.01 par value; 150,000,000 shares authorized; 55,894,288 and 55,589,454 shares issued and 32,483,983 and 32,216,480 shares outstanding at March 31, 2016 and December 31, 2015, respectively $ 600
$ 600
Preferred stock, $0.01 par value; 25,000,000 shares authorized; none issued —
—
Additional paid-in capital 363,200
357,200
Retained earnings 700,100
682,000
Accumulated other comprehensive income, net 103,400
83,600
Treasury stock, at cost (23,410,305 shares at March 31, 2016 and 23,372,974 shares at December 31, 2015) (363,600 ) (362,600 )
Total stockholders’ equity 803,700
760,800
Total liabilities and stockholders’ equity $ 3,796,800
$ 3,755,800



Employers Holdings, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
(in millions, except per share data)
	Three Months Ended
	March 31,
	2017			2016
Revenues	(unaudited)
Net premiums earned	$	175.3		$	172.6
Net investment income	18.8			17.8
Net realized gains on investments	2.2			1.5
Other income	—			0.1
Total revenues	196.3			192.0
Expenses
Losses and loss adjustment expenses	109.0			107.3
Commission expense	21.5			20.3
Underwriting and other operating expenses	35.9			36.3
Interest expense	0.4			0.4
Total expenses	166.8			164.3
Net income before income taxes	29.5			27.7
Income tax expense	6.3			5.9
Net income	$	23.2		$	21.8
Comprehensive income
Unrealized gains during the period (net of tax expense of $5.1 and $11.2 for the three months ended March 31, 2017 and 2016, respectively)	$	9.4		$	20.8
Reclassification adjustment for realized gains in net income (net of taxes of $0.8 and $0.5 for the three months ended March 31, 2017 and 2016, respectively)	(1.4		)	(1.0		)
Other comprehensive income, net of tax	8.0			19.8
Total comprehensive income	$	31.2		$	41.6

Net realized gains on investments
Net realized gains on investments before credit related impairments	$	2.4		$	6.8
Other than temporary impairment recognized in earnings	(0.2		)	(5.3		)
Net realized gains on investments	$	2.2		$	1.5

Earnings per common share (Note 10):
Basic	$	0.72		$	0.67
Diluted	$	0.70		$	0.66
Cash dividends declared per common share and eligible RSUs and PSUs	$	0.15		$	0.09

See accompanying unaudited notes to the consolidated financial statements.

Employers Holdings, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
(in thousands, except per share data)
Three Months Ended
March 31,
2016
2015
Revenues (unaudited)
Net premiums earned $ 172,600
$ 159,000
Net investment income 17,800
16,900
Net realized gains on investments 1,500
1,200
Other income 100
100
Total revenues 192,000
177,200
Expenses
Losses and loss adjustment expenses 107,300
106,200
Commission expense 20,300
18,700
Underwriting and other operating expenses 36,300
33,500
Interest expense 400
700
Total expenses 164,300
159,100
Net income before income taxes 27,700
18,100
Income tax expense 6,700
4,100
Net income $ 21,000
$ 14,000
Comprehensive income
Unrealized gains during the period (net of tax expense of $11,200 and $5,000 for the three months ended March 31, 2016 and 2015, respectively) $ 20,800
$ 9,200
Reclassification adjustment for realized gains in net income (net of taxes of $500 and $400 for the three months ended March 31, 2016 and 2015, respectively) (1,000 )
(800 )
Other comprehensive income, net of tax 19,800
8,400
Total comprehensive income $ 40,800
$ 22,400

Net realized gains on investments
Net realized gains on investments before credit related impairments $ 6,800
$ 1,200
Other than temporary impairment recognized in earnings (5,300 ) —
Net realized gains on investments $ 1,500
$ 1,200

Earnings per common share (Note 10):
Basic $ 0.65
$ 0.44
Diluted $ 0.64
$ 0.43
Cash dividends declared per common share $ 0.09
$ 0.06



Employers Holdings, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
For the Three Months Ended March 31, 2017 and 2016
(Unaudited)

	Common Stock			Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Income, Net		Treasury Stock at Cost			Total Stockholders' Equity
	Shares	Amount		Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Income, Net		Treasury Stock at Cost			Total Stockholders' Equity
	(in millions, except share data)
Balance, January 1, 2017	56,226,277	$	0.6	$	372.0		$	777.2		$	74.5	$	(383.7	)	$	840.6
Stock-based compensation	—	—		2.0			—			—		—			2.0
Stock options exercised	37,005	—		0.6			—			—		—			0.6
Vesting of restricted and performance stock units, net of shares withheld to satisfy minimum tax withholding	110,286	—		(1.9		)	—			—		—			(1.9		)
Dividends declared	—	—		—			(5.0		)	—		—			(5.0		)
Net income for the period		—		—			23.2			—		—			23.2
Change in net unrealized gains on investments, net of taxes of $(4.3)		—		—			—			8.0		—			8.0
Balance, March 31, 2017	56,373,568	$	0.6	$	372.7		$	795.4		$	82.5	$	(383.7	)	$	867.5

Balance, January 1, 2016	55,589,454	$	0.6	$	357.2		$	682.0		$	83.6	$	(362.6	)	$	760.8
Stock-based compensation	—	—		1.8			—			—		—			1.8
Stock options exercised	262,239	—		4.0			—			—		—			4.0
Vesting of restricted and performance stock units, net of shares withheld to satisfy minimum tax withholding	42,595	—		(0.6		)	—			—		—			(0.6		)
Acquisition of common stock	—	—		—			—			—		(1.0		)	(1.0		)
Dividends declared	—	—		—			(2.9		)	—		—			(2.9		)
Net income for the period		—		—			21.8			—		—			21.8
Change in net unrealized gains on investments, net of taxes $(10.7)		—		—			—			19.8		—			19.8
Balance, March 31, 2016	55,894,288	$	0.6	$	362.4		$	700.9		$	103.4	$	(363.6	)	$	803.7

See accompanying ~~unaudited~~ notes to the consolidated financial statements.

														Employers Holdings, Inc. and Subsidiaries	Consolidated Statements of Cash Flows
(in thousands)
(in millions)							(in millions)
	Three Months Ended							Three Months Ended
	March 31,							March 31,
	2016			2015				2017			2016
Operating activities	(unaudited)							(unaudited)
Net income	$	21,000		$	14,000			$	23.2		$	21.8
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	2,200			1,700				2.1			2.2
Stock-based compensation	1,800			1,800				1.9			1.8
Amortization of premium on investments, net	3,700			3,200				3.6			3.7
Allowance for doubtful accounts	(2,600		)	1,200				(0.4		)	(2.6		)
Deferred income tax expense	1,700			1,800				3.0			1.7
Realized gains on investments, net	(1,500		)	(1,200		)
Excess tax benefits from stock-based compensation	(800		)	(600		)
Net realized gains on investments								(2.2		)	(1.5		)
Other	100			400				(0.3		)	0.1
Change in operating assets and liabilities:
Premiums receivable	(11,400		)	(1,600		)		(18.7		)	(11.4		)
Reinsurance recoverable for paid and unpaid losses	6,600			9,300
Reinsurance recoverable on paid and unpaid losses								7.7			6.6
Federal income taxes	4,100			(1,600		)		3.2			4.1
Unpaid losses and loss adjustment expenses	(5,600		)	600				(2.8		)	(5.6		)
Unearned premiums	14,800			13,800				20.5			14.8
Accounts payable, accrued expenses and other liabilities	(4,000		)	(1,400		)
Payables and other liabilities								(3.1		)	(4.0		)
Deferred reinsurance gain—LPT Agreement	(3,100		)	(2,900		)		(3.0		)	(3.1		)
Contingent commission receivable—LPT Agreement	—			(200		)
Other	(6,200		)	(13,400		)		(4.0		)	(7.0		)
Net cash provided by operating activities	20,800			24,900				30.7			21.6
Investing activities
Purchase of fixed maturity securities	(102,500		)	(168,000		)		(138.3		)	(102.5		)
Purchase of equity securities	(32,600		)	(8,000		)		(5.6		)	(32.6		)
Purchase of short-term investments								(7.9		)	—
Proceeds from sale of fixed maturity securities	42,400			—				27.3			42.4
Proceeds from sale of equity securities	26,300			8,200				5.8			26.3
Proceeds from maturities and redemptions of investments	61,500			85,100
Capital expenditures	(200		)	(900		)
Proceeds from maturities and redemptions of fixed maturity securities								63.3			61.5
Proceeds from maturities of short-term investments								8.5			—
Net change in unsettled investment purchases and sales								18.0			—
Capital expenditures and other								(3.5		)	(0.2		)
Change in restricted cash and cash equivalents	(1,700		)	2,400				(0.5		)	(1.7		)
Net cash used in investing activities	(6,800		)	(81,200		)		(32.9		)	(6.8		)
Financing activities
Acquisition of treasury stock	(1,000		)	—
Acquisition of common stock								—			(1.0		)
Cash transactions related to stock-based compensation	3,400			(300		)		(1.3		)	3.4
Dividends paid to stockholders	(2,900		)	(1,900		)
Stockholder dividends paid								(5.0		)	(2.9		)
Payments on notes payable and capital leases	(100		)	(100		)		(0.1		)	(0.1		)
Excess tax benefits from stock-based compensation	800			600
Net cash provided by (used in) financing activities	200			(1,700		)
Net increase (decrease) in cash and cash equivalents	14,200			(58,000		)
Net cash used in financing activities								(6.4		)	(0.6		)
Net (decrease) increase in cash and cash equivalents								(8.6		)	14.2
Cash and cash equivalents at the beginning of the period	56,600			103,600				67.2			56.6
Cash and cash equivalents at the end of the period	$	70,800		$	45,600			$	58.6		$	70.8

See accompanying unaudited notes to the consolidated financial statements.

Employers Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

1. Basis of Presentation and Summary of Operations

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

In 1999, the Nevada State Industrial Insurance System (the Fund) entered into a retroactive 100% quota share reinsurance agreement (the LPT Agreement) through a loss portfolio transfer transaction with third party reinsurers. The LPT Agreement commenced on June 30, 1999 and will remain in effect until all claims under the covered policies have closed, the LPT Agreement is commuted or terminated, upon the mutual agreement of the parties, or the reinsurers' aggregate maximum limit of liability is exhausted, whichever occurs first. The LPT Agreement does not provide for any additional termination terms. On January 1, 2000, EICN assumed all of the assets, liabilities and operations of the Fund, including the Fund's rights and obligations associated with the LPT Agreement. See Note 7.

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

The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities Exchange Act of 1934, as amended. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal, recurring adjustments) necessary for a fair presentation of the Company’s consolidated financial position and results of operations for the periods presented have been included. The results of operations for an interim period are not necessarily indicative of the results for an entire year. These financial statements have been prepared consistent with the accounting policies described in the Company’s ~~Annual Report on~~ Form 10-K for the year ended December 31, ~~2015~~2016 (Annual Report).

The Company considers an operating segment to be any component of its business whose operating results are regularly reviewed by the Company’s chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance based on discrete financial information. 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, recoverability of deferred income taxes, and valuation of investments.

Reclassifications

Certain prior period information has been reclassified to conform to the current period presentation. See Note 2.

2. New Accounting Standards

Recently Adopted Accounting Standards

In March 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) Number 2016-09, Compensation - Stock Compensation (Topic 718) that impacted the net tax benefits on the Company's stock-based compensation. The Company elected to early adopt this standard in the third quarter of 2016 with an effective date of January 1, 2016. Adoption of this standard resulted in a $0.8 million reduction to Income tax expense and a corresponding increase to Net income for the three months ended March 31, 2016 and increased basic and diluted earnings per share by $0.02 for the same period. This standard also requires that assumed proceeds under the treasury stock method be modified to exclude the excess tax benefits that would have been recognized in Additional paid-in capital. Additionally, this standard requires that excess tax benefits from stock-based

compensation be reported as cash flows from operating activities, as opposed to financing activities. This update resulted in a change in presentation in the Consolidated Statements of Cash Flows.

Recently Issued Accounting Standards

In January ~~2016,~~2017, the FASB issued ASU Number ~~2016-01,Financial Instruments - Overall~~ 2017-04, Intangibles-Goodwill and Other (Topic 350)~~(Subtopic 825-10)~~. This update ~~replaces~~simplifies the ~~guidance to classify equity securities with readily determinable fair values into different categories (trading or available-for-sale) and requires equity securities~~measurement of goodwill by eliminating the performance of Step 2 in the goodwill impairment testing. This update allows the testing to be ~~measured at fair value with changes in fair value recognized through net income. Additionally, this update eliminates the method and significant assumptions used to estimate~~performed by comparing the fair value of ~~financial instruments measured at amortized cost. It requires financial instruments to be measured at~~a reporting unit with its carrying amount and recognize an impairment charge when the carrying amount exceeds fair ~~value using the exit price notion. Furthermore,~~value. Additionally, this update ~~clarifies that an evaluation~~eliminated the requirements of ~~deferred tax assets related~~any reporting unit with a zero or negative carrying value to ~~available-for-sale securities is needed, in combination~~perform Step 2, but requires disclosure of the amount of goodwill allocated to a reporting unit with ~~an evaluation~~zero or negative carrying amount of ~~other deferred tax assets, to determine if a valuation allowance is required.~~net assets. This update becomes effective for fiscal years beginning after December 15, ~~2017, including interim periods within those fiscal years.~~2019. The Company ~~has determined that at March 31, 2016, adoption of~~does not expect this ~~guidance would result in~~update to have a ~~$62.4 million reclassification adjustment, net of tax, between retained earnings and accumulated other comprehensive income. The Company has not yet estimated the full~~material impact ~~that the adoption will have on~~to its consolidated ~~statement~~financial condition and results of ~~comprehensive income.~~operations.

In ~~February 2016,~~March 2017, the FASB issued ASU Number ~~2016-02, Leases~~2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20) ~~(Topic 842)~~. This update ~~provides guidance~~shortens the amortization period on callable debt securities held at a new lessee model that includes the recognition of assets and liabilities arising from lease transactions on the balance sheet. Additionally, the update provides clarity on the definition of a lease and the distinction between finance and operating leases. Furthermore, the update requires certain qualitative and quantitative disclosures pertainingpremium to the ~~amounts recorded~~earliest call date, which now closely aligns the amortization period of premiums and discounts to expectations incorporated in the ~~financial statements.~~market pricing on callable debt securities. This update becomes effective for ~~annual reporting periods, including~~fiscal years beginning after December 15, 2018 and interim periods within those ~~annual periods, beginning after December 15, 2018~~fiscal years, and early adoption is permitted. The Company has not yet estimated the full impact that the adoption will have on its consolidated financial condition and results of operations.

~~In March 2016, the FASB issued~~ ~~ASU Number 2016-09, Compensation - Stock Compensation~~ (Topic 718). This update simplifies several aspects of the accounting for share based-payment award transactions including income taxes and classification of awards on the balance sheet and on the statement of cash flows. This update becomes effective for annual reporting periods, including

interim periods within those annual periods, beginning after December 15, 2016 and early adoption is permitted. The Company has not yet estimated the full impact that the adoption will have on its consolidated financial condition and results of operations.

3. Fair Value of Financial Instruments

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


	March 31, 2016				December 31, 2015				March 31, 2017				December 31, 2016
	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
	(in millions)								(in millions)
Financial assets
Investments	$	2,520.2	$	2,520.2	$	2,487.2	$	2,487.2	$	2,610.5	$	2,610.5	$	2,552.6	$	2,552.6
Cash and cash equivalents	70.8		70.8		56.6		56.6		58.6		58.6		67.2		67.2
Restricted cash and cash equivalents	4.2		4.2		2.5		2.5		4.1		4.1		3.6		3.6
Financial liabilities
Notes payable	$	32.0	$	32.2	$	32.0	$	36.6	$	32.0	$	34.5	$	32.0	$	33.0

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

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

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

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

~~Fair~~The Company uses third party pricing services to assist with its investment accounting function. The ultimate pricing source varies depending on the investment security and pricing service used, but investment securities valued on the basis of observable inputs (Levels 1 and 2) are generally assigned values on the basis of ~~available-for-sale fixed maturity and equity securities~~actual transactions. Securities valued on the basis of pricing models with significant unobservable inputs or nonbinding broker quotes are ~~based~~classified as Level 3. The Company performs quarterly analyses on ~~quoted market~~the prices ~~where available. If quoted market~~it receives from third parties to determine whether the prices ~~and an estimate determined by using objectively verifiable information~~ are ~~unavailable, the Company produces an estimate~~reasonable estimates of fair value, ~~based on internally developed valuation techniques, which, depending on~~including confirming the ~~level~~fair values of these securities through observable market ~~inputs, will render~~prices using an alternative pricing source, as it is ultimately management’s responsibility to ensure that the fair ~~value estimate as Level 2 or Level 3.~~ values reflected in the Company’s consolidated financial statements are appropriate. If differences are noted in these analyses, the Company may obtain additional information from other pricing services to validate the quoted price.

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

For securities not actively traded, third party pricing services may use quoted market prices of similar instruments or discounted cash flow analyses, incorporating inputs that are currently observable in the markets for similar securities. Inputs that are often used in the valuation methodologies include, but are not limited to, broker quotes, benchmark yields, credit spreads, default rates,

and prepayment speed assumptions. There were no adjustments to prices obtained from third party pricing services as of March 31, 2017 and December 31, 2016 that were material to the consolidated financial statements.

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 Company would be required to produce an estimate of fair value using some of the same methodologies, making assumptions for market-based inputs that are unavailable.

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

~~The following table presents the items on the accompanying consolidated balance sheets that are stated~~2 at ~~fair value and the corresponding fair value measurements.~~

March 31, 2016 December 31, 2015
Level 1 Level 2 Level 3 Level 1 Level 2 Level 3
(in millions)
Fixed maturity securities
U.S. Treasuries $ —
$ 130.6
$ —
$ —
$ 120.2
$ —
U.S. Agencies —
24.4
—
—
24.4
—
States and municipalities —
863.3
—
—
854.5
—
Corporate securities —
940.1
—
—
925.3
—
Residential mortgage-backed securities —
244.0
—
—
237.9
—
Commercial mortgage-backed securities —
80.1
—
—
80.3
—
Asset-backed securities —
30.1
—
—
45.9
—
Total fixed maturity securities $ —
$ 2,312.6
$ —
$ —
$ 2,288.5
$ —
Equity securities
Corporate equity securities $ 202.3
$ —
$ —
$ 198.7
$ —
$ —
Federal Home Loan Bank stock $ —
$ —
$ 5.3
$ —
$ —
$ —
Total equity securities $ 202.3
$ —
$ 5.3
$ 198.7
$ —
$ —

~~The following table provides a reconciliation~~each of the ~~beginning and ending balances that are measured using Level 3 inputs for the three months ended March 31, 2016.~~

Equity Securities
(in millions)
Beginning balance, January 1, 2016 $ —
Purchases, issuances, settlements, net 5.3
Ending balance, March 31, 2016 $ 5.3
periods presented.

Each of the Company's insurance operating subsidiaries is a member of the Federal Home Loan Bank (FHLB) of San Francisco. Members are required to purchase stock in the FHLB in addition to maintaining collateral deposits that back any funds advanced. Investment in FHLB stock is recorded at cost, as purchases and sales of these securities are at par value with the issuer. The FHLB stock is considered a restricted security and is periodically evaluated for impairment based on the ultimate recovery of par value. Due to the nature of FHLB stock, its carrying value approximates fair ~~value.~~value and was determined by the Company to be Level 3 at each of the periods presented.

Certain of the Company's privately placed asset-backed securities are designated as Level 3 primarily due to restrictions on resale. Third party pricing based on actual transactions are typically not available for these securities due to the limited nature of observable pricing inputs.

The following table presents the items in the Company's Consolidated Balance Sheets that are stated at fair value and the corresponding fair value measurements.



	March 31, 2017						December 31, 2016
	Level 1		Level 2		Level 3		Level 1		Level 2		Level 3
	(in millions)
Fixed maturity securities
U.S. Treasuries	$	—	$	133.7	$	—	$	—	$	127.4	$	—
U.S. Agencies	—		15.0		—		—		12.8		—
States and municipalities	—		817.5		—		—		851.6		—
Corporate securities	—		985.7		—		—		956.7		—
Residential mortgage-backed securities	—		302.9		—		—		258.0		—
Commercial mortgage-backed securities	—		94.9		—		—		95.5		—
Asset-backed securities	—		40.2		5.4		—		35.4		7.0
Total fixed maturity securities	$	—	$	2,389.9	$	5.4	$	—	$	2,337.4	$	7.0
Equity securities
Industrial and miscellaneous	$	174.2	$	—	$	—	$	167.2	$	—	$	—
Non-redeemable preferred (FHLB stock)	—		—		4.9		—		—		4.9
Other	20.7		—		—		20.1		—		—
Total equity securities	$	194.9	$	—	$	4.9	$	187.3	$	—	$	4.9
Short-term investments	$	—	$	15.4	$	—	$	—	$	16.0	$	—

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



	March 31, 2017		December 31, 2016
	(in millions)
Cash and cash equivalents at fair value	$	23.6	$	9.7
Cash equivalents measured at NAV, which approximates fair value	35.0		57.5
Total cash and cash equivalents	$	58.6	$	67.2

The following table provides a reconciliation of the beginning and ending balances that are measured using Level 3 inputs for the three months ended March 31, 2017 and 2016.



	Level 3 Securities
	2017			2016
	(in millions)
Beginning balance, January 1	$	11.9		$	—
Transfers in (out) of Level 3 ⁽¹⁾	(1.4		)	—
Purchases and sales, net	(0.2		)	5.3
Ending balance, March 31	$	10.3		$	5.3


(1)	Transferred from Level 3 to Level 2 because observable market data became available for the securities.

4. Investments

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


	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value		Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(in millions)									(in millions)
At March 31, 2016
At March 31, 2017
Fixed maturity securities
U.S. Treasuries	$	125.1	$	5.5	$	—		$	130.6	$	130.5	$	3.4	$	(0.2	)	$	133.7
U.S. Agencies	23.0		1.4		—			24.4		14.2		0.8		—			15.0
States and municipalities	810.8		52.5		—			863.3		794.2		28.3		(5.0		)	817.5
Corporate securities	912.9		32.4		(5.2		)	940.1		969.1		19.8		(3.2		)	985.7
Residential mortgage-backed securities	235.2		8.9		(0.1		)	244.0		301.5		4.2		(2.8		)	302.9
Commercial mortgage-backed securities	78.9		1.3		(0.1		)	80.1		95.4		0.4		(0.9		)	94.9
Asset-backed securities	30.0		0.1		—			30.1		45.7		0.1		(0.2		)	45.6
Total fixed maturity securities	2,215.9		102.1		(5.4		)	2,312.6		2,350.6		57.0		(12.3		)	2,395.3
Equity securities
Corporate equity securities	139.9		63.9		(1.5		)	202.3
Federal Home Loan Bank stock	5.3		—		—			5.3
Industrial and miscellaneous										102.0		73.0		(0.8		)	174.2
Non-redeemable preferred (FHLB stock)										4.9		—		—			4.9
Other										10.7		10.0		—			20.7
Total equity securities	145.2		63.9		(1.5		)	207.6		117.6		83.0		(0.8		)	199.8
Short-term investments										15.4		—		—			15.4
Total investments	$	2,361.1	$	166.0	$	(6.9	)	$	2,520.2	$	2,483.6	$	140.0	$	(13.1	)	$	2,610.5


At December 31, 2015
At December 31, 2016
Fixed maturity securities
U.S. Treasuries	$	116.4	$	3.9	$	(0.1	)	$	120.2	$	124.1	$	3.5	$	(0.2	)	$	127.4
U.S. Agencies	23.0		1.4		—			24.4		11.9		0.9		—			12.8
States and municipalities	809.4		45.1		—			854.5		833.0		24.7		(6.1		)	851.6
Corporate securities	913.4		19.9		(8.0		)	925.3		942.3		18.9		(4.5		)	956.7
Residential mortgage-backed securities	231.8		7.1		(1.0		)	237.9		255.9		4.7		(2.6		)	258.0
Commercial mortgage-backed securities	81.1		0.2		(1.0		)	80.3		96.1		0.4		(1.0		)	95.5
Asset-backed securities	46.0		—		(0.1		)	45.9		42.6		—		(0.2		)	42.4
Total fixed maturity securities	2,221.1		77.6		(10.2		)	2,288.5		2,305.9		53.1		(14.6		)	2,344.4
Equity securities
Corporate equity securities	137.5		65.8		(4.6		)	198.7
Equity securities	137.5		65.8		(4.6		)	198.7
Industrial and miscellaneous										100.5		67.4		(0.7		)	167.2
Non-redeemable preferred (FHLB stock)										4.9		—		—			4.9
Other										10.7		9.4		—			20.1
Total equity securities										116.1		76.8		(0.7		)	192.2
Short-term investments										16.0		—		—			16.0
Total investments	$	2,358.6	$	143.4	$	(14.8	)	$	2,487.2	$	2,438.0	$	129.9	$	(15.3	)	$	2,552.6

The amortized cost and estimated fair value of the Company's fixed maturity securities at March 31, ~~2016~~2017, 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		Amortized Cost		Estimated Fair Value
	(in millions)				(in millions)
Due in one year or less	$	132.8	$	134.4	$	180.5	$	181.8
Due after one year through five years	869.8		902.0		874.7		899.4
Due after five years through ten years	612.3		647.1		600.4		615.5
Due after ten years	256.9		274.9		252.4		255.2
Mortgage and asset-backed securities	344.1		354.2		442.6		443.4
Total	$	2,215.9	$	2,312.6	$	2,350.6	$	2,395.3

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 March 31, ~~2016~~2017 and December 31, ~~2015~~2016.


	March 31, 2016						December 31, 2015						March 31, 2017						December 31, 2016
	Estimated Fair Value		Gross Unrealized Losses			Number of Issues	Estimated Fair Value		Gross Unrealized Losses			Number of Issues	Estimated Fair Value		Gross Unrealized Losses			Number of Issues	Estimated Fair Value		Gross Unrealized Losses			Number of Issues
	(in millions, except number of issues data)												(in millions, except number of issues data)
Less than 12 months:
Fixed maturity securities
U.S. Treasuries	$	—	$	—		—	$	27.4	$	(0.1	)	20	$	32.8	$	(0.2	)	16	$	33.3	$	(0.2	)	14
States and municipalities													120.7		(5.0		)	32	200.9		(6.1		)	50
Corporate securities	67.2		(2.5		)	28	328.4		(4.7		)	122	228.9		(2.8		)	215	289.5		(4.1		)	101
Residential mortgage-backed securities	—		—			—	50.5		(0.8		)	24	165.2		(2.8		)	59	137.5		(2.6		)	51
Commercial mortgage-backed securities	7.3		(0.1		)	2	51.5		(1.0		)	22	50.5		(0.9		)	21	48.0		(1.0		)	21
Asset-backed securities	—		—			—	34.1		—			27	23.8		(0.2		)	22	30.1		(0.2		)	20
Total fixed maturity securities	74.5		(2.6		)	30	491.9		(6.6		)	215	621.9		(11.9		)	365	739.3		(14.2		)	257
Equity securities	30.3		(1.5		)	39	35.8		(4.6		)	45	13.1		(0.7		)	29	13.6		(0.6		)	28
Total less than 12 months	$	104.8	$	(4.1	)	69	$	527.7	$	(11.2	)	260	$	635.0	$	(12.6	)	394	$	752.9	$	(14.8	)	285

12 months or greater:
Fixed maturity securities
Corporate securities	$	33.5	$	(2.7	)	17	$	34.6	$	(3.3	)	15	$	16.4	$	(0.4	)	6	$	15.2	$	(0.4	)	5
Residential mortgage-backed securities	20.9		(0.1		)	23	7.1		(0.2		)	25
Asset-backed securities	—		—			—	11.1		(0.1		)	4
Total fixed maturity securities	54.4		(2.8		)	40	52.8		(3.6		)	44	16.4		(0.4		)	6	15.2		(0.4		)	5
Equity securities													1.5		(0.1		)	3	1.7		(0.1		)	5
Total 12 months or greater	$	54.4	$	(2.8	)	40	$	52.8	$	(3.6	)	44	$	17.9	$	(0.5	)	9	$	16.9	$	(0.5	)	10

Total available-for-sale:
Fixed maturity securities
U.S. Treasuries	$	—	$	—		—	$	27.4	$	(0.1	)	20	$	32.8	$	(0.2	)	16	$	33.3	$	(0.2	)	14
States and municipalities													120.7		(5.0		)	32	200.9		(6.1		)	50
Corporate securities	100.7		(5.2		)	45	363.0		(8.0		)	137	245.3		(3.2		)	221	304.7		(4.5		)	106
Residential mortgage-backed securities	20.9		(0.1		)	23	57.6		(1.0		)	49	165.2		(2.8		)	59	137.5		(2.6		)	51
Commercial mortgage-backed securities	7.3		(0.1		)	2	51.5		(1.0		)	22	50.5		(0.9		)	21	48.0		(1.0		)	21
Asset-backed securities	—		—			—	45.2		(0.1		)	31	23.8		(0.2		)	22	30.1		(0.2		)	20
Total fixed maturity securities	128.9		(5.4		)	70	544.7		(10.2		)	259	638.3		(12.3		)	371	754.5		(14.6		)	262
Equity securities	30.3		(1.5		)	39	35.8		(4.6		)	45	14.6		(0.8		)	32	15.3		(0.7		)	33
Total available-for-sale	$	159.2	$	(6.9	)	109	$	580.5	$	(14.8	)	304	$	652.9	$	(13.1	)	403	$	769.8	$	(15.3	)	295

~~Based on reviews of the fixed maturity securities, the~~The Company determined that unrealized losses on fixed maturities for the three months ended March 31, ~~2016~~2017 were primarily the result of changes in prevailing interest rates and not the credit quality of the issuers. The fixed maturity securities whose total fair value was less than amortized cost were not determined to be other-than-temporarily impaired given the lack of severity and duration of the impairment, the credit quality of the issuers, the Company’s intent to not sell the securities, and a determination that it is not more likely than not that the Company will be required to sell the securities until fair value recovers to above amortized cost, or principal value upon maturity.

~~Based on reviews of the equity securities, the~~The Company recognized ~~a total impairment~~impairments of ~~$5.3~~$0.2 million ~~in the fair value~~(consisting of ~~32 equity securities for~~one security) during the three months ended March 31, ~~2016~~2017~~, as a~~. The other-than-temporary impairment recognized during this period related to an equity security and was the result of ~~the Company's intent to sell and/or~~ the severity and duration of the change in fair value of ~~the securities. The remaining~~this security. Certain unrealized losses on equity securities were not considered to be other-than-temporary due to the financial condition and near-term prospects of the ~~issuers. The other-than-temporary impairment of equity~~issuers, and the Company's intent to hold the securities ~~during the first quarter of 2016 was primarily due~~until fair value recovers to ~~the continued downturn in the energy sector.~~above cost.

Net realized gains on investments and the change in unrealized gains (losses) on fixed maturity and equity securities are determined on a specific-identification basis and were as follows:


	Three Months Ended						Three Months Ended
	March 31,						March 31,
	2016			2015			2017			2016
	(in millions)						(in millions)
Net realized gains on investments
Fixed maturity securities
Gross gains	$	0.2		$	—		$	0.5		$	0.2
Gross losses	(0.1		)	—			—			(0.1		)
Net realized gains on fixed maturity securities	$	0.1		$	—		$	0.5		$	0.1
Equity securities
Gross gains	$	7.2		$	1.5		$	1.9		$	7.2
Gross losses	(5.8		)	(0.3		)	(0.2		)	(5.8		)
Net realized gains on equity securities	$	1.4		$	1.2		$	1.7		$	1.4
Total	$	1.5		$	1.2		$	2.2		$	1.5

Change in unrealized gains (losses)
Change in unrealized gains
Fixed maturity securities	$	29.3		$	14.1		$	6.2		$	29.3
Equity securities	1.2			(1.2		)	6.1			1.2
Total	$	30.5		$	12.9		$	12.3		$	30.5

Net investment income was as follows:


	Three Months Ended						Three Months Ended
	March 31,						March 31,
	2016			2015			2017			2016
	(in millions)						(in millions)
Fixed maturity securities	$	16.7		$	16.4		$	17.8		$	16.7
Equity securities	1.9			1.1			1.8			1.9
Cash equivalents and restricted cash							0.1			—
Gross investment income	18.6			17.5			19.7			18.6
Investment expenses	(0.8		)	(0.6		)	(0.9		)	(0.8		)
Net investment income	$	17.8		$	16.9		$	18.8		$	17.8

The Company is required by various state laws and regulations to ~~keep~~hold securities or letters of credit in depository accounts with certain states in which it does business. ~~As of~~ ~~March 31, 2016~~ ~~and~~ ~~December 31, 2015, securities having a fair value of~~ ~~$1,032.3 million~~ ~~and~~ ~~$881.2 million, respectively, were on deposit.~~ These laws and regulations govern not only the amount but also the types of securities that are eligible for deposit. As of March 31, 2017 and December 31, 2016, securities having a fair value of $1,175.7 million and $1,009.7 million, respectively, were on deposit.

Certain reinsurance contracts require ~~Company~~the Company's funds to be held in trust for the benefit of the ceding reinsurer to secure the outstanding liabilities assumed by the Company. The fair value of fixed maturity securities and restricted cash and cash equivalents held in trust for the benefit of ceding reinsurers at March 31, ~~2016~~2017 and December 31, ~~2015~~2016 was ~~$32.9~~$27.6 million and $~~32.7~~27.2 million, respectively.

5. Income Taxes

Income tax expense for interim periods is measured using an estimated effective tax rate for the annual period. The ~~following is a reconciliation~~Company's effective tax rate was 21.4% and 21.3% for the three months ended March 31, 2017 and 2016, respectively. For each of ~~the federal statutory~~these periods, tax-advantaged investment income, LPT Reserve Adjustments, Deferred Gain amortization, and certain other adjustments served to reduce our effective income tax rate tobelow the ~~Company’s effective tax rates for the periods presented.~~

Three Months Ended
March 31,
2016 2015
Expense computed at statutory rate 35.0 % 35.0 %
Dividends received deduction and tax-exempt interest (8.2 ) (8.8 )
LPT deferred gain amortization (3.2 ) (4.2 )
Other 0.6
0.5
Effective tax rate 24.2 % 22.5 %
U.S. statutory rate of 35%.

6. Liability for Unpaid Losses and Loss Adjustment Expenses

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


	Three Months Ended					Three Months Ended
	March 31,					March 31,
	2016			2015		2017		2016
	(in millions)					(in millions)
Unpaid losses and LAE, gross of reinsurance, at beginning of period	$	2,347.5		$	2,369.7	$	2,301.0	$	2,347.5
Less reinsurance recoverable, excluding bad debt allowance, on unpaid losses and LAE	628.2			669.5		580.0		628.2
Net unpaid losses and LAE at beginning of period	1,719.3			1,700.2		1,721.0		1,719.3
Losses and LAE, net of reinsurance, incurred during the period related to:
Current period	110.7			107.6		111.9		110.7
Prior periods	(0.3		)	1.7		—		(0.3		)
Total net losses and LAE incurred during the period	110.4			109.3		111.9		110.4
Paid losses and LAE, net of reinsurance, related to:
Current period	4.7			4.1		4.7		4.7
Prior periods	104.5			98.1		102.9		104.5
Total net paid losses and LAE during the period	109.2			102.2		107.6		109.2
Ending unpaid losses and LAE, net of reinsurance	1,720.5			1,707.3		1,725.3		1,720.5
Reinsurance recoverable, excluding bad debt allowance, on unpaid losses and LAE	621.4			663.0		572.9		621.4
Unpaid losses and LAE, gross of reinsurance, at end of period	$	2,341.9		$	2,370.3	$	2,298.2	$	2,341.9

Total net losses and LAE included in the above table excludes the impact of the aggregate of amortization of the deferred reinsurance gain—LPT Agreement, LPT Reserve Adjustments, and LPT Contingent Commission Adjustments, which totaled $2.9 million and $3.1 million for the three months ended March 31, 2017 and 2016, ~~and 2015~~respectively (Note 7).

The change in ~~the estimates of~~ incurred losses and LAE attributable to ~~insured events for~~ prior periods was related to the Company's assigned risk ~~business.~~business for the three months ended March 31, 2016.

7. LPT Agreement

The Company is party to a ~~100%~~ ~~quota share retroactive reinsurance agreement (LPT Agreement)~~the LPT Agreement under which $~~1.5 billion~~1,525.0 million in liabilities for losses and LAE related to claims incurred by ~~EICN~~the Fund prior to July 1, 1995 were reinsured for consideration of $775.0 million. The LPT Agreement provides coverage up to $~~2.0 billion~~2,000.0 million. The initial Deferred Gain resulting from the LPT Agreement was recorded as a liability in the accompanying consolidated balance sheets as Deferred reinsurance gain–LPT Agreement. The Company is also entitled to receive a contingent profit commission under the LPT Agreement. The contingent profit commission 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 Company records its estimate of contingent profit commission in the accompanying ~~consolidated balance sheets~~Consolidated Balance Sheets as Contingent commission receivable–LPT Agreement and a corresponding liability is recorded in the accompanying ~~consolidated balance sheets~~Consolidated Balance Sheets in Deferred reinsurance gain–LPT Agreement. The Deferred Gain is being amortized using the recovery method. Amortization is determined by the proportion of actual reinsurance recoveries to total estimated recoveries over the life of the LPT Agreement, except for the contingent profit commission, which is amortized through June 30, 2024, the date through which the Company is entitled to receive a contingent profit commission under the LPT Agreement. The amortization is recorded in losses and LAE incurred in the accompanying consolidated statements of comprehensive income. Any adjustments to the Deferred Gain are recorded in losses and LAE incurred in the accompanying consolidated statements of comprehensive income.

The Company amortized ~~$3.1~~$2.9 million and ~~$2.9~~$3.1 million of the Deferred Gain for the three months ended March 31, 2017 and 2016, ~~and 2015,~~ respectively. ~~Additionally, the Deferred Gain was reduced by $0.2 million for the three months ended March 31, 2015, due to a favorable LPT Contingent Commission Adjustment.~~ The remaining Deferred Gain was ~~$186.4~~$171.9 millionand ~~$189.5~~$174.9 million as of March 31, ~~2016~~2017 and December 31, ~~2015~~,2016, respectively. The estimated remaining liabilities subject to the LPT Agreement were ~~$490.8~~$458.6 million and ~~$498.0~~$465.5 million as of March 31, ~~2016~~2017 and December 31, ~~2015~~,2016, respectively. Losses and LAE paid with respect to the LPT Agreement totaled ~~$702.4~~$729.6 million and ~~$695.2~~$722.7 million from inception through March 31, ~~2016~~2017 and December 31, ~~2015~~,2016, respectively.

8. Accumulated Other Comprehensive Income ~~net~~

Accumulated other comprehensive income ~~net,~~ is comprised of unrealized gains on investments classified as available-for-sale, net of deferred tax expense. The following table summarizes the components of accumulated other comprehensive ~~income, net:~~income:


	March 31, 2016			December 31, 2015			March 31, 2017			December 31, 2016
	(in millions)						(in millions)
Net unrealized gain on investments, before taxes	$	159.1		$	128.6		$	126.9		$	114.6
Deferred tax expense on net unrealized gains	(55.7		)	(45.0		)	(44.4		)	(40.1		)
Total accumulated other comprehensive income, net	$	103.4		$	83.6
Total accumulated other comprehensive income							$	82.5		$	74.5

9. Stock-Based Compensation

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


	Number Awarded	Weighted Average Fair Value on Date of Grant		Weighted Average Exercise Price		Aggregate Fair Value on Date of Grant		Number Awarded	Weighted Average Fair Value on Date of Grant	Weighted Average Exercise Price	Aggregate Fair Value on Date of Grant
						(in millions)					(in millions)
March 2016
Stock options⁽¹⁾	67,431	$	8.38	$	27.72	$	0.6
March 2017
RSUs⁽¹⁾	80,816	27.72		—		2.2		72,020	37.60	—	2.7
PSUs⁽²⁾	97,236	27.72		—		2.7		97,440	37.60	—	3.7

(1)

The ~~stock options and~~ RSUs awarded in March ~~2016~~2017 were awarded to certain ~~officers~~employees of the Company and vest 25% on March 15, ~~2017,~~2018, and each of the subsequent three anniversaries of that date. The ~~stock options and~~ RSUs are subject to accelerated vesting in certain circumstances, including but not limited to: death, disability, retirement, or in connection with change of control of the Company. ~~The stock options expire seven years from the date of grant.~~

(2)

The PSUs awarded in March ~~2016~~2017 were awarded to certain ~~officers~~employees of the Company and have a performance period of two years followed by an additional one year vesting period. The PSU awards are subject to certain performance goals with payouts that range from 0% to 200% of the target awards. The value shown in the table represents the aggregate number of PSUs awarded at the target level.

Commencing in 2017, employees who were awarded RSUs and PSUs are entitled to receive dividend equivalents for eligible awards, payable in cash, when the underlying award vests and becomes payable. If the underlying award does not vest or is forfeited, any dividend equivalents with respect to the underlying award will also fail to become payable and will be forfeited.

A total of ~~262,239~~37,005, 262,239, and ~~463,466~~586,132 stock options were exercised during the three months ended March 31, ~~2016~~2017 and 2016, and the year ended December 31, ~~2015~~2016, respectively.

10. Earnings Per Share

Basic earnings per share excludes 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 reflects the potential dilutive impact of all convertible securities on earnings per share. Diluted earnings per share includes shares that are assumed to be issued under the “treasury stock method,” which reflects the potential dilution that would occur if outstanding RSUs and PSUs had vested and options were to be exercised.

Commencing in 2017, certain stock-based compensation awards are eligible to receive dividend equivalents on awards that fully vest or become payable. These awards are not considered participating securities for the purposes of determining earnings per share.

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


	Three Months Ended					Three Months Ended
	March 31,					March 31,
	2016		2015			2017		2016
	(in millions, except share data)				(in millions, except share data)
Net income available to stockholders—basic and diluted	$	21.0	$	14.0		$	23.2	$	21.8
Weighted average number of shares outstanding—basic	32,413,818		31,740,923			32,327,784		32,413,818
Effect of dilutive securities:
PSUs	139,033		322,850			309,891		151,031
Stock options	238,582		310,899			225,664		304,073
RSUs	71,517		79,392			102,028		86,310
Dilutive potential shares	449,132		713,141			637,583		541,414
Weighted average number of shares outstanding—diluted	32,862,950		32,454,064			32,965,367		32,955,232

Diluted earnings per share excludes outstanding options and other common stock equivalents in periods where the inclusion of such options and common stock equivalents would be anti-dilutive. The following table presents options, PSUs, and RSUs that were excluded from diluted earnings per share.

Three Months Ended
March 31,
2016 2015
Options, PSUs and RSUs excluded under the treasury method as the potential proceeds on settlement or exercise price were greater than the value of shares acquired 80,800
267,444



	Three Months Ended
	March 31,
	2017	2016
Options excluded as the exercise price was greater than the average market price	—	—
Options, PSUs and RSUs excluded under the treasury method as the potential proceeds on settlement or exercise price were greater than the value of shares acquired	—	80,800

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

You should read the following discussion and analysis in conjunction with our consolidated financial statements and the related notes thereto included in Item 1 of Part I. Unless otherwise indicated, all references to “we,” “us,” “our,” “the Company,” or similar terms refer to ~~Employers Holdings, Inc. (EHI),~~EHI, together with its subsidiaries. The information contained in this quarterly report is not a complete description of our business or the risks associated with an investment in our common stock. We urge you to carefully review and consider the various disclosures made by us in this quarterly report and in our other reports filed with the Securities and Exchange Commission (SEC), including our Annual ~~Report on Form 10-K for the year ended~~ ~~December 31, 2015~~ ~~(Annual Report).~~Report.

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

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

Overview

We are a Nevada holding company. Through our insurance subsidiaries, we provide workers’ compensation insurance coverage to select, small businesses in low to medium hazard industries. Workers’ compensation insurance is provided under a statutory system wherein most employers are required to provide coverage for their employees’ medical, disability, vocational rehabilitation, and/or death benefit costs for work-related injuries or illnesses. We provide workers’ compensation insurance in 3336 states and the District of Columbia, with a concentration in California, where over one-half of our business is generated. Our revenues are primarily comprised of net premiums earned, net investment income, and net realized gains on investments.

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

Our strategy is to pursue profitable growth opportunities across market cycles and maximize total investment returns within the constraints of prudent portfolio management. We pursue profitable growth opportunities by focusing on disciplined underwriting and claims management, utilizing medical provider networks designed to produce superior medical and indemnity outcomes, establishing and maintaining strong, long-term relationships with independent insurance agencies, and developing important alternative distribution channels. We continue to execute a number of ~~strategic~~ongoing business initiatives, including: focusing on internal and ~~customer facing~~customer-facing business process excellence; ~~emphasizing~~accelerating the settlement of open claims; diversifying our risk exposure across ~~our~~geographic markets; utilizing a ~~three-company~~multi-company pricing platform; utilizing ~~territorial multipliers in California; non-renewing under-performing business;~~territory-specific pricing; and ~~targeting~~leveraging data-driven strategies to target, price, and underwrite profitable classes of business across all of our markets.

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

Pricing on our 2017 first quarter renewals showed an overall price decrease of 1.8% versus the rate levels on such business in effect a year ago. Despite the competitive market conditions we currently face, through our efforts thus far in 2017, we believe that we have continued to write attractive business in new and existing states and have strengthened our relationships with our business partners. As a result, given the strength of our balance sheet, the strong execution of our underwriting, claims, and investment strategies, and our active capital management, we believe that we are well positioned for the current market cycle.

Results of Operations

A primary measure of our performance is our ability to increase our Adjusted stockholders' equity over the ~~long term.~~long-term. We believe that this measure is important to our investors, analysts, and other interested parties who benefit from having an objective and

consistent basis for comparison with other companies within our industry. The following table shows a reconciliation of our stockholders' equity on a GAAP basis to our Adjusted stockholders' ~~equity and the number of common shares outstanding.~~equity.


	March 31, 2016		December 31, 2015		March 31, 2017		December 31, 2016
	(in millions, except share data)				(in millions, except share data)
GAAP stockholders' equity	$	803.7	$	760.8	$	867.5	$	840.6
Deferred reinsurance gain–LPT Agreement	186.4		189.5		171.9		174.9
Less: Accumulated other comprehensive income, net	103.4		83.6		82.5		74.5
Adjusted stockholders' equity⁽¹⁾	$	886.7	$	866.7	$	956.9	$	941.0
Common shares outstanding	32,483,983		32,216,480


(1)	Adjusted stockholders' equity is a non-GAAP measure ~~that is defined as~~consisting of total GAAP stockholders' equity plus the Deferred ~~reinsurance gain–LPT Agreement (Deferred Gain),~~Gain, less Accumulated other comprehensive income, net. ~~We believe that Adjusted stockholders' equity is an important supplemental measure of our capital position.~~

~~Overall,~~Our net income was ~~$21.0~~$23.2 million and ~~$14.0 million for three months ended March 31, 2016 and 2015, respectively. We recognized underwriting income of $8.7 million and $0.6~~$21.8 million for the three months ended March 31, 2017 and 2016, respectively, and ~~2015,~~our underwriting income was $8.9 million and $8.7 million for the same periods, respectively. Underwriting income or loss is determined by deducting losses and LAE, commission expense, and underwriting and other operating expenses from net premiums earned.

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


	Three Months Ended					Three Months Ended
	March 31,					March 31,
	2016		2015			2017		2016
	(in millions)				(in millions)
Gross premiums written	$	190.7	$	174.0		$	197.6	$	190.7
Net premiums written	188.7		171.9			$	196.1	$	188.7

Net premiums earned	$	172.6	$	159.0		$	175.3	$	172.6
Net investment income	17.8		16.9			18.8		17.8
Net realized gains on investments	1.5		1.2			2.2		1.5
Other income	0.1		0.1			—		0.1
Total revenues	192.0		177.2			196.3		192.0

Losses and LAE	107.3		106.2			109.0		107.3
Commission expense	20.3		18.7			21.5		20.3
Underwriting and other operating expenses	36.3		33.5			35.9		36.3
Interest expense	0.4		0.7			0.4		0.4
Income tax expense	6.7		4.1			6.3		5.9
Total expenses	171.0		163.2			173.1		170.2
Net income	$	21.0	$	14.0		$	23.2	$	21.8
Less amortization of the Deferred Gain related to losses	$	2.6	$	2.4		$	2.4	$	2.6
Less amortization of the Deferred Gain related to contingent commission	0.5		0.5			0.5		0.5
Less impact of LPT Contingent Commission Adjustments⁽¹⁾	—		0.2
Net income before impact of the LPT Agreement⁽²⁾	$	17.9	$	10.9
Net income before impact of the LPT Agreement⁽¹⁾						$	20.3	$	18.7

(1)

Any adjustment to the contingent profit commission under the LPT Agreement results in a cumulative adjustment to the Deferred Gain, which is recognized in losses and LAE incurred in the Consolidated Statements of Comprehensive Income, such that the Deferred Gain reflects the balance that would have existed had the revised contingent profit commission been recognized at the inception of the LPT Agreement (LPT Contingent Commission Adjustments).

~~(2)~~

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

and LAE. We periodically reevaluate the remaining direct reserves subject to the LPT Agreement and the expected losses and LAE subject to the contingent profit commission under the LPT Agreement. Our reevaluation results in corresponding adjustments, if needed, to reserves, ceded reserves, contingent commission receivable, and the Deferred Gain, with the net effect being an increase or decrease to net income. Net income before impact of the LPT Agreement is not a measurement of financial performance under GAAP, but rather reflects a difference in accounting treatment between statutory and GAAP, and should not be considered in isolation or as an alternative to net income before income taxes or net income, or any other measure of performance derived in accordance with GAAP.

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

have defined it, is helpful to our management in identifying trends in our performance because the LPT Agreement has limited significance on our current and ongoing operations.

Gross Premiums Written

Gross premiums written ~~is the sum of both direct premiums written~~were $197.6 million and ~~assumed premiums written before the effect of ceded reinsurance. Gross premiums written increased 9.6%~~$190.7 million for the three months ended March 31, 2017 and 2016, ~~compared to the same period of 2015.~~respectively. The ~~difference~~year-over-year increase was primarily ~~the result of~~due to a ~~$13.5~~$3.9 million increase in ~~our~~ final audit premiums ~~year-over-year. Additionally, we saw~~and growth in new business premium. Renewal premium remained relatively flat for the first quarter, year-over-year, with increases in payroll exposure being largely offset by a 1.8% decrease in average rate.

Net Premiums Written

Net premiums written ~~year-over-year, particularly in states outside California,~~were $196.1 million and $188.7 million for the three months ended March 31, 2017 and 2016, respectively, which ~~was partially offset by declines in premium in the LA Area~~included $1.5 million and $1.9 million of ~~California, as we continue to focus on profitable classes of business.~~reinsurance premiums ceded, respectively.

Net Premiums Earned

Net premiums earned ~~are those portions of the premiums that apply to the expired portions of the policies in force. Net premiums earned are recognized as revenue. Net premiums earned increased 8.6%~~were $175.3 million and $172.6 million for the three months ended March 31, 2017 and 2016, ~~compared to the same period of 2015. The difference was primarily the result of a $13.5 million increase in our final audit premiums, year-over-year. Additionally, we saw growth in~~respectively. Net premiums earned ~~year-over-year, particularly in states outside California, driven by our effort to diversify our risk exposure across our markets~~are primarily a function of the amount and ~~target profitable classes~~timing of ~~business across all of our markets. Fifty-seven percent of our in-force~~net premiums ~~were generated in California and no other state represented a significant concentration of business as of March 31, 2016.~~previously written.

The following table shows the percentage change in our in-force premiums, policy count, average policy size, and payroll exposure upon which our premiums are based ~~and net rate overall~~for California, where 56% of our premiums were generated, and for all other states, excluding California:


	As of March 31, 2016												As of March 31, 2017
	Year-to-Date Increase (Decrease)						Year-Over-Year Increase (Decrease)						Year-to-Date (Decrease) Increase						Year-Over-Year (Decrease) Increase
	Overall		California		All Other States		Overall		California		All Other States		Overall		California		All Other States		Overall		California		All Other States
In-force premiums	0.6	%	0.1	%	1.3	%	(0.4	)%	(3.6	)%	4.1	%	0.3	%	(0.3	)%	1.0	%	(0.5	)%	(1.5	)%	0.8	%
In-force policy count	0.7		(0.5	)	2.1		0.6		(4.5	)	6.6		0.3		(1.1	)	1.7		—		(5.0	)	5.3
Average in-force policy size	(0.1	)	0.6		(0.7	)	(1.0	)	0.9		(2.4	)	—		0.8		(0.7	)	(0.5	)	3.7		(4.2	)
In-force payroll exposure	1.1		1.4		0.9		2.8		(0.6	)	4.8		1.3		1.7		1.1		0.2		0.3		0.2
Net rate⁽¹⁾	(0.4	)	(1.3	)	0.4		(3.1	)	(3.0	)	(0.7	)


~~(1)~~	Net rate, defined as total in-force premiums 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.

Our in-force premiums and policy count in the LA Area of California declined ~~3.6%~~10.5% and ~~4.5%~~13.3%, respectively, year-over-year as of March 31, ~~2016,~~2017, while our in-force premiums and policy count in ~~all other states~~California outside of the LA Area increased ~~4.1%~~5.0% and ~~6.6%~~1.0%, respectively, during the same ~~period, as we continued to diversify our risk exposure across our markets.~~

~~Our net rate (total~~period. The year-over-year decline in overall in-force premiums ~~divided~~was driven by ~~total insured payroll exposure) in California decreased 3.0% year-over-year as~~lower average rates and the non-renewal of ~~March 31, 2016, as we continued to diversify~~certain policies.

The following table shows our premiums in California by territory and targeted profitable classes of business. Net rate 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.

~~Our~~ in-force premiums and number of policies in-force for ~~California~~each state with at least five percent of our in-force premiums and all other states combined ~~were as follows:~~for the periods presented:


	March 31, 2016			December 31, 2015			March 31, 2015			December 31, 2014			March 31, 2017			December 31, 2016			March 31, 2016			December 31, 2015
State	In-force Premiums		Policies In-force	In-force Premiums		Policies In-force	In-force Premiums		Policies In-force	In-force Premiums		Policies In-force	In-force Premiums		Policies In-force	In-force Premiums		Policies In-force	In-force Premiums		Policies In-force	In-force Premiums		Policies In-force
	(dollars in millions)												(dollars in millions)
California	$	352.5	43,843	$	352.2	44,080	$	365.7	45,915	$	370.8	47,093	$	347.2	41,657	$	348.3	42,120	$	352.5	43,843	$	352.2	44,080
Other	270.8		41,252	267.3		40,416	260.2		38,689	257.1		38,209
Florida													37.7		5,392	35.2		5,263	30.3		4,958	29.4		4,735
Illinois													29.9		3,073	30.6		3,106	33.1		3,264	32.5		3,286
Other (33 states and D.C.)													205.5		34,955	204.5		34,333	207.4		33,030	205.4		32,395
Total	$	623.3	85,095	$	619.5	84,496	$	625.9	84,604	$	627.9	85,302	$	620.3	85,077	$	618.6	84,822	$	623.3	85,095	$	619.5	84,496

Our alternative distribution channels that utilize partnerships and alliances generated $~~150.3~~158.8 million and $~~146.8~~150.3 million, or ~~24.1%~~25.6% and ~~23.5%~~24.1%, of our in-force premiums as of March 31, ~~2016~~2017 and ~~2015~~2016, respectively. We believe that the bundling of products and services through these relationships contributes to higher retention rates than business generated by our independent agents. These relationships also allow us to access new customers that we may not have access to through our independent agent distribution channel. We continue to actively seek new partnerships and alliances.

Net Investment Income and Net Realized Gains 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 increased ~~5.3%~~5.6% for the three months ended March 31, ~~2016,~~2017, compared to the same period of ~~2015.~~2016. The average pre-tax book yield on invested assets was 3.2% and 3.1% at March 31, 2016 and 2015, respectively. The tax-equivalent yield on invested assets was 3.8% at both March 31, 2016 and 2015. The increasedincrease in net investment income for the three months ended March 31, ~~2016~~2017 was primarily related to ~~higher~~an increase in invested assets and a slight change in the mix of invested assets in our investment portfolio. The average pre-tax book yield ~~year-over-year, attributable to increased~~on invested assets was 3.1% and 3.2% at March 31, 2017 and 2016, respectively, and the average tax-equivalent yield on our invested assets (which adjusts the book yield of our investments in ~~high-yield equity securities.~~tax-advantaged securities to an equivalent pre-tax book yield) was 3.6% and 3.8%, 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.

Net realized gains on investments were ~~$1.5~~$2.2 million and ~~$1.2~~$1.5 million for the three months ended March 31, ~~2016~~2017 and ~~2015,~~2016, respectively. ~~Net~~The increase in net realized gains on investments ~~during the first quarter of 2016 were the result of $6.8 million in gains~~year-over-year was related to the sale of equity securities as part of a regular rebalancing of our equity investment ~~portfolio and to meet cash needs at~~portfolio. For the ~~holding company,~~three months ended March 31, 2017, these gains were partially offset by ~~$5.3~~$0.2 million in other-than-temporary impairments of ~~certain~~one equity ~~securities due to our intent to sell certain securities and the continued downturn in the energy sector.~~security.

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

~~Combined Ratio~~Losses and LAE, Commission Expenses, and Underwriting and Other Operating Expenses

The combined ratio, a key measurement of underwriting profitability, is the sum of the loss and LAE ratio, the commission expense ratio, and the underwriting and other operating expenses ratio. ~~When the~~A combined ratio is below 100%~~, we have recorded~~ indicates that an insurance company is generating an underwriting ~~income,~~profit, and conversely, ~~when the~~a combined ratio above 100% indicates that an insurance company is ~~greater than 100%, we have recorded~~generating an underwriting loss and cannot be profitable without investment income. Because we have only one operating segment, holding company expenses are included in our calculation of the combined ratio and increased the combined ratio by 1.9 and 2.3 percentage points for the three months ended March 31, 2016 and 2015, respectively.loss.

The following table provides the calculation of our calendar ~~period~~year combined ratios.

Three Months Ended
March 31,
2016
2015
Loss and LAE ratio 62.2 % 66.8 %
Underwriting and other operating expenses ratio 21.0
21.1
Commission expense ratio 11.8
11.7
Combined ratio 95.0 % 99.6 %



	Three Months Ended
	March 31,
	2017		2016
Loss and LAE ratio	62.2	%	62.2	%
Underwriting and other operating expenses ratio	20.4		21.0
Commission expense ratio	12.3		11.8
Combined ratio	94.9	%	95.0	%

We include all of the operating expenses of our holding company in the calculation of our combined ratio, which served to increase our combined ratios by 2.2 and 1.9 percentage points for the three months ended March 31, 2017 and 2016, respectively.

Loss and LAE ~~Ratio.~~Ratio ~~This is the ratio of losses and LAE to net premiums earned.~~

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.~~techniques and management judgment.

Our indemnity claims frequency (the number of claims expressed as a percentage of payroll) ~~has decreased year-over-year; however,~~continued to decrease year-over-year and, beginning in the first quarter of 2017, our loss experience indicates a slight ~~upward~~downward movement in medical and indemnity costs per claim that is reflected in our current accident year loss estimate. We believe our current accident year loss ~~and LAE~~ estimate is adequate; however, given the long-tail nature of our business, ultimate losses will not be known with any certainty for many years.

Our loss and LAE ratio ~~decreased 4.6 percentage points,~~was flat for the three months ended March 31, 2017, compared to the same period of 2016, while the amount of our losses and LAE increased ~~1.0%~~1.6% for the three months ended March 31, 2017. The increase in the amount of our loss and LAE was primarily attributable to an increase in net premiums earned. Prior accident year favorable loss development of $0.3 million for the three months ended March 31, 2016 ~~compared~~was related to ~~the same period of 2015. The decrease in~~ our assigned risk business.

Our current accident year loss and LAE ratio was ~~primarily due to a decrease in the current accident year loss estimate.~~

~~Our current accident year loss estimates were~~63.8% and 64.1% ~~and 67.7%~~ for the three months ended March 31, ~~2016~~2017 and ~~2015,~~2016, respectively. The decrease in our current accident year loss ~~estimate~~and LAE ratio reflects the continued impact of key business initiatives, ~~including but not limited to: emphasizing~~including: an emphasis on the settlement of open claims; diversifying our risk exposure across ~~our~~geographic markets; ~~non-renewing underperforming business;~~ and ~~targeting~~leveraging data-driven strategies to target, underwrite, and price profitable classes of business across all of our markets. In addition, we have increased rates in the LA Area in California limiting our growth in that territory, while we continue to grow in other territories in California and outside California. Prior accident year favorable (unfavorable) loss development was $0.3 million and $(1.7) million for the three months ended March 31, 2016 and 2015, respectively. Prior accident year loss development was related to our assigned risk business.

Excluding the impact from the LPT Agreement, losses and LAE would have been ~~$110.4~~$111.9 million and ~~$109.3~~$110.4 million,, or ~~64.0%~~63.8% and ~~68.7%~~64.0% of net premiums earned, for ~~the~~ the three months ended March 31, ~~2016~~2017 and ~~2015~~2016, respectively.

The table below reflects losses and LAE reserve adjustments and the impact of the LPT on net income before taxes.


	Three Months Ended						Three Months Ended
	March 31,						March 31,
	2016		2015				2017		2016
	(in millions)					(in millions)
Prior accident year favorable (unfavorable) loss development, net	$	0.3	$	(1.7	)
Prior accident year favorable loss development, net							$	—	$	0.3
Amortization of the Deferred Gain related to losses	$	2.6	$	2.4			$	2.4	$	2.6
Amortization of the Deferred Gain related to contingent commission	0.5		0.5				0.5		0.5
Impact of LPT Contingent Commission Adjustments	—		0.2
Total impact of the LPT on losses and LAE	3.1		3.1				2.9		3.1
Total losses and LAE reserve adjustments	$	3.4	$	1.4			$	2.9	$	3.4

Underwriting and Other Operating Expenses ~~Ratio.~~ The underwriting and other operating expenses ratio is the ratio 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.Ratio

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

Our underwriting and other operating expenses ratio ~~was relatively flat for~~decreased 0.6 percentage points and the ~~three months ended March 31, 2016, compared to the same period of 2015. The~~ amount of our underwriting and other operating expenses ~~increased 8.4%~~decreased 1.1% for the three months ended March 31, ~~2016,~~2017, compared to the same period of ~~2015.~~2016. During the three months ended March 31, ~~2016~~2017, our premium taxes and assessments ~~increased $1.4~~decreased $0.7 million and our bad debt expense decreased $0.7 million, partially offset by a $1.2 million increase in our compensation-related expenses, ~~increased $1.2 million,~~ compared to the same period of ~~2015.~~2016.

Commission Expense ~~Ratio.~~ ~~The commission expense ratio is the ratio of commission expense to net premiums earned and measures the cost of compensating agents and brokers for the business we have underwritten.~~Ratio

Commission ~~expense includes~~expenses include 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.

Our commission expense ratio ~~was relatively flat~~increased 0.5 percentage points for the three months ended March 31, ~~2016,~~2017, compared to the same period of ~~2015, while~~2016, and our commission expense ~~increased~~ ~~8.6%, for the~~ ~~three~~ ~~months ended March 31, 2016, compared to the same period of 2015. The increase in commission expense~~was $1.2 million higher for the three months ended March 31, ~~2016~~2017, compared to the same period of 2016. The increase in the commission expense ratio was primarily ~~due~~related to ~~increased net premiums earned.~~higher base commissions paid in the first quarter of 2017 and a change in the accrual for agency incentive commissions that decreased our commissions during the first quarter of 2016.

Income Tax Expense

Income tax expense was ~~$6.7~~$6.3 million and ~~$4.1~~$5.9 million for the three months ended March 31, 2017 and 2016, ~~and 2015, respectively. Our~~respectively, representing an effective tax rate ~~was 24.2%~~of 21.4% and ~~22.5%~~21.3% for the three months ended March 31, 2017 and 2016, respectively. For each of the periods presented, tax-advantaged investment income, LPT Reserve Adjustments, Deferred Gain amortization, and ~~2015, respectively. The increase in~~certain other adjustments served to reduce our effective income tax ~~expense was primarily due to increases in our projected annual net income before taxes.~~rate below the U.S. statutory rate of 35%.

Liquidity and Capital Resources

Holding Company Liquidity

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

~~The holding company had~~ ~~$33.2 million~~ ~~of cash and cash equivalents and fixed maturity securities maturing within the next 24 months at~~ ~~March 31, 2016~~. Total cash and investments at the holding company ~~was $85.6~~were $60.6 million at March 31, ~~2016.~~2017, consisting of $16.5 million of cash and cash equivalents, $7.7 million of short-term investments and $36.4 million of fixed maturity securities. We do not currently have a revolving credit facility because we believe that the ~~liquidity~~holding company's cash needs offor the ~~holding company over the next 24 months~~foreseeable future will be met with its cash and investments ~~and~~on hand, as well as dividends available from ~~our~~its insurance subsidiaries.

Operating Subsidiaries' Liquidity

The primary sources of cash for our insurance operating subsidiaries are ~~funds generated from underwriting operations,~~premium collections, investment income, ~~maturities~~sales and ~~sales~~maturities of investments and ~~capital contributions from the parent holding company.~~reinsurance recoveries. The primary uses of cash for our insurance subsidiaries are payments of ~~claims~~

losses and LAE, commission expenses, underwriting and other operating expenses, ceded reinsurance, investment purchases and dividends paid to their parent.

Total cash and investments held by our operating subsidiaries was $2,619.5 million at March 31, 2017, consisting of ~~investments, and payments of dividends to the parent holding company, which are subject to state insurance laws and regulations.~~

~~Our insurance subsidiaries had~~ ~~$383.3~~$53.0 million of cash and cash equivalents, ~~and~~$7.8 million of short-term investments, $2,358.4 million of fixed maturity securities, ~~maturing within the next 24 months~~$199.8 million of equity securities, and $0.5 million of other invested assets. Sources of immediate and unencumbered liquidity at our operating subsidiaries as of March 31, ~~2016~~.2017 consisted of $44.7 million of cash and cash equivalents, $151.7 million of publicly-traded equity securities whose proceeds are available within four business days, and $1,183.5 million of highly liquid fixed maturity securities whose proceeds are available within four business days. We believe that our ~~subsidiaries’~~subsidiaries' liquidity needs ~~over~~for the ~~next 24 months~~foreseeable future will be met with cash from operations, investment income, and maturing investments.

Each of our insurance subsidiaries ~~EICN, ECIC, EPIC, and EAC, became~~is a member of the ~~Federal Home Loan Bank of San Francisco (FHLB) in January 2016.~~FHLB. Membership allows our subsidiaries access to collateralized advances, which may be used to support and enhance liquidity management. The amount of advances that may be taken is dependent on statutory admitted assets on a per company basis. Currently, none of our subsidiaries has advances outstanding under the FHLB facility.

We purchase reinsurance to protect us against the costs of severe claims and catastrophic events. On July 1, ~~2015,~~2016, we entered into a new reinsurance program that is effective through June 30, ~~2016.~~2017. The reinsurance program consists of one treaty covering excess of loss and catastrophic loss events in ~~five~~four layers of coverage. Our reinsurance coverage is ~~$193.0~~$190.0 million in excess of our ~~$7.0~~$10.0 million retention on a per occurrence basis, subject to certain exclusions. We believe that our reinsurance program meets our needs and that we are sufficiently capitalized.

Various state laws and regulations require us to hold investment securities or letters of credit on deposit with certain states in which we do business. Securities having a fair value of ~~$1,032.3~~$1,175.7 million and $~~881.2~~1,009.7 million were on deposit at March 31, ~~2016~~2017 and December 31, ~~2015~~2016, respectively. These laws and regulations govern both the amount and types of ~~fixed maturity~~investment securities that are eligible for deposit. Additionally, certain reinsurance contracts require ~~Company~~company funds to be held in trust for the benefit of the ceding reinsurer to secure the outstanding liabilities we assumed. The fair value of fixed maturity securities held in trust for the benefit of our ceding reinsurers was ~~$32.9~~$27.6 million and $~~32.7~~27.2 million at March 31, ~~2016~~2017 and December 31, ~~2015~~2016, respectively.

Sources of Liquidity

We monitor the cash flows ~~at both the~~of each of our subsidiaries individually, as well as collectively as a consolidated ~~and subsidiary levels.~~group. We use trend and variance analyses to project future cash needs, making adjustments to our forecasts, as appropriate. ~~For additional information regarding our cash flows, see Item 1, Unaudited Consolidated Statements of Cash Flows.~~

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


	March 31,						March 31,
	2016			2015			2017			2016
	(in millions)						(in millions)
Cash and cash equivalents provided by (used in):
Operating activities	$	20.8		$	24.9		$	30.7		$	21.6
Investing activities	(6.8		)	(81.2		)	(32.9		)	(6.8		)
Financing activities	0.2			(1.7		)	(6.4		)	(0.6		)
Increase (Decrease) in cash and cash equivalents	$	14.2		$	(58.0	)
(Decrease) Increase in cash and cash equivalents							$	(8.6	)	$	14.2

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

Operating Activities

Net cash provided by operating activities for the three months ended March 31, 2017 included net premiums received of $177.1 million, and investment income received of $22.9 million. These operating cash inflows were partially offset by net claims payments of $107.1 million, underwriting and other operating expenses paid of $41.8 million, and commissions paid of $20.0 million.

Net cash provided by operating activities for the three months ended March 31, 2016 included net premiums received of $176.0 million, and investment income received of $22.5 million. These operating cash inflows were partially offset by net claims payments of $109.4 million, ~~(net of $7.8 million recovered from reinsurers),~~ underwriting and other operating expenses paid of $46.1 million, ~~(including premium taxes paid of $12.1 million),~~ and commissions paid of $21.2 million.

~~Major components of net cash provided by operating activities for the~~ ~~three~~ ~~months ended~~ ~~March 31, 2015~~ included net premiums received of $171.3 million and investment income received of $21.4 million. These were partially offset by claims payments of $99.5 million (net of $10.5 million recovered from reinsurers), underwriting and other operating expenses paid of $49.6 million (including premium taxes paid of $7.3 million), and commissions paid of $18.7 million.Investing Activities

~~Investing Cash Flows.~~ ~~The major components of net~~Net cash used in investing activities for the three months ended March 31, 2017 and 2016 was primarily related to the investment of premiums received and ~~2015~~the reinvestment of funds from maturities, redemptions, and interest income. These investing cash outflows were ~~the purchases of fixed maturity and equity securities,~~ partially offset by investment sales whose proceeds ~~from sales, maturities,~~were used to fund claims payments, underwriting and ~~redemptions of investments.~~other operating expenses, stockholder dividend payments, and common stock repurchases.

Financing ~~Cash Flows.~~ ~~Cash provided by~~Activities

Net cash used in financing activities for the three months ended March 31, 2017 was primarily related to stockholder dividend payments.

Net cash used in financing activities for the three months ended March 31, 2016 ~~was due to cash received related to the exercise~~included purchases of ~~stock options during the quarter, offset by cash used to repurchase~~our common stock and ~~to pay~~stockholder dividend payments. These financing cash outflows were offset by net proceeds from stock-based compensation, mainly proceeds and income tax benefits from exercises of stock options.

Dividends

Stockholder dividends ~~to stockholders.~~

~~The majority of cash used in financing activities for the three months ended 2015 was to pay dividends to stockholders.~~

~~Dividends.~~ ~~Dividends~~ paid ~~to stockholders~~ were ~~$2.9~~$5.0 million and ~~$1.9~~$2.9 million for the three months ended March 31, ~~2016~~2017 and ~~2015,~~2016, respectively. On April ~~27, 2016,~~26, 2017, the Board of Directors declared a ~~$0.09~~$0.15 dividend per share and eligible RSU and PSU, payable May ~~25, 2016,~~24, 2017, to stockholders of record on May ~~11, 2016.~~10, 2017.

Share ~~Repurchases.~~Repurchases

On February 16, 2016, the Board of Directors authorized a share repurchase program for up to $50.0 million of our common stock from February 22, 2016 through February 22, 2018 (the 2016 Program). Through March 31, ~~2016,~~2017, we repurchased a total of ~~37,331~~724,381 shares of common stock under the 2016 Program at an average price of ~~$27.88~~$29.08 per share, including commissions, for a total cost of ~~$1.0~~$21.1 million. We made no repurchases of common stock during the three months ended March 31, 2017.

Capital Resources

~~Our capital structure is comprised of outstanding debt and stockholders’ equity.~~ As of March 31, ~~2016, our~~2017, the capital ~~structure~~resources available to us consisted ofof: (i) $32.0 million inof notes payable consisting of surplus notes maturing in ~~2034, and $990.1~~2034; (ii) $867.5 million of stockholders’ ~~equity, plus~~equity; and (iii) the $171.9 million Deferred Gain. ~~Outstanding debt was 3.1% of total capitalization, including the Deferred Gain, as of March 31, 2016.~~

Contractual Obligations and ~~Commitments.~~Commitments

The following table identifies our ~~long-term~~ debt and contractual obligations as of March 31, ~~2016.~~2017.


	Payment Due By Period										Payment Due By Period
	Total		Less Than 1-Year		1-3 Years		4-5 Years		More Than 5 Years		Total		Less Than 1-Year		1-3 Years		4-5 Years		More Than 5 Years
	(in millions)										(in millions)
Operating leases	$	19.5	$	5.0	$	8.4	$	5.4	$	0.7	$	14.1	$	4.8	$	6.3	$	3.0	$	—
Purchased liabilities	6.4		3.2		3.1		0.1		—		8.3		4.0		2.3		1.8		0.2
Notes payable⁽¹⁾	60.2		1.5		3.1		3.1		52.5		61.2		1.7		3.4		3.4		52.7
Capital leases	0.7		0.3		0.4		—		—		0.8		0.3		0.3		0.2		—
Losses and LAE reserves ⁽²⁾⁽³⁾	2,341.9		380.7		476.5		272.1		1,212.6		2,298.2		391.6		488.4		276.9		1,141.3
Total contractual obligations	$	2,428.7	$	390.7	$	491.5	$	280.7	$	1,265.8	$	2,382.6	$	402.4	$	500.7	$	285.3	$	1,194.2


(1)	Notes payable ~~obligations reflect~~includes payments for the principal and estimated interest expense on our surplus notes outstanding based on LIBOR ~~rates~~ plus a margin. The ~~estimated interest expense was based on the contractual obligations of the debt outstanding as of~~ ~~March 31, 2016. The~~ interest rates ~~range~~used ranged from ~~4.7%~~5.2% to ~~4.9%~~5.3%.

(2)

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


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

Recoveries By Period
Total
Less Than
1-Year
1-3 Years 4-5 Years
More Than
5 Years
(in millions)
Reinsurance recoverables for unpaid losses $ (621.4 ) $ (31.0 ) $ (58.7 ) $ (54.5 ) $ (477.2 )



	Recoveries Due By Period
	Total			Less Than 1-Year			1-3 Years			4-5 Years			More Than 5 Years
	(in millions)
Reinsurance recoverables for unpaid losses and LAE	$	(572.9	)	$	(30.1	)	$	(57.1	)	$	(53.3	)	$	(432.4	)

Investments

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

~~The cost or~~As of March 31, 2017, the total amortized cost of our investment portfolio was $~~2.4~~2.5 billion and ~~the~~its fair value was $~~2.5~~2.6 billion as. These investments provide a source of ~~March 31, 2016~~.

~~We employ an~~income, which may fluctuate with changes in interest rates and our current investment strategy that emphasizes asset quality and considers the durations, maturities, and anticipated cash flows of securities against anticipated claim payments, other expenditures and liabilities, and capital and liquidity 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 growth.strategies.

As of March 31, ~~2016~~2017, our investment portfolio, which is classified as available-for-sale, consisted of 91.8% fixed maturity ~~securities whose fair values may fluctuate due to prevailing market interest rates.~~securities. We strive to limit interest rate risk associated with fixed maturity investments by managing the duration of ~~our fixed maturity~~these securities. Our fixed maturity securities (excluding cash and cash equivalents) had a duration of ~~4.2~~4.3 years at March 31, ~~2016~~2017. To minimize interest rate risk, our portfolio is weighted toward short-term and intermediate-term bonds; however, our investment strategy balances consideration of duration, yield, and credit risk. Our investment guidelines require that the minimum weighted average quality of our fixed maturity securities portfolio be "AA-," using ratings assigned by Standard & Poor's (S&P). Our fixed maturity securities portfolio had a weighted average quality of "AA-" as of March 31, ~~2016~~2017, with ~~57.9%~~58.2% of the portfolio rated "AA" or better, based on market value.

We ~~carry our~~also have a modest portfolio of equity securities, ~~on our balance sheet~~which we record at fair value. We ~~seek~~strive to ~~minimize our~~limit the exposure to equity price risk associated with equity securities 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 ~~8.2%~~7.7% of our investment portfolio at March 31, ~~2016~~2017.

~~Given current economic uncertainty and continuing market volatility, we~~We believe that our current asset allocation ~~best~~ meets our strategy to preserve capital for ~~policyholders,~~claims and policy liabilities and to provide sufficient ~~income~~capital resources to support and grow our ongoing insurance ~~operations, and to effectively grow book value over a long-term investment horizon.~~operations.

The following table shows the estimated fair value, the percentage of the fair value to total invested assets, the average book yield, and the average tax equivalent yield (each based on the fair value of each category of invested ~~assets~~assets) as of March 31, ~~2016~~2017.


Category	Estimated Fair Value		Percentage of Total		Book Yield		Tax Equivalent Yield		Estimated Fair Value		Percentage of Total		Book Yield		Tax Equivalent Yield
	(in millions, except percentages)								(in millions, except percentages)
U.S. Treasuries	$	130.6	5.2	%	1.8	%	1.8	%	$	133.7	5.1	%	1.8	%	1.8	%
U.S. Agencies	24.4		1.0		4.7		4.7		15.0		0.6		4.1		4.1
States and municipalities	863.3		34.2		3.2		4.6		817.5		31.3		3.1		4.4
Corporate securities	940.1		37.3		3.1		3.1		985.7		37.8		3.1		3.1
Residential mortgage-backed securities	244.0		9.7		3.2		3.2		302.9		11.6		3.1		3.1
Commercial mortgage-backed securities	80.1		3.2		2.5		2.5		94.9		3.6		2.7		2.7
Asset-backed securities	30.1		1.2		1.3		1.3		45.6		1.7		2.3		2.3
Equity securities	207.6		8.2		5.2		6.8		199.8		7.7		5.6		7.4
Short-term investments									15.4		0.6		1.2		1.2
Total	$	2,520.2	100.0	%					$	2,610.5	100.0	%
Weighted average yield					3.2	%	3.8	%					3.1	%	3.6	%

The following table shows the percentage of total estimated fair value of our fixed maturity securities as of March 31, ~~2016~~2017 by credit rating category, using the lower of ratings assigned by Moody's ~~Investor Services and/~~Investors Service or S&P.



Rating	Percentage of Total Estimated Fair Value
“AAA”	~~9.5~~10.6	%
“AA”	~~48.4~~47.6
“A”	~~27.8~~28.5
“BBB”	~~13.8~~12.6
Below investment grade	~~0.5~~0.7
Total	100.0	%

Investments that we currently own could be subject to default by the issuer or could suffer declines in fair value that become other-than-temporary. We regularly assess individual securities as part of our ongoing portfolio management, including the identification of other-than-temporary declines in fair value. Our other-than-temporary impairment assessment includes reviewing the extent and duration of declines in the 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 maturity.

~~Based on our reviews of fixed maturity and equity securities, we~~We believe that we have appropriately identified the declines in the fair values of our unrealized losses for the three months ended March 31, ~~2016.~~2017. 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 to not sell the securities, and a determination that it is not more likely than not that the Company will be required to sell the securities until fair value recovers to above cost, or principal value upon maturity.

~~Based on reviews~~We recognized impairments of ~~the~~$0.2 million (consisting of one equity ~~securities, the Company recognized a total impairment of $5.3 million in the fair value of 32 equity securities for~~security) during the three months ended March 31, ~~2016, as a~~2017. The other-than-temporary impairment recognized during this period related to an equity security and was the result of ~~our intent to sell and/or~~ the severity and duration of the change in fair value of ~~the securities. The remaining~~this security. Certain unrealized losses on equity securities were not considered to be other-than-temporary due to the financial condition and near-term prospects of the ~~issuers. The other-than-temporary impairment of equity~~issuers, and our intent to hold the securities ~~during the first quarter of 2016 was primarily due~~until fair value recovers to ~~the continued downturn in the energy sector.~~above cost.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

Critical Accounting Policies

These unaudited interim consolidated financial statements include amounts based on the use of estimates and judgments of management for those transactions that are not yet complete. We believe that the estimates and judgments that were most critical to the preparation of the consolidated financial statements involved the following: (a) reserves for losses and LAE; (b) reinsurance recoverables; (c) recognition of premium income; (d) deferred income taxes; and (e) valuation of investments. These estimates and judgments require the use of assumptions about matters that are highly uncertain and therefore are subject to change as facts and circumstances develop. Our accounting policies are discussed under "Critical Accounting Policies" in Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk is the risk of potential economic loss principally arising from adverse changes in the fair value of financial instruments. The major components of market risk affecting us are credit risk, interest rate risk, and equity price risk, and are described in detail in our Annual Report. We have not experienced any material changes in market risk since December 31, ~~2015~~2016.

The primary market risk exposure to our investment portfolio, which consists primarily of fixed maturity securities, is interest rate risk. We have the ability to hold fixed maturity securities to maturity and we strive to limit interest rate risk by managing duration. As of March 31, ~~2016~~2017, our fixed maturity securities portfolio had a duration of ~~4.2~~4.3 years. We continually monitor the impact of interest rate changes on our investment portfolio and liquidity obligations. Changes to our market risk, if any, since December 31, ~~2015~~2016 are reflected in Management’s Discussion and Analysis of Financial Condition and Results of Operations and the financial statements contained in this Form 10-Q.

Item 4. Controls and Procedures

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

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

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

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

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

The following table ~~summarizes~~provides information with respect to the Company's repurchases of ~~our~~its common stock ~~for~~during the ~~three months ended March 31, 2016:~~first quarter of 2017:

Period Total Number of Shares Purchased
Average
Price Paid
Per Share⁽¹⁾
Total Number of Shares Purchased as Part of Publicly Announced Program
Approximate
Dollar Value of Shares that
May Yet be Purchased Under the Program⁽²⁾
(in millions)
January 1 – January 31, 2016 —
$ —
—
$ —
February 1 – February 29, 2016 —
—
—
50.0
March 1 – March 31, 2016 37,331
27.88
37,331
49.0
Total 37,331
$ 27.88
37,331



Period	Total Number of Shares Purchased	Average Price Paid Per Share⁽¹⁾		Total Number of Shares Purchased as Part of Publicly Announced Program	Approximate Dollar Value of Shares that May Yet be Purchased Under the Program⁽²⁾
					(in millions)
January 1 – January 31, 2017	—	$	—	—	$	28.9
February 1 – February 28, 2017	—	—		—	28.9
March 1 – March 31, 2017	—	—		—	28.9
Total	—	$	—	—


(1)	Includes fees and commissions paid on stock repurchases.

(2)

On February 16, 2016, the Board of Directors authorized a share repurchase program for repurchases of up to $50 million of the Company's common stock (the 2016 Program). We expect that shares may be purchased at prevailing market prices through February 22, 2018 through a variety of methods, including open market or private transactions, in accordance with applicable laws and regulations and as determined by management. The timing and actual number of shares ~~repurchased~~that may be purchased will depend on a variety of factors, including the share price, corporate and regulatory requirements, and other market and economic conditions. Repurchases under the 2016 Program may be commenced, modified, or suspended from time to time without prior notice, and the program may be suspended or discontinued at any time.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits



			Incorporated by Reference Herein
Exhibit No.	Description of Exhibit	Included Herewith	Form	Exhibit	Filing Date
*3.1	Amended and Restated Bylaws of Employers Holdings, Inc.	X
10.1	~~Amendment No. 1, dated January 29, 2016, to~~ Employment Agreement ~~effective November 10, 2014~~ by and between Employers Holdings, Inc. and ~~Terry Eleftheriou~~Tracey L. Berg, dated January 12, 2017, and effective as of January 31, 2017	X		~~8-K~~	~~10.1~~
10.2	~~February 2, 2016~~Form of Performance Share Agreement	X
10.3	Form of Restricted Stock Unit Agreement	X
31.1	Certification of Douglas D. Dirks Pursuant to Section 302	X
31.2	Certification of ~~Terry Eleftheriou~~Michael S. Paquette Pursuant to Section 302	X
32.1	Certification of Douglas D. Dirks Pursuant to Section 906	X
32.2	Certification of ~~Terry Eleftheriou~~Michael S. Paquette Pursuant to Section 906	X
101.INS	XBRL Instance Document	X
101.SCH	XBRL Taxonomy Extension Schema Document	X
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document	X
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document	X
101.LAB	XBRL Taxonomy Extension Label Linkbase Document	X
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document	X

SIGNATURES

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

EMPLOYERS HOLDINGS, INC.



Date:	April ~~28, 2016~~27, 2017	/s/ ~~Douglas D. Dirks~~Michael S. Paquette
		~~Douglas D. Dirks~~
		~~President and Chief Executive Officer~~
		~~Employers Holdings, Inc.~~



~~Date:~~	~~April 28, 2016~~	~~/s/ Terry Eleftheriou~~
		~~Terry Eleftheriou~~Michael S. Paquette
		Executive Vice President and Chief Financial Officer
		Employers Holdings, Inc.
		(Principal Financial and Accounting Officer)

2627



Employers Holdings, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share data)
	As of			As of
	March 31, 2016			December 31, 2015
Assets	(unaudited)
Available for sale:
Fixed maturity securities at fair value (amortized cost $2,215,900 at March 31, 2016 and $2,221,100 at December 31, 2015)	$	2,312,600		$	2,288,500
Equity securities at fair value (cost $145,200 at March 31, 2016 and $137,500 at December 31, 2015)	207,600			198,700
Total investments	2,520,200			2,487,200
Cash and cash equivalents	70,800			56,600
Restricted cash and cash equivalents	4,200			2,500
Accrued investment income	19,600			20,600
Premiums receivable (less bad debt allowance of $9,600 at March 31, 2016 and $12,200 at December 31, 2015)	315,100			301,100
Reinsurance recoverable for:
Paid losses	7,900			7,700
Unpaid losses	621,400			628,200
Deferred policy acquisition costs	47,000			44,300
Deferred income taxes, net	55,500			67,900
Property and equipment, net	23,000			24,900
Intangible assets, net	8,400			8,500
Goodwill	36,200			36,200
Contingent commission receivable—LPT Agreement	29,200			29,200
Other assets	38,300			40,900
Total assets	$	3,796,800		$	3,755,800

Liabilities and stockholders’ equity
Claims and policy liabilities:
Unpaid losses and loss adjustment expenses	$	2,341,900		$	2,347,500
Unearned premiums	323,700			308,900
Total claims and policy liabilities	2,665,600			2,656,400
Commissions and premium taxes payable	47,500			52,500
Accounts payable and accrued expenses	19,700			24,100
Deferred reinsurance gain—LPT Agreement	186,400			189,500
Notes payable	32,000			32,000
Other liabilities	41,900			40,500
Total liabilities	$	2,993,100		$	2,995,000
Commitments and contingencies
Stockholders’ equity:
Common stock, $0.01 par value; 150,000,000 shares authorized; 55,894,288 and 55,589,454 shares issued and 32,483,983 and 32,216,480 shares outstanding at March 31, 2016 and December 31, 2015, respectively	$	600		$	600
Preferred stock, $0.01 par value; 25,000,000 shares authorized; none issued	—			—
Additional paid-in capital	363,200			357,200
Retained earnings	700,100			682,000
Accumulated other comprehensive income, net	103,400			83,600
Treasury stock, at cost (23,410,305 shares at March 31, 2016 and 23,372,974 shares at December 31, 2015)	(363,600		)	(362,600		)
Total stockholders’ equity	803,700			760,800
Total liabilities and stockholders’ equity	$	3,796,800		$	3,755,800



Employers Holdings, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
(in thousands, except per share data)
	Three Months Ended
	March 31,
	2016			2015
Revenues	(unaudited)
Net premiums earned	$	172,600		$	159,000
Net investment income	17,800			16,900
Net realized gains on investments	1,500			1,200
Other income	100			100
Total revenues	192,000			177,200
Expenses
Losses and loss adjustment expenses	107,300			106,200
Commission expense	20,300			18,700
Underwriting and other operating expenses	36,300			33,500
Interest expense	400			700
Total expenses	164,300			159,100
Net income before income taxes	27,700			18,100
Income tax expense	6,700			4,100
Net income	$	21,000		$	14,000
Comprehensive income
Unrealized gains during the period (net of tax expense of $11,200 and $5,000 for the three months ended March 31, 2016 and 2015, respectively)	$	20,800		$	9,200
Reclassification adjustment for realized gains in net income (net of taxes of $500 and $400 for the three months ended March 31, 2016 and 2015, respectively)	(1,000		)	(800		)
Other comprehensive income, net of tax	19,800			8,400
Total comprehensive income	$	40,800		$	22,400

Net realized gains on investments
Net realized gains on investments before credit related impairments	$	6,800		$	1,200
Other than temporary impairment recognized in earnings	(5,300		)	—
Net realized gains on investments	$	1,500		$	1,200

Earnings per common share (Note 10):
Basic	$	0.65		$	0.44
Diluted	$	0.64		$	0.43
Cash dividends declared per common share	$	0.09		$	0.06



	Equity Securities
	(in millions)
Beginning balance, January 1, 2016	$	—
Purchases, issuances, settlements, net	5.3
Ending balance, March 31, 2016	$	5.3



	Recoveries By Period
	Total			Less Than 1-Year			1-3 Years			4-5 Years			More Than 5 Years
	(in millions)
Reinsurance recoverables for unpaid losses	$	(621.4	)	$	(31.0	)	$	(58.7	)	$	(54.5	)	$	(477.2	)