Edgar Filing: Employers Holdings, Inc.

Document

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

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

ACT OF 1934

For the Quarterly Period Ended March 31, 2019

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

ACT OF 1934

For the transition period from ____ to ____

Commission file number: 001-33245

EMPLOYERS HOLDINGS, INC.

(Exact name of registrant as specified in its charter)



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

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

(888) 682-6671

(Registrant’s telephone number, including area code)

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

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

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



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

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

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



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

TABLE OF CONTENTS



		Page No.
PART 1 – FINANCIAL INFORMATION

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

	PART II – OTHER INFORMATION

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

Signatures		34

PART I – FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements



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



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

See accompanying unaudited notes to the consolidated financial statements.



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

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

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

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

See accompanying unaudited notes to the consolidated financial statements.



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

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

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

See accompanying unaudited notes to the consolidated financial statements.



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

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



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

See accompanying unaudited notes to the consolidated financial statements.

Employers Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

1. Basis of Presentation and Summary of Operations

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

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

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

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

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

Use of Estimates

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

Pending Acquisition

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

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

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

2. New Accounting Standards

Recently Issued Accounting Standards

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

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

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

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

Recently Adopted Accounting Standards

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

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

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

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

3. Fair Value of Financial Instruments

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



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

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


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


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


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

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

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

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

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

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

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

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



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

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



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

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



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


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

4. Investments

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

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



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



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

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



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



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

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



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

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



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

12 months or greater:
Fixed maturity securities
U.S. Treasuries	$	67.1	$	(0.6	)	23	$	72.7	$	(1.1	)	25
Corporate securities	317.9