Edgar Filing: Employers Holdings, Inc.

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K


	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2006


	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 (IRS Employer Identification No.)

9790 Gateway Drive, Reno, Nevada 89521

(Address of principal executive offices and zip code)

(888) 682-6671

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class			Name of each exchange on which registered
Common Stock, $0.01 par value per share			New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes No

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of ‘‘accelerated filer and large accelerated filer’’ in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer	Accelerated filer	Non-accelerated filer

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

The registrant completed the initial public offering of its common stock on February 5, 2007. Accordingly, there was no public market for the registrant’s common stock as of June 30, 2006, the last day of the registrant’s most recently completed second fiscal quarter.


Class			March 26, 2007
Common Stock, $0.01 par value per share			53,527,907 shares, outstanding

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s Definitive Proxy Statement relating to the 2007 Annual Meeting of Stockholders to be held May 31, 2007, are incorporated by reference in Items 10, 11, 12, 13 and 14 of Part III of this report.

TABLE OF CONTENTS


		Page No.
	Forward-Looking Statements		3
	Glossary		5
PART I
Item 1	Business		9
Item 1A	Risk Factors		47
Item 1B	Unresolved Staff Comments		66
Item 2	Properties		66
Item 3	Legal Proceedings		67
Item 4	Submission of Matters to a Vote of Security Holders		68
PART II
Item 5	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		69
Item 6	Selected Financial Data		72
Item 7	Management’s Discussion and Analysis of Financial Condition and Results of Operations		76
Item 7A	Quantitative and Qualitative Disclosures About Market Risk		117
Item 8	Financial Statements and Supplementary Data		120
Item 9	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		145
Item 9A	Controls and Procedures		145
Item 9B	Other Information		145
PART III
Item 10	Directors, Executive Officers and Corporate Governance		146
Item 11	Executive Compensation		146
Item 12	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		146
Item 13	Certain Relationships and Related Transactions, and Director Independence		146
Item 14	Principal Accountant Fees and Services		146
PART IV
Item 15	Exhibits and Financial Statement Schedules		147

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FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933 and 21E of the Securities Exchange Act of 1934. You should not place undue reliance on these statements. These forward-looking statements including statements regarding our expected financial position, business, financing plans, litigation, future premiums, revenues, earnings, pricing, investments, business relationships, expected losses, loss reserves, competition and rate increases with respect to our business and the insurance industry in general. These forward-looking statements reflect our views with respect to future events and financial performance. The words ‘‘believe,’’ ‘‘expect,’’ ‘‘plans,’’ ‘‘intend,’’ ‘‘project,’’ ‘‘estimate,’’ ‘‘may,’’ ‘‘should,’’ ‘‘will,’’ ‘‘continue,’’ ‘‘potential,’’ ‘‘forecast’’ and ‘‘anticipate’’ and similar expressions identify forward-looking statements. Although we believe that these expectations reflected in such forward-looking statements are reasonable, we can give no assurance that the expectations will prove to be correct. Actual results may differ from those expected due to risks and uncertainties, including those discussed in ‘‘Risk Factors’’ in Item 1A of this report and the following:


	•	adequacy and accuracy of our pricing methodologies;


	•	our dependence on a concentrated geographic area and on the workers’ compensation industry;


	•	developments in the frequency or severity of claims and loss activity that our underwriting, reserving or investment practices do not anticipate based on historical experience or industry data;


	•	changes in rating agency policies or practices;


	•	negative developments in the workers’ compensation insurance industry;


	•	increased competition on the basis of coverage availability, claims management, safety services, payment terms, premium rates, policy terms, types of insurance offered, overall financial strength, financial ratings and reputation;


	•	changes in regulations or laws applicable to us, our policyholders or the agencies that sell our insurance;


	•	changes in legal theories of liability under our insurance policies;


	•	changes in general economic conditions, including interest rates, inflation and other factors;


	•	effects of acts of war, terrorism or natural or man-made catastrophes;


	•	non-receipt of expected payments, including reinsurance receivables;


	•	performance of the financial markets and their effects on investment income and the fair values of investments;


	•	possible failure of our information technology or communications systems;


	•	adverse state and federal judicial decisions;


	•	litigation and government proceedings;


	•	possible loss of the services of any of our executive officers or other key personnel;


	•	cyclical nature of the insurance industry;


	•	investigations into issues and practices in the insurance industry;


	•	changes in interest rates; and


	•	changes in demand for our products.

The foregoing factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this report.

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These forward-looking statements are subject to certain 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 listed under the heading ‘‘Risk Factors’’ in Item 1A of this report. All subsequent written and oral forward-looking statements attributable to us or individuals acting on our behalf are expressly qualified in their entirety by these cautionary statements. We caution you not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. 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. Before making an investment decision, you should carefully consider all of the factors identified in this report that could cause actual results to differ.

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GLOSSARY


Accident year		The year the claim occurred. When referring to a group of claims, the collection of all claims that occurred in the year.


Accident year losses and LAE ratio		Losses and LAE, regardless of when such losses and LAE are incurred and net of amounts ceded to reinsurers, for insured events that occurred during a particular year divided by the premiums earned for that year.


Accumulated surplus		The aggregation of all increases and decreases to surplus since inception of an insurance company to the valuation date.


Adverse development		An increase in the estimated ultimate losses and LAE from one valuation date to a subsequent valuation date for claims occurring in a given time period.


Assume		To receive from a ceding company all or a portion of a risk in consideration of receipt of a premium.


Assumed premiums written		Premiums received by our insurance subsidiaries from an authorized state-mandated pool or under previous fronting facilities.


Base direct premiums written		Direct premiums prior to any adjustments for final policy audits or retrospective ratings adjustments.


Cede		To transfer to a reinsurer all or a portion of a risk in consideration of payment of a premium.


Ceded premiums written		The portion of direct premiums written ceded to reinsurers.


Closed block		The accounting mechanism and procedure set up by the Company as described in ‘‘The Conversion—Closed Block.’’


Combined ratio		Expressed as a percentage, a key measurement of profitability traditionally used in the property-casualty insurance industry. The combined ratio is the sum of the losses and LAE ratio, the commission expense ratio and the underwriting and other operating expense ratio.


Commission expense ratio		Commission expense expressed as a percentage of net premiums earned.


Development		The amount by which estimated losses, measured subsequently by reference to payments and additional estimates, differ from those originally reported for a period. Development is favorable when losses ultimately settle for less than levels at which they were reserved or subsequent estimates indicate a basis for reserve decreases on open claims. Development is unfavorable when losses ultimately settle for more than levels at which they were reserved or subsequent estimates indicate a basis for reserve increases on open claims.

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Direct premiums written		The premiums on all policies the Company’s insurance subsidiaries have issued during the year.


Direct reserves		The estimates of future losses and LAE payments on policies written by an insurance company before the effect of ceded reinsurance.


Excess of loss reinsurance		A form of reinsurance in which the reinsurer pays all or a specified percentage of a loss caused by a particular occurrence or event in excess of a fixed amount and up to a stipulated limit.


Fronting facility		The issuance of insurance policies by an insurer as an accommodation to another insurer. Usually, the insurer providing the fronting facility cedes all or substantially all the risk, as well as a significant percentage of the premium, to the insurer being accommodated. This device often is used to enable an insurer to underwrite risks in a jurisdiction in which it is not licensed.


GAAP		U.S. generally accepted accounting principles.


Gross premiums written		The sum of both direct premiums written and assumed premiums written before the effect of ceded reinsurance and any inter-company pooling agreement.


Guaranteed cost		A fixed premium rate for the term of the workers’ compensation insurance policy, provided that the final premium will vary based on the difference between the estimated term payroll at the time the policy is issued and the final audited payroll of the customer after the policy expires.


In force policy		An ‘‘in force’’ policy is a policy that has been issued and is in effect on a given date. Generally, a policy is in force if it has been issued, the required premium has been received and the policy has not been properly cancelled or terminated.


Incurred but not reported or IBNR		Relating to insured losses that have occurred but have not yet been reported to the insurer or reinsurer.


Loss adjustment expenses or LAE		The expenses of investigating, administering and settling claims, including legal expenses.


Losses and LAE		The sum of net incurred losses and loss adjustment expenses.


Losses and loss adjustment expenses ratio or losses and LAE ratio		The sum of net incurred losses and loss adjustment expenses expressed as a percentage of net premiums earned.


Losses and LAE reserves		The balance sheet liability representing estimates of amounts needed to pay reported and unreported claims and related loss adjustment expenses.


Net premiums earned		The portion of net premiums written equal to the expired portion of the time for which insurance protection was provided during the financial year and is recognized as revenue.

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Net premiums written		The sum of direct premiums written and assumed premiums written less ceded premiums written.


Net premiums written to total statutory surplus ratio		The ratio of our insurance subsidiaries’ annual net premiums written to total statutory surplus.


Persistency		Percentage of insurance policies remaining in force between specified measurement dates. In addition, it is used with respect to premiums, to measure the amount of annualized premium remaining in force on a stated collection of policies between specified measurement dates.


Policyholder dividend		A payment to the policyholder on a type of policy upon which a portion of the premium may be repaid to the policyholder after expiration depending upon the loss experience.


Reinsurance		A transaction in which an original insurer, or ceding company, remits a portion of the premium to a reinsurer, or assuming company, as payment for the reinsurer’s assumption of a portion of the risk.


Retention		The amount of loss(es) from a single occurrence or event which is paid by the company prior to the attachment of excess of loss reinsurance.


Retroactive reinsurance		A form of reinsurance in which a reinsurer agrees to reimburse a ceding company for liabilities incurred as a result of past insurable events.


Retrospective rating		A method of establishing rates in which the current year’s premium is calculated to reflect the actual current year’s loss experience. An initial premium is charged and then adjusted at the end of the policy year to reflect the actual loss experience of the business.


Risk based capital		A formula developed by the NAIC used to establish minimum surplus requirements beyond necessary reserve requirements.


Statutory accounting practices		Statutory requirements based on criteria established by the NAIC in regard to the preparation of an insurer’s financial statements required to be filed with a state insurance department. Compared to GAAP, they are more regulatory by nature and give a more conservative depiction of an insurer’s financial condition.


Statutory surplus		The amount remaining after all liabilities are subtracted from all admitted assets, as determined in accordance with statutory accounting practices. This amount is regarded as financial protection to policyholders in the event an insurance company suffers unexpected or catastrophic losses.


Treaty		A contract of reinsurance.

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Underwriting		The process whereby an insurer reviews applications submitted for insurance coverage and determines whether to accept all or part, and at what premium, of the coverage being requested.


Underwriting and other operating expense ratio		Underwriting and other operating expense expressed as a percentage to net premiums earned.


Underwriting and other operating expense		Includes the costs to acquire and maintain an insurance policy, excluding commissions, which costs are included in amortization of deferred policy acquisition costs. In addition, it includes state and local taxes based on premiums, as well as licenses, fees, assessments and contributions to workers’ compensation security funds. Other underwriting expenses consist of policyholder dividends and general administrative expenses such as salaries, rent, office supplies, depreciation and all other operating expenses not otherwise classified separately, and boards, bureaus and assessments of statistical agencies for policy service and administration items such as rating manuals, rating plans and experience data.

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PART I

Item 1. Business

Overview

Employers Holdings, Inc. (Employers Holdings) is a holding company and is the successor to EIG Mutual Holding Company (EIG), which was incorporated in Nevada in 2005. Our two insurance subsidiaries, Employers Insurance Company of Nevada (EICN) and Employers Compensation Insurance Company (ECIC) are domiciled in Nevada and California, respectively. Unless otherwise indicated, all references to ‘‘Employers,’’ ‘‘we,’’ ‘‘us,’’ ‘‘our,’’ ‘‘the Company’’ or similar terms refer to Employers Holdings, Inc. together with its subsidiaries.

We are a specialty provider of workers’ compensation insurance focused on select small businesses engaged in low to medium hazard industries. Workers’ compensation is a statutory system under which an employer is required to provide coverage for its employees’ medical, disability, vocational rehabilitation and death benefit costs for work-related injuries or illnesses. Our business has historically targeted businesses located in several western states, primarily California and Nevada. We distribute our products almost exclusively through independent agents and brokers and our strategic distribution partners. During 2005, based on net premiums written, we were the largest, seventh largest and seventeenth largest non-governmental writer of workers’ compensation insurance in Nevada, California and the United States, respectively, as reported by A.M. Best Company (A.M. Best).

The workers’ compensation insurance industry has historically classified risks into four hazard groups based on severity, with businesses in the first or lowest group having the lowest cost claims. In 2006, 66.8% and 31.8% of our base direct premiums written (which we define as direct written premiums prior to any final policy audits or retrospective rating adjustments) were generated by businesses in the second and third lowest hazard groups, respectively. Businesses in the second lowest hazard group include restaurants, physician offices, stores and educational institutions. Businesses in the third lowest hazard group include the residential carpentry, plumbing and real estate agency businesses. Within each hazard group, our underwriters use their local market expertise and disciplined underwriting to select specific types of businesses and risks that allow us to generate attractive returns. We underwrite these businesses and risks on an individual basis, as opposed to following an occupational class-based underwriting approach. For example, while we insure many physician offices, our underwriting guidelines do not allow us to insure offices that we believe have a higher risk profile, such as psychiatrist offices and drug treatment centers. In addition, our underwriters are selective on the basis of businesses’ geographic location.

In 2006, we generated 73.5% and 19.4% of our direct premiums written in California and Nevada, respectively. In addition, we write business in seven other states (Arizona, Colorado, Idaho, Illinois, Montana, Texas and Utah) and are licensed to write business in eight additional states (Florida, Georgia, Maryland, Massachusetts, New Mexico, New York, Oregon and Pennsylvania). We leverage the extensive field knowledge and local experience of our underwriting and claims professionals to identify business opportunities and establish ourselves as a leader in workers’ compensation insurance. We market and sell our workers’ compensation insurance products through independent local and regional agents and brokers, and through our strategic distribution partners, including our principal partners ADP, Inc. (ADP), and Blue Cross of California, an operating subsidiary of Wellpoint, Inc. (Wellpoint). In 2006, policies underwritten directly or through our independent agents and brokers generated $275.4 million, or 70.5%, of our base direct premiums written, while those underwritten through our strategic relationships generated $114.9 million, or 29.5%, of our base direct premiums written.

We had net premiums written of $439.7 million and $387.2 million, total revenues of $496.5 million and $520.3 million and net income of $137.6 million and $171.6 million for the years ended December 31, 2005 and 2006, respectively. Our combined ratio on a statutory basis was 70.7% for the year ended December 31, 2006 (elsewhere in this report, unless otherwise stated, the term ‘‘combined ratio’’ refers to a calculation based on GAAP). Our average combined ratio on a statutory basis for the five years ended December 31, 2005 was 96.8%. This ratio was lower than the industry composite combined ratio

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calculated by A.M. Best for U.S. insurance companies having more than 50% of their premiums generated by workers’ compensation insurance products. The industry combined ratio on a statutory basis for these companies was 106.8% during the same five years. Companies with lower combined ratios than their peers generally experience greater profitability. We had total assets of $3.2 billion at December 31, 2006.

As of the date of this filing, our insurance subsidiaries were assigned a group letter rating of A− (Excellent), with a ‘‘positive’’ financial outlook, by A.M. Best, the fourth highest of 16 ratings. This A.M. Best rating is a financial strength rating designed to reflect our ability to meet our obligations to policyholders. This rating does not refer to our ability to meet non-insurance obligations and is not a recommendation to purchase or discontinue any policy or contract issued by us or to buy, hold or sell our securities.

Our Competitive Strengths

We believe we benefit from the following competitive strengths:

Focused Operations

We focus on providing workers’ compensation insurance to select small businesses in low to medium hazard groups in specific geographic markets. We believe that this focus provides us with a unique competitive advantage because we are able to gain in-depth customer and market knowledge and expertise. In addition, we believe that we benefit by focusing on small businesses, as they are not generally the principal focus of large insurance companies. As a result, we believe we enjoy strong persistency and attractive pricing. We have also benefited from the attractive pricing resulting from the bundling of our workers’ compensation insurance product with the small group health insurance product marketed to our targeted customers by one of our strategic distribution partners, Wellpoint.

Disciplined Underwriting

We employ a disciplined, conservative and highly automated underwriting approach designed to individually select specific types of businesses, which we believe will have fewer and less costly claims relative to other businesses in the same hazard group. Our underwriting guidelines are designed to minimize underwriting of classes and subclasses of business which have historically demonstrated claims severity that do not meet our target risk profiles. We price our policies based on the specific risks associated with each potential insured rather than solely on the industry class in which a potential insured is classified. In 2006, policyholders in the second lowest industry defined hazard group generated approximately 66.8% of our base direct premiums written. Our statutory losses and LAE ratio, a measure which relates inversely to our underwriting profitability, was 38.0% and 58.3% in 2006 and 2005 respectively, 38.6 and 18.2 percentage points below the 2005 statutory industry composite losses and LAE ratio calculated by A.M. Best for U.S. insurance companies having more than 50% of their premiums generated by workers’ compensation insurance products. Our statutory losses and LAE ratio was at least ten percentage points below the A.M. Best composite losses and LAE ratio for the industry for each of the five years ended December 31, 2005. Our disciplined underwriting approach is a critical element of our culture and has allowed us to realize competitive prices, diversify our risks and achieve profitable growth.

Long-Standing and Strategic Distribution Relationships

We have established long-standing, strong relationships with independent agents and brokers by emphasizing personal interaction, offering responsive service and competitive commissions and maintaining a focus on workers’ compensation insurance. We are able to use these long-standing relationships to identify new business opportunities. Our field underwriters continue to work closely with independent agents and brokers to market and underwrite our business, regularly visit their offices and participate in presentations to customers, which results in enhanced understanding of the businesses and risks we underwrite and the needs of prospective customers. To expand our distribution reach, we have also developed important and long-standing strategic distribution relationships with ADP and Wellpoint and have recently entered into a strategic distribution relationship with E-chx, Inc. (E-chx), a payroll outsourcing company. Through our strategic distribution partnership with ADP, we jointly market our workers’ compensation insurance products with ADP’s payroll services, primarily to small businesses in California, as well as in Colorado, Idaho, Illinois, Texas and Utah, generating $44.0 million in gross

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premiums written in 2006. Through our strategic distribution partnership with Wellpoint, we jointly market our workers’ compensation insurance products with Wellpoint’s group health insurance plans to small businesses in California, generating $70.9 million in gross premiums written in 2006.

Scalable and Cost-Effective Infrastructure

We have three strategic business units overseeing 13 territorial offices serving the various states in which we are currently doing business. We believe we have created an efficient, cost-effective, scalable infrastructure that complements our geographic reach, our focus on workers’ compensation insurance and our targeting of small businesses. As part of our cost-effective infrastructure, we have developed a highly automated underwriting software program that allows for electronic submission and review of insurance applications, employing our underwriting standards and guidelines. This automated process leads to efficient and timely processing of applications for small, straight-forward policies that meet our standards and saves our independent agents and brokers considerable time in processing customer applications.

Financial Strength

As of December 31, 2006, our insurance subsidiaries had total consolidated statutory surplus of $640.5 million and, as of the date of this filing, were assigned a group letter rating of A− (Excellent), with a ‘‘positive’’ financial outlook, by A.M. Best, the fourth highest of 16 ratings. The amount of statutory surplus is regarded as financial protection to policyholders in the event an insurance company suffers unexpected or catastrophic losses. We have a proven history of conservative reserving. There have been no prior year adverse developments or increases in the estimated ultimate losses and LAE from one valuation date to a subsequent valuation date, in our reserves since we commenced operations in Nevada in 2000. Our insurance subsidiaries’ ratio of net premiums written to total consolidated statutory surplus, a measure of underwriting leverage, of 0.60:1 and 0.83:1 at December 31, 2006 and 2005 respectively, compared to an industry average of 1.1:1 at such dates, further demonstrates the strength of our balance sheet. In connection with our assumption in 2000 of the assets, liabilities and operations of the Nevada State Industrial Insurance System (the Fund), including in force policies and historical liabilities associated with the Fund for losses prior to January 1, 2000, our Nevada insurance subsidiary assumed the Fund’s rights and obligations under a retroactive 100% quota share reinsurance agreement (referred to as the LPT Agreement) which the Fund had entered into with third party reinsurers. The LPT Agreement substantially reduced the exposure to losses for pre-July 1995 Nevada insured risks.

Strong Senior Management with Extensive Industry Experience

We have a strong senior management team with significant insurance industry experience across a variety of markets and market conditions. Our executive officers and senior management team also have significant experience with the state-by-state workers’ compensation legislative and regulatory environment, particularly in the states in which we operate or are licensed, and they have been proactive in encouraging legislation that allows us to operate profitably within a balanced framework. Douglas D. Dirks, our President and Chief Executive Officer and four of our other executive officers have an average of over 18 years of insurance industry experience and over 16 years of workers’ compensation insurance experience. Additionally, our underwriting and claims senior managers on average have over 20 years of experience in the insurance industry.

Our Strategies

We plan to pursue profitable growth by focusing on the following strategies:

Maintain Focus on Underwriting Profitability

We are committed to disciplined underwriting, and we will continue this approach in pursuing profitable growth opportunities. We will carefully monitor market trends to assess new business opportunities, only pursuing opportunities that we expect to meet our pricing and risk standards. We will seek to underwrite our portfolio of low to medium hazard risks with a view toward maintaining long-term underwriting profitability across market cycles.

Continue to Grow in Our Existing Markets

Since commencing operations in Nevada in 2000, we have expanded our operations to California, were able to establish important strategic distribution relationships with ADP and Wellpoint, entered

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seven other states and obtained licenses in eight new states. We plan to continue to seek profitable growth in our existing markets by addressing the workers’ compensation insurance needs of small businesses, which we believe represent a large and profitable market segment and by entering new strategic distribution agreements such as our recent agreement with E-chx. Small businesses generally grow faster than large businesses and, according to the United States Small Business Administration, 60% to 80% of new jobs over the past decade ending in 2005 were created by small businesses. Accordingly, we believe that the characteristics of our existing markets should be favorable over the long term. In the states in which we operate, the workers’ compensation market for small businesses is not highly concentrated, with a significant portion of premiums being written by numerous insurance companies with small individual market shares. We believe that our focus on workers’ compensation insurance, our disciplined underwriting and risk selection, and our loss control and claims management expertise for small businesses position us to profitably increase our market share in our existing markets.

Enter New Markets Through Our Existing Distribution Relationships

Since commencing operations in Nevada in 2000, we have expanded our operations to California, established important strategic distribution relationships with ADP and Wellpoint, entered seven new states and obtained licenses in eight other states. We intend to continue to selectively enter new markets, taking into account the adequacy of premium rates, market dynamics, the labor market, political and economic conditions and the regulatory environment. Our strategic distribution partnerships with ADP and Wellpoint have allowed us to access new customers and to write attractive business in an efficient manner. For example, we entered Illinois in the fourth quarter of 2006 and we intend to enter Florida and Oregon in the second quarter of 2007. Additionally, we will seek to leverage our existing independent agent and broker relationships to enter new states.

Capitalize on the Flexibility of Our New Corporate Structure

The initial public offering (IPO) completed on February 5, 2007, occurred in conjunction with our conversion from a mutual insurance holding company owned by our Nevada policyholder members to a stock corporation owned by our public stockholders. We believe that our conversion to a publicly traded stock corporation gives us enhanced financial and strategic flexibility. This allows us to consider acquisitions, joint ventures and other strategic transactions, as well as new product offerings, which make strategic sense for our business while achieving our goal of profitable growth.

Manage Capital Prudently

We intend to manage our capital prudently relative to our overall risk exposure, establishing adequate loss reserves to protect against future adverse developments while seeking to grow profits and long-term stockholder value, maintain our financial strength, fund growth, invest in our infrastructure or return capital to stockholders, which may include share repurchases. We will target an optimal level of overall leverage to support our underwriting activities and are committed to maintaining our financial strength and ratings over the long term.

Leverage Infrastructure, Technology and Systems

We will continue to invest in our scalable, cost-effective infrastructure and our underwriting and claims processing technology and systems. We recently introduced a new automated underwriting system, E ACCESS, which over time will replace three legacy underwriting systems. We anticipate that this new system will reduce transaction costs and support future profitable growth. In the first quarter of 2008, we expect to implement a new claims system designed to enhance our ability to support best-in-class claims processing.

Our History

Our Nevada insurance subsidiary was incorporated and domiciled in Nevada in December 1999. On January 1, 2000, our Nevada insurance subsidiary assumed all the assets, liabilities and operations of the Fund, pursuant to legislation enacted in the 1999 Nevada legislature. The Fund, which was an agency of the State of Nevada, had over 80 years of workers’ compensation experience in Nevada. Following our assumption of the Fund’s assets, liabilities and operations, Nevada no longer had a monopolistic state

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agency that provided workers’ compensation coverage to businesses in the state. Businesses in Nevada could obtain their coverage from an insurer in the private market (including from us), join a self insured group or, if they met the financial qualifications required by statute, self insure their own losses.

In connection with our assumption of the assets, liabilities and operations of the Fund, our Nevada insurance subsidiary assumed the Fund’s rights and obligations associated with a retroactive 100% quota share reinsurance agreement with third party reinsurers (LPT Agreement), which substantially reduced our exposure to losses for pre-July 1, 1995, Nevada insured risks. For further discussion of the LPT Agreement, see ‘‘Item 6—Selected Financial Data’’, ‘‘Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Reinsurance—LPT Agreement’’ and ‘‘Item 8—Financial Statements and Supplementary Data—Note 7 to our Consolidated Financial Statements’’ which are included elsewhere in this report.

As the workers’ compensation regulatory and marketplace environment in Nevada became more competitive, and the monopolistic Fund was eliminated, we adjusted our staffing, programs and insurance products accordingly. In 2000, we moved our corporate headquarters from Carson City to Reno, Nevada and, in 2001, we closed an injured worker rehabilitation center that we considered to be operating uneconomically, terminating the center’s staff and selling the associated properties. During 2002, we closed offices in rural Nevada, either terminating the associated staff or relocating them to Reno or Henderson. We began focusing our business model on select small businesses engaged in low to medium hazard industries.

Through July 2002, we operated exclusively in Nevada. During the first half of 2002, we recognized that the California small business workers’ compensation insurance market presented potentially attractive opportunities. The California market had experienced the insolvency or departure of a number of workers’ compensation companies as companies competed for California business by pricing workers’ compensation insurance products at low levels. As the underwriting capacity decreased in California, the rates charged by the remaining workers’ compensation insurance providers and by California’s state workers’ compensation fund increased significantly. In order to capitalize on the opportunity for potential profit presented by these circumstances, we formed and capitalized a wholly owned stock corporation incorporated in California, ECIC, and on July 1, 2002 we acquired the renewal rights to a book of workers’ compensation insurance business, and certain other tangible and intangible assets from Fremont Compensation Insurance Group and its affiliates, or collectively, Fremont. The book of business we acquired from Fremont was primarily comprised of accounts in California and, to a lesser extent, in Colorado, Idaho, Montana and Utah.

Because of that transaction, we were able to establish our important relationships and distribution agreements with ADP and Wellpoint. The Fremont transaction also involved the acquisition of in force policies that were written through a fronting facility with Clarendon Insurance Group (Clarendon), and the entry by ECIC into a fronting facility with Clarendon. The fronting facility was placed into run off in the fourth quarter of 2003. For further discussion of the Clarendon fronting facility, see ‘‘—Reinsurance —Clarendon Fronting Facility.’’

In 2003, EICN and ECIC, as well as our wholly-owned subsidiaries Employers Occupational Health, Inc. (EOH), and Elite Insurance Services, Inc. (EIS), began to operate under the Employers Insurance Group trade name. On April 1, 2005, we reorganized into a mutual insurance holding company, EIG Mutual Holding Company, wholly-owned by the policyholders of EICN. Effective February 5, 2007, we converted into a Nevada stock corporation and changed our name to ‘‘Employers Holdings, Inc.’’ and all of the membership interests in EIG were extinguished. In exchange, eligible members of EIG received shares of our common stock or cash. Upon conversion and the completion of the IPO EIG became Employers Holdings, Inc., a publicly traded company.

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The Conversion

The following section provides a summary of the conversion and the terms of our plan of conversion. The description of the conversion in the following sections is only a summary and is qualified in its entirety by reference to the complete terms of the plan of conversion, a copy of which was filed as an exhibit to our registration statement which was declared effective January 30, 2007.

Plan of Conversion

On August 17, 2006, the board of directors of EIG unanimously proposed, approved and adopted a plan of conversion under which EIG would convert from a mutual insurance holding company to a publicly traded stock corporation.

On August 22, 2006, EIG filed an application for conversion with the Nevada Commissioner of Insurance. The Nevada Commissioner of Insurance held a public hearing on the application for conversion on October 26, 2006 and issued an initial order approving the application for conversion on November 29, 2006. At a special meeting of EIG’s members on January 13, 2007, the plan of conversion, including the amended and restated articles of incorporation of EIG, was approved by the required vote of EIG’s members. On January 13, 2007, the Nevada Commissioner of Insurance issued a final order approving EIG’s application for conversion.

Under applicable Nevada law, those persons who were owners of one or more policies issued by EICN that were in force as of August 17, 2006, the date the plan of conversion was initially proposed, approved and adopted by EIG’s board of directors, and who therefore had a membership interest in EIG as of such date, were eligible members entitled to receive consideration in the conversion. Persons who became members after the adoption date were not eligible under Nevada law to receive consideration in the conversion although their membership interests were extinguished when the conversion was completed. In addition, persons who were policyholders of our California domiciled insurance subsidiary, ECIC, did not have membership interests in EIG and therefore were not entitled to receive consideration in the conversion.

Effective February 5, 2007, under the terms of the plan of conversion, EIG converted from a mutual insurance holding company to a stock company. In connection with the conversion, EIG’s name was changed to Employers Holdings, Inc. and all membership interests in EIG were extinguished. On March 9, 2007 eligible members of EIG received, in the aggregate, 22,765,407 shares of the Company’s common stock and cash totaling $462,988,115.

Closed Block

As required by Nevada law, we established a closed block as of February 5, 2007 for the preservation of the reasonable dividend expectations of eligible members and other policyholders holding policies entitling the holder to distributions from the surplus of EICN in accordance with the terms of a dividend plan or program with respect to such policy. The closed block was created for the benefit of (1) all policies issued by EICN that were in force as of February 5, 2007, and that were participating pursuant to a dividend plan or program of EICN and (2) all policies that were no longer in force as of February 5, 2007, but that were participating pursuant to a dividend plan or program of EICN, that had an inception date that was not earlier than 24 months prior to and not later than February 5, 2007, and for which a participating policy dividend has not been calculated, declared and paid by EICN as of February 5, 2007.

Workers’ Compensation Insurance Market

Overview

Workers’ compensation is a statutory system under which an employer is required to provide coverage for its employees’ medical, disability, vocational rehabilitation and death benefit costs for work-related injuries or illnesses. Most businesses comply with this requirement by purchasing workers’ compensation insurance. The principal concept underlying workers’ compensation laws is that an employee injured in the course of his or her employment has only the legal remedies available under workers’ compensation laws and does not have any other recourse against his or her employer. Generally, workers are covered for injuries that occur in the course and within the scope of their employment. An

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employer’s obligation to pay workers’ compensation benefits does not depend on any negligence or wrongdoing on the part of the employer and exists even for injuries that result from the negligence or wrongdoings of another person, including the employee. The level of benefits varies by state, the nature and severity of the injury or disease and the wages of the injured worker.

Workers’ compensation insurance policies generally provide that the carrier will pay all benefits that the insured employer may become obligated to pay under applicable workers’ compensation laws. Each state has a regulatory and adjudicatory system that quantifies the level of wage replacement to be paid, determines the level of medical care required to be provided and the cost of permanent impairment and specifies the options in selecting healthcare providers available to the injured employee or the employer. These state laws generally require two types of benefits for injured employees: (1) medical benefits, which include expenses related to diagnosis and treatment of an injury and/or disease, as well as any required rehabilitation, and (2) indemnity payments, which consist of temporary wage replacement, permanent disability payments and death benefits to surviving family members. To fulfill these mandated financial obligations, virtually all businesses are required to purchase workers’ compensation insurance or, if permitted by state law or approved by the U.S. Department of Labor, to self-insure. The businesses may purchase workers’ compensation insurance from a private insurance carrier such as EICN or ECIC, a state-sanctioned assigned risk pool, a state agency, a self-insurance fund (an entity that allows businesses to obtain workers’ compensation coverage on a pooled basis, typically subjecting each employer to joint and several liability for the entire fund) or, may self insure, thereby retaining all risk.

Workers’ compensation was the fourth largest property and casualty insurance line in the U.S. in 2005, on a net written premium basis, according to the National Council on Compensation Insurance (NCCI). According to the NCCI, net premiums written in 2005 for the workers’ compensation industry were approximately $37.8 billion, or 8.9% of the estimated $425.7 billion in net premiums written for the property and casualty industry as a whole. Premium volume in the workers’ compensation industry was up 8.8% in 2005 compared to 2004, while the entire property and casualty industry experienced a 0.4% increase in net premium written in 2005 from 2004, according to the NCCI.

Industry Developments

We believe the workers’ compensation sector has recovered from a period characterized by deteriorating operating profitability caused primarily by rising medical claim costs, rising indemnity claim costs and poor investment performance. We believe that these challenges to the workers’ compensation sector have been resolved, resulting in current pricing conditions that are more favorable for us.

During the period from 1994 to 2001, we believe that rising loss costs, despite declines in the frequency of losses, severely eroded underwriting profitability in the workers’ compensation insurance industry. According to the Insurance Information Institute, the workers’ compensation industry’s accident year combined ratios rose from 97% in 1994 to a high of 138% in 1999. In addition, the NCCI estimated that workers’ compensation loss reserves for private carriers were deficient by $9 billion at year end 2005, which are significantly up from just $0.5 billion year end 1994, yet down from a high of $21 billion at year end 2001.

California Market. We believe that during the late 1990’s, California faced even greater challenges than the U.S. workers’ compensation market as a whole. California is the largest workers’ compensation insurance market in the United States. In 2005, California accounted for an estimated $15.1 billion in written premiums (net of deductibles) according to the Workers’ Compensation Insurance Rating Bureau of California (WCIRB), or approximately 27.2% of the entire U.S. workers’ compensation market.

From 1995, when California imposed an open rating system where carriers set their own rates, through 1999, California’s workers’ compensation market was characterized by severe price competition. Carriers were reducing rates in order to maintain, or increase, their market share. Workers’ compensation rates in California declined approximately 47% from 1993 to 1998, according to the WCIRB. These lower rates, together with increases in medical and indemnity claim costs, severely eroded underwriting profitability.

This deterioration in underwriting profitability compelled many workers’ compensation carriers to significantly reduce their California workers’ compensation premium writings, creating a reduction in

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market capacity. It is noteworthy that, according to the WCIRB, insurance carriers representing approximately 35% of the California market in 1994 are no longer writing workers’ compensation insurance in California.

We believe that this reduction in capacity in California led to significant rate increases from 2000 through 2003. In addition to, and as a result of, these rate increases, the California legislature passed reform bills which were designed to reduce loss costs. Among other things, these bills addressed medical fee schedules, chiropractic and physical therapy visits, medical utilization guidelines, vocational rehabilitation, permanent disability schedules and the presumption of the treating physician.

As a result of the rate increases from 2000 to 2003 and the legislative reforms, underwriting profitability in California improved significantly according to the WCIRB estimates as of March 31, 2006 (after reflecting the estimate of California reform legislation on unpaid losses). The WCIRB has reported that 2005 marked the third consecutive year with combined ratios in California estimated to be below 80%, following eight consecutive years in which they exceeded 100%.

Despite rate decreases in 2004, 2005 and in 2006, we believe that California remains a profitable operating environment. According to the WCIRB, total estimated ultimate losses in California were down to $7.1 billion in accident year 2005 compared to $12.3 billion in 2002, a reduction of 42%. Indemnity claim counts were down 36% during that same time period. We believe that the impact of reforms will continue to result in loss costs that are supportable by current rate levels.

Nevada Market. The Nevada workers’ compensation market has changed dramatically over the past decade. A fully competitive, private market is a relatively recent phenomenon in Nevada. From 1913 until July 1999, the workers’ compensation market was served by a monopolistic state fund. In the 1980’s, businesses were also allowed to opt for self insurance. In July of 1999, the Nevada workers’ compensation insurance market was opened to competition by private carriers, and the state fund was privatized in January of 2000.

Nevada has adopted a ‘‘loss cost’’ rate regulation system, under which insurance companies are permitted to file to deviations upwards or downwards from the benchmark rates set by the Insurance Commissioner. As a result, the primary way in which private carriers compete with one another is based on expense differentiation and dividends. The rate environment has been stable. Although some new capital continues to enter the state, the total number of competitors has remained fairly stable at around 210. Competition among the private insurance carriers has stabilized, and we have seen fewer insured’s changing carriers. However, we are beginning to see signs that the self insurance market is attracting increasing numbers of employers from the private carrier market.

Our Business Operations

Customers

Our target customers are select small businesses engaged in low to medium hazard industries. Through December 31, 2006, the workers’ compensation insurance industry classified risks into four hazard groups based on severity of claims, with businesses in the first, or lowest, hazard group having the most predictable and least costly claims and those in the fourth, or highest, hazard group having the least predictable and most costly claims. All references to hazard groups are to the four hazard groups as defined by the NCCI prior to January 1, 2007. Our historical loss experience has been more favorable for lower hazard groups than for higher hazard groups. Further, we believe it is generally more costly to service and manage the risks associated with higher hazard groups, thereby comparatively reducing the profit margin derived from underwriting business in higher hazard groups. By targeting lower hazard groups, we believe that we improve our ability to generate profitable underwriting results. In 2006, 66.8% and 31.8% of our base direct premiums written were generated by insureds in the second and third lowest hazard groups, respectively. Insureds in the second lowest hazard group include restaurants, physician offices, stores and educational institutions. Insureds in the third lowest hazard group include the residential carpentry, plumbing, and real estate agency businesses.

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The following table sets forth our base direct premiums written by type of insured for our top ten types of insureds and as a percentage of our total base direct premiums written for the year ended December 31, 2006:


Type of Employer	Hazard Group level		Base Direct Premiums Written			Percentage of Total
	(in thousands)
Restaurants		2		$	27,654		7.1	%
Physicians and physician office clerical		2			24,858		6.4
Store: Wholesale not otherwise classified		2			18,854		4.8
College: Professional employees and clerical		2			11,590		3.0
Store: Retail not otherwise classified		2			11,189		2.9
Clerical office employees not otherwise classified		2			9,846		2.5
Machine shops not otherwise classified		2			9,455		2.4
Clothing manufacturers		2			9,040		2.3
Dentists and dental surgeons–all employees including clerical		2			7,939		2.0
Automobile		2			6,458		1.7
Total				$	136,883		35.1	%

The following table sets forth our base direct premiums written by hazard group and as a percentage of our total base direct premiums written for the two years ended December 31:


Hazard Group	2005			Percentage of 2005 Total			2006			Percentage of 2006 Total
	(in thousands, except percentages)
1		$	6,016		1.3	%		$	5,197		1.3	%
2			305,533		67.4				260,711		66.8
3			140,701		31.1				124,078		31.8
4			784		0.2				358		0.1
Total		$	453,034		100.0	%		$	390,344		100.0	%

In 2006, our insureds had average annual premiums of approximately $13,200.

We are not dependent on any single employer or type of employer and the loss of any single employer or type of employer would not have a material adverse effect on our business. We do not expect the size of our insureds to increase significantly over time.

Our business targets insureds located in several western states, primarily California and Nevada. The following table sets forth our direct premiums written by state and as a percentage of total direct premiums written for the last three years ended December 31, 2006:


States	2004			Percentage of Total			2005			Percentage of Total			2006			Percentage of Total
	(in thousands, except percentages)
California		$	277,096		74.9	%		$	350,039		77.7	%		$	288,529		73.5	%
Nevada			87,977		23.8				82,428		18.3				76,016		19.4
Colorado			2,353		0.6				11,093		2.5				13,466		3.4
Utah			1,974		0.5				4,681		1.0				7,164		1.8
Idaho			314		0.1				1,263		0.3				3,849		1.0
Montana			472		0.1				1,236		0.2				3,141		0.8
Other			—		—				—		—				511		0.1
Total		$	370,186		100.0	%		$	450,740		100.0	%		$	392,676		100.0	%

We believe there are significant opportunities for growth in additional markets. During the first quarter of 2007, we obtained a certificate of authority to write workers’ compensation insurance in

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Massachusetts. We are optimistic that we will be able to enter the workers’ compensation insurance market successfully in other states if we so choose to. For example, we entered Illinois in the fourth quarter of 2006 and we intend to enter Florida and Oregon in the second quarter of 2007.

Substantially all of our policies are written through independent agents and brokers or strategic distribution partners that act as the producer of record on the policy. We treat these independent agents and brokers and strategic distribution partners as our customers as they normally offer a strong purchasing recommendation to the targeted business.

Marketing and Distribution

We distribute our workers’ compensation insurance products principally though independent agents and brokers and through our principal strategic distribution partners, ADP and Wellpoint. We have entered into an additional strategic partnership with E-chx in California and are actively pursuing other strategic partnership opportunities. We manage the marketing and distribution of our products from three strategic business units:


	•	Pacific Region, which markets and underwrites business written through independent agents and brokers in the state of California. Pacific Region offices are located in Fresno, Glendale and San Francisco, California;


	•	Strategic Markets, which markets and underwrites business written through our strategic partner relationships. Strategic Markets offices are located in Newbury Park, California and Boise, Idaho,


	•	Western Region, which markets and underwrites business written through independent agents and brokers in the states of Arizona, Colorado, Idaho, Illinois, Montana, Nevada, Texas, and Utah. Western Region offices are located in Phoenix, Arizona, Denver, Colorado, Tampa, Florida, Boise, Idaho, Schaumberg, Illinois, Reno and Henderson, Nevada, Irving, Texas, and Salt Lake City, Utah.

The following table sets forth our base direct premiums written by strategic business unit and as a percentage of our total base direct premiums written for the last two years ended December 31, 2006:


	2005			Percentage of Total			2006			Percentage of Total
	(in thousands, except percentages)
Pacific Region		$	229,437		50.6	%		$	172,299		44.1	%
Strategic Markets			120,442		26.6				114,910		29.5
Western Region			103,155		22.8				103,135		26.4
Total		$	453,034		100.0	%		$	390,344		100.0	%

Each of our strategic business units employs a Vice President of Sales, each of whom is responsible for setting marketing goals at their respective business unit level and supervising their respective business unit’s field sales representatives. Field sales representatives are assigned to individual agents or brokers.

Independent Insurance Agents and Brokers. As of December 31, 2006, we marketed and sold our insurance products through more than 1,000 independent insurance agents and brokers. For the years ended December 31, 2005 and 2006, agents and brokers produced $324.2 million and $267.1 million, respectively, of base direct premiums written for us. We pay commissions which we believe are competitive with other workers’ compensation insurers and we also believe that we deliver prompt, efficient and professional support services. We generally pay a 12% commission on new and renewal business. Our ratio of commissions to net premiums earned for year ended December 31, 2006 was 12.3%.

No single independent agent or broker representing us accounted for more than 2.0% and 2.8% of base direct premiums written in 2005 and 2006, respectively.

Our marketing efforts directed at agents and brokers are implemented by our field marketing representatives and underwriters. We seek to establish and maintain long-term relationships with the principals, producers and customer service representatives of independent agents and brokers that will

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actively market our products and services. We believe that the decision by agents and brokers to place business with an insurer depends in part upon the quality and breadth of services offered by the insurer to the agents and brokers and policyholders, as well as the insurer’s expertise and dedication to a particular line of business. Accordingly, we have sought to enhance the ease of doing business with us and to provide superior service. For example, our recently introduced highly automated underwriting system, E ACCESS, enables agents and brokers to directly input data and the system then prices the risk and binds the coverage without human intervention. Also, we believe that our primary focus on workers’ compensation insurance allows us to compete effectively with much larger insurers because of the services we offer and our industry expertise.

We do not delegate underwriting authority to agents or brokers that sell our insurance. Our field underwriters continue to work closely with independent agents and brokers to market and underwrite our business, regularly visit their offices and participate in presentations to customers, which results in enhanced understanding of the businesses and risks we underwrite and the needs of prospective customers.

Strategic Distribution Partners. We have had key distribution relationships with our principal strategic distribution partners, ADP and Wellpoint, since 2002. We do not delegate underwriting authority to our strategic distribution partners. Our field underwriters continue to work closely with them to market and underwrite our business, regularly visit their offices and participate in presentations to customers, which results in enhanced understanding of the businesses and risks we underwrite and the needs of prospective customers.

ADP. ADP is a payroll services company providing services to small and medium businesses. ADP is the largest payroll service provider in the United States with over 450,000 clients. As part of its services, ADP sells our workers’ compensation insurance product in addition to its payroll and accounting services. Our workers’ compensation insurance products are distributed through ADP’s insurance agency and field sales staff. During the year ended December 31, 2006, we wrote approximately $44.0 million in gross premiums written in five western states (California, Colorado, Idaho, Texas, and Utah) through ADP. We pay ADP fees which are a percentage of premiums for services provided by ADP on our ADP business.

Within the ADP insurance agency, there are two group programs: accounts with 1 to 50 employees, known as the small business unit, and accounts with 51 to 100 employees, known as the major account unit. The majority of business that we write is written through ADP’s small business unit.

ADP utilizes innovative methods to market workers’ compensation insurance. It offers a ‘‘Pay-by-Pay’’ program. An advantage of the ‘‘Pay-by-Pay’’ program is that, unlike a traditional workers’ compensation insurance policy, policies sold through this program do not require the policyholder to pay a deposit at the inception of the policy. In addition, the workers’ compensation premium is deducted each time ADP runs the policyholder’s payroll along with their appropriate federal, state, and local taxes. These characteristics of the ‘‘Pay-by-Pay’’ program enable us to price the workers’ compensation insurance written as a part of that program competitively.

Although we do not have an exclusive relationship with ADP, we believe we are a strategic distribution partner of ADP for our selected markets and classes of business. Nevertheless, there are some classes of business that ADP provides payroll services for that do not fall within our underwriting criteria. If the risk does not fit our underwriting criteria, ADP may submit that risk to another insurer.

Our agreement with ADP may be terminated without cause upon 120 days’ notice. The agreement does not contain a specific termination date.

Wellpoint. The Wellpoint ‘‘Integrated Medicomp’’ Partnership includes two agreements, a small group health insurance plan (for businesses with 1 to 50 employees) and a large group health insurance plan (for businesses with 51 to 250 employees). The large group health insurance plan was effective July 1, 2006. These two group health insurance plans are combined with a standard workers’ compensation insurance policy into a program that meets the state requirements for workers’ compensation. This exclusive relationship allows us to distribute an integrated group health/workers’ compensation product offered in California through the Wellpoint distribution force of life and health agents. It combines Blue Cross Group Health with workers’ compensation insurance coverage written through our

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California-domiciled insurance subsidiary, ECIC. During the year ended December 31, 2006, we wrote approximately $70.9 million in gross premiums written through Wellpoint’s Integrated Medicomp Program. The primary benefit to the employer is a single bill for their group health and workers’ compensation insurance coverages. We believe that this is perceived by the employers as a more efficient way for them to manage the purchase of these products. Another key benefit to this program is the increased satisfaction from employees who are able to use the same medical network for occupational and non-occupational illness and injury. Being the largest group health carrier in California often allows Wellpoint to negotiate favorable rates with their physicians and associated facilities, which we benefit from through reduced claims costs.

An essential element of the program is some level of premium savings to the business for both independent lines of coverage. These premium savings generally result in increased interest from the business as well as long term persistency and the overall success of the program. We believe that, in general, when businesses purchase this combination of coverages, their employees make fewer workers’ compensation claims because those employees are insured for non-work related illnesses or injuries and thus are less likely to seek treatment for a non-work related illness or injury through their employers’ workers’ compensation insurance carrier. We pay Wellpoint fees which are a percentage of premiums for services provided by Wellpoint on our Wellpoint business.

Although our distribution agreements with Wellpoint are exclusive, Wellpoint may terminate its agreements with us if we are not able to provide coverage through a carrier with an A.M. Best financial strength rating of ‘‘B++’’ or better. Wellpoint may also terminate its agreements with us without cause after giving us 60 days notice. The agreements are for an initial two-year period running through January 1, 2008. After that date they are automatically renewable for subsequent one-year periods unless terminated by either party at least 60 notice days prior to the end of their current term.

E-chx. We entered a joint sales, services and program administration agreement with E-chx in November 2006, pursuant to which E-chx, a payroll solutions company providing payroll outsourcing solutions for small businesses, will market our workers’ compensation insurance product in addition to its payroll services. The program is only available in California. Although we do not have an exclusive relationship with E-chx, we are their only strategic partnership in California. E-chx offers products and services in all 50 states. We pay E-chx fees which are a percentage of premiums for services provided by E-chx.

E-chx offers an ‘‘E-PAY’’ program under which policies sold through this program do not require the policyholder to pay a deposit at the inception of the policy, unlike a traditional workers’ compensation insurance policy. In addition, the workers’ compensation premium is deducted each time E-chx runs the policyholder’s payroll along with their appropriate federal, state, and local taxes. We believe that these characteristics of the ‘‘E-PAY’’ program will allow us to competitively price the workers’ compensation insurance written as a part of that program.

Our agreement with E-chx is not exclusive, and E-chx may terminate the agreement without cause upon 90 days written notice. The agreement is for an initial two-year period running through November 2008 and is automatically renewable for subsequent two-year periods.

Direct Business. We write a small amount of direct business, or business that comes to us directly without using an agent or broker, or without coming through one of our strategic distribution partners. This direct business is a legacy of our assumption of the assets and liabilities of the Fund. Although we do not market any direct business so as to avoid channel conflict with our independent agents and brokers, we intend to maintain this pre-existing book of business because it is very well known by our underwriters and profitable. In the year ended December 31, 2006, we wrote approximately $8.3 million in gross premiums written attributable to this direct business.

Underwriting

We target select small businesses engaged in low to medium hazard industries. We employ a disciplined, conservative underwriting approach designed to individually select specific types of businesses, predominantly those in the three lowest of the four workers’ compensation insurance industry hazard groups, that we believe will have fewer and less costly claims relative to other businesses in the same hazard groups.

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We provide workers’ compensation coverage to several homogeneous groups of business such as physicians, dentists, restaurants and retail stores. Annually we review the premium, payroll, and loss history trends of each group and develop a schedule rating modification that is applied to all policyholders that meet the qualification standards for a given group. Qualification standards vary between groups and may include factors such as management experience, loss experience, and nature of operations conducted by the insured and/or other exposures specific to the class of business. Each insured’s experience modification is also applied in the determination of their premium.

Our underwriting strategy involves continuing our disciplined underwriting approach in pursuing profitable growth opportunities. We carefully monitor market trends to assess new business opportunities, only pursuing opportunities that we expect to meet our pricing and risk standards. We seek to underwrite our portfolio of low to medium hazard risks with a view toward maintaining long term underwriting profitability across market cycles.

We execute our underwriting processes through highly automated systems and through seasoned underwriters with specific knowledge of local markets. Within these systems, we have developed underwriting templates for specific, targeted classes of business that produce faster quotations when all underwriting criteria are met by a specific risk. These underwriting guidelines consider many factors such as type of business, nature of operations, risk exposures and other employer-specific conditions, and are designed to minimize underwriting of certain classes and subclasses of business such as chemical manufacturing, high-rise construction and long-haul trucking, which have historically demonstrated claims severity that do not meet our target risk profiles. Our systems price our policies based on the specific risks associated with each potential insured rather than solely on the industry class in which such potential insured is classified.

While our underwriting systems are highly automated, we do not delegate underwriting authority to agents or brokers that sell our insurance or to any other third party. We currently have four underwriting systems in production today. To create efficiency and standardization, on July 1, 2006, we implemented a new underwriting and policy administration system, E ACCESS. Two of our other systems are currently being phased out. By the end of 2007, we will be using one underwriting and policy issuance system, E ACCESS, for all new business and renewals. Our field underwriters continue to work closely with independent agents, brokers and our strategic distribution partners to market and underwrite our business, regularly visit their offices and participate in presentations to customers, which result in enhanced understanding of the businesses and risks we underwrite and the needs of prospective customers.

Our underwriting guidelines are defined centrally by our Corporate Underwriting Department. However, we manage underwriting from our Western Region, Pacific Region and Strategic Markets strategic business units. Each of our strategic business units has the authority to write business within the classes that are permitted for the relevant strategic business unit by our underwriting guidelines. The average length of underwriting experience of our current underwriting professionals exceeds ten years. Our chief underwriting officer, who is responsible for supervision of the underwriting conducted at all of the strategic business units, has the authority to permit a strategic business unit to underwrite particular risks that fall outside the classes of business specified in our underwriting guidelines on a case-by-case basis. Also, our chief underwriting officer directly oversees the writing of business in the case of certain of our larger customers.

Principal Products and Pricing

Our workers’ compensation insurance product is written primarily on a guaranteed cost basis, meaning the premium for a policyholder is set in advance and varies based only upon changes in the policyholder’s class and payroll. Class and specific risk credits are formulated to fit the needs of targeted classes and employer groups.

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The premiums we charge are established when coverage is bound. Premiums are based on the particular class of business and our estimates of expected losses, loss adjustment expenses and other expenses related to the policies we underwrite. Generally, premiums for workers’ compensation insurance policies are a function of:


	•	the amount of the insured employer’s payroll;


	•	the applicable premium rate, which varies with the nature of the employees’ duties and the business of the insured;


	•	the insured’s industry classification; and


	•	factors reflecting the insured employer’s historical loss experience.

In addition, our pricing decisions need to take into account the workers’ compensation insurance regulatory regime of each state in which we conduct operations, because such regimes address the rates that industry participants in that state may or should charge for policies. In approximately sixteen states, including Florida and Idaho, workers’ compensation insurance rates are set by the state insurance regulators and are adjusted periodically. This style of rate regulation is sometimes referred to as ‘‘administered pricing.’’ In some of these states, insurance companies are permitted to file to deviate upwards or downwards from the benchmark rates set by the insurance regulators. In the vast majority of states, workers’ compensation insurers have more flexibility to offer rates that reflect the risk the insurer is taking based on each employer’s profile. These states are often referred to as ‘‘loss cost’’ states. Except for Idaho, all of the states in which we currently operate, including California and Nevada, are ‘‘loss cost’’ states.

In ‘‘loss cost’’ states, the state first approves a set of loss costs that provide for expected loss and, in most cases, LAE payments, which are prepared by an insurance rating bureau (for example, the WCIRB in California and the NCCI in Nevada). An insurer then selects a factor, known as a loss cost multiplier, to apply to loss costs to determine its insurance rates. In these states, regulators permit pricing flexibility primarily through (1) the selection of the loss cost multiplier and (2) schedule rating modifications that allow an insurer to adjust premiums upwards or downwards for specific risk characteristics of the policyholder such as:


	•	type of work conducted at the premises or work environment;


	•	on-site medical facilities;


	•	level of employee safety;


	•	use of safety equipment; and


	•	policyholder management practices.

In all of the states in which we currently operate, we use both variables (i.e., both (1) and (2) above) to calculate a policy premium that we believe will cover the claim payments, losses and LAE, and company overhead and result in a reasonable profit for us.

State legislative reforms relating to the benefits payable to injured workers can also affect the premium rates that we are able to charge for our insurance products. For example, since September 2003 through January 1, 2007, we have reduced our rates by 60.5% in California, and we expect that we will need to further reduce our rates in California in the foreseeable future, as a result of cost savings arising from benefit reforms, such as new controls on medical costs and changes in the state’s permanent disability compensation formula. Although the California Insurance Commissioner does not set premium rates, he does adopt and publish advisory ‘‘pure premium’’ rates which are rates that would cover expected losses but do not contain an element to cover operating expenses or profit. He recommended a 16.4% reduction in workers’ compensation ‘‘pure premium’’ rates starting in July 2006. In early November 2006, the California Insurance Commissioner recommended that ‘‘pure premium’’ rates be reduced by an additional 9.5% for policies written on or after January 1, 2007. Our California rates continue to be based upon our actuarial analysis of current and anticipated cost trends, including the 9.5% reduction on January 1, 2007 recommended by the California Insurance Commissioner.

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Claims and Medical Case Management

We have an active claims team composed of five units that provide regional coverage and claims support. These units are located in Henderson, Nevada; Newbury Park, Glendale and San Francisco, California; and Boise, Idaho. The role of our claims units is to actively investigate, evaluate, pay claims efficiently and aid injured workers in an early return to work, in accordance with applicable laws and regulations. We have implemented rigorous claims guidelines and claims reporting and control procedures in our claims units. We also provide medical case management services for all claims that we determine will benefit from such involvement. These services are provided by EOH in Nevada and under the supervision of EOH in California. Additionally, EOH maintains an exclusive medical provider network in Nevada, with which it has negotiated discounts.

Our claims department also provides claims management services for those claims incurred by the Fund and assumed by our Nevada insurance subsidiary in connection with the LPT Agreement with a date of injury prior to July 1, 1995. We receive a fee from the third party reinsurers equal to 7% of the loss payments on these claims.

In Nevada, we have created our own medical provider network and we make every effort to channel injured workers into this network. In the other states in which we do business, we utilize networks affiliated with WellPoint and Concentra Operating Corporation. In addition to our medical networks, we work closely with local vendors, including attorneys, medical professionals and investigators, to bring local expertise to our reported claims. We pay special attention to reducing costs in each region and have established discounting arrangements with these groups. We use preferred provider organizations, bill review services and utilization management to closely monitor medical costs and to verify that providers charge no more than the applicable fee schedule, or in some cases what is usual and customary.

We pursue all avenues of subrogation and recovery in an effort to mitigate claims costs. Subrogation rights are based upon state and federal laws and upon the insurance policy issued to the insured. Our subrogation efforts are handled through our subrogation department.

Loss Control

Our loss control professionals are an important part of our loss control strategy and we believe their consultative services provide value to our policyholders. The purpose of our loss control group is to aid policyholders in preventing losses before they occur and in containing costs once claims occur. The group also assists our underwriting personnel in evaluating potential and current policyholders.

Premium Audits

We conduct premium audits on substantially all of our voluntary business policyholders annually, upon the expiration of each policy, including when the policy is renewed. The purpose of these audits is to comply with applicable state and reporting bureau requirements and to verify that policyholders have accurately reported their payroll expenses and employee job classifications, and therefore have been invoiced the premium required under the terms of their policies. In addition to annual audits, we selectively perform interim audits on certain classes of business if significant or unusual claims are filed or concerns are raised regarding projected annual payrolls which could result in substantial variances at final audit.

Losses and Loss Adjustment Expense Reserves

We are directly liable for losses and LAE under the terms of insurance policies our insurance subsidiaries underwrite. Significant periods of time can elapse between the occurrence of an insured loss, the reporting of the loss to the insurer and the insurer’s payment of that loss. Our loss reserves are reflected in our balance sheets under the line item caption ‘‘unpaid losses and loss adjustment expenses.’’ As of December 31, 2006, our reserve for unpaid losses and LAE, net of reinsurance, was $1.2 billion. The process of estimating reserves involves a considerable degree of judgment by management and, as of any given date, is inherently uncertain. For a detailed description of our reserves, the judgments, key assumptions and actuarial methodologies that we use to estimate our reserves and the role of our consulting actuary, see ‘‘Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies—Reserves for Losses and Loss Adjustment Expenses.’’

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The following table provides a reconciliation of the beginning and ending loss reserves on a GAAP basis at December 31:


	2004				2005				2006
	(in thousands)
Unpaid losses and LAE at beginning of period		$	2,193,439			$	2,284,542			$	2,349,981
Less reinsurance recoverables excluding bad debt allowance on unpaid losses			1,230,982				1,194,728				1,141,500
Net unpaid losses and LAE at beginning of the period			962,457				1,089,814				1,208,481
Losses and LAE, net of reinsurance, incurred in:
Current year			289,544				333,497				256,257
Prior years			(37,582	)			(78,053	)			(107,129	)
Total net losses and LAE incurred			251,962				255,444				149,128
Deduct payments for losses and LAE, net of reinsurance related to:
Current year			33,475				40,116				41,098
Prior years			91,130				96,661				106,859
Total net payments for losses and LAE during the current period.			124,605				136,777				147,957
Ending unpaid losses and LAE, net of reinsurance			1,089,814				1,208,481				1,209,652
Reinsurance recoverable excluding bad debt allowance on unpaid losses and LAE			1,194,728				1,141,500				1,098,103
Ending unpaid losses and LAE, gross of reinsurance		$	2,284,542			$	2,349,981			$	2,307,755

Our estimates of incurred losses and LAE attributable to insured events of prior years have decreased for past accident years because actual losses and LAE paid and current projections of unpaid losses and LAE were less than we originally anticipated. We refer to such decreases as favorable developments. The reductions in reserves were $37.6 million, $78.1 million and $107.1 million for the years ended December 31, 2004, 2005 and 2006, respectively. Estimates of net incurred losses and LAE are established by management utilizing actuarial indications based upon our historical and industry experience regarding claim emergence and claim payment patterns, and regarding claim cost trends, adjusted for future anticipated changes in claims-related and economic trends, as well as regulatory and legislative changes, to establish our best estimate of the losses and LAE reserves. The decrease in the prior year reserves was primarily the result of actual paid losses being less than expected, and revised assumptions used in projection of future losses and LAE payments based on more current information about the impact of certain changes, such as legislative changes, which was not available at the time the reserves were originally established. While we have had favorable developments over the past three years, the magnitude of these developments illustrates the inherent uncertainty in our liability for losses and loss adjustment expenses, and we believe that favorable or unfavorable developments of similar magnitude, or greater, could occur in the future. For a detailed description of the major sources of recent favorable developments, see ‘‘Item 6—Selected Financial Data’’ and ‘‘Item 8—Financial Statements and Supplementary Data—Note 6 to our Consolidated Financial Statements’’.

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Our reserve for unpaid losses and loss adjustment expenses (gross and net), as well as our case and IBNR reserves, as of December 31, 2004, 2005 and 2006 were as follows:


	2004			2005			2006
	(in thousands)
Case reserves		$	777,379		$	772,544		$	753,102
IBNR			1,235,277			1,290,029			1,261,521
LAE			271,886			287,408			293,132
Gross unpaid losses and LAE			2,284,542			2,349,981			2,307,755
Reinsurance recoverables on unpaid losses and LAE, gross			1,194,728			1,141,500			1,098,103
Net unpaid losses and LAE		$	1,089,814		$	1,208,481		$	1,209,652

Loss Development

The following tables show changes in the historical loss reserves, on a gross basis and net of reinsurance, for our insurance subsidiaries for the seven years ended December 31, 2006. These tables are presented on a GAAP basis. The paid and reserve data in the following tables is presented on a calendar year basis. We commenced operations as a non-governmental mutual insurance company on January 1, 2000 when our Nevada insurance subsidiary assumed the assets, liabilities and operations of the Fund. Paid and reserve data for the years 1995 through 1999 has not been included in the following tables because (i) prior to December 31, 1999, the Fund was not required to include reserves related to losses and LAE for claims occurring prior to July 1, 1995 in its annual statutory financial statements filed with the Nevada Division of Insurance (consequently, the financial statements made no provision for such liabilities and complete information in respect of those years is not available in a manner that conforms with the information in this table) and (ii) for claims occurring subsequent to July 1, 1995 and prior to the Company’s inception on January 1, 2000, we believe that the loss development pattern was uniquely attributable to Nevada workers’ compensation reforms adopted in the early 1990s, which pattern is not indicative of development that would be expected to be repeated in our prospective operations.

The top line of each table shows the net reserves or the gross reserves for unpaid losses and LAE recorded at each year-end. Such amount represents an estimate of unpaid losses and LAE occurring in that year as well as future payments on claims occurring in prior years. The upper portion of these tables (net and gross cumulative amounts paid, respectively) present the cumulative amounts paid during subsequent years on those losses for which reserves were carried as of each specific year. The lower portions (net reserves re-estimated) show the re-estimated amounts of the previously recorded reserve based on experience as of the end of each succeeding year. The re-estimate changes as more information becomes known about the actual losses for which the initial reserve was carried. An adjustment to the carrying value of unpaid losses for a prior year will also be reflected in the adjustments for each subsequent year. For example, an adjustment made in the 2000 year will be reflected in the re-estimated ultimate net loss for each of the years thereafter. The gross cumulative redundancy (deficiency) line represents the cumulative change in estimates since the initial reserve was established. It is equal to the difference between the initial reserve and the latest re-estimated reserve amount. A redundancy means that the original estimate was higher than the current estimate. A deficiency means that the current estimate is higher than the original estimate.

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	2000			2001			2002			2003			2004			2005			2006
	(in thousands)
Net reserves for losses and loss adjustment expenses
Originally estimated		$	936,000		$	887,000		$	908,326		$	962,457		$	1,089,814		$	1,208,481		$	1,209,652
Net cumulative amounts paid as of:
One year later			108,748			81,022			80,946			91,130			96,661			106,859
Two years later			161,721			120,616			130,386			150,391			161,252
Three years later			191,453			149,701			165,678			193,766
Four years later			215,015			173,204			194,400
Five years later			235,613			194,980
Six years later			255,772
Net reserves re-estimated as of:
One year later			896,748			875,522			847,917			924,878			1,011,759			1,101,352
Two years later			885,221			781,142			805,058			886,711			975,765
Three years later			800,959			742,272			779,373			884,426
Four years later			766,204			719,912			788,262
Five years later			743,997			730,112
Six years later			754,447
Net cumulative redundancy:			181,553			156,888			120,064			78,031			114,049			107,129			0
Gross reserves – December 31			2,326,000			2,226,000			2,212,368			2,193,439			2,284,542			2,349,981			2,307,755
Reinsurance recoverables, gross			1,390,000			1,339,000			1,304,042			1,230,982			1,194,728			1,141,500			1,098,103
Net reserves – December 31			936,000			887,000			908,326			962,457			1,089,814			1,208,481			1,209,652
Gross re-estimated reserves			2,082,409			2,009,608			2,032,553			2,084,764			2,138,648			2,233,077			2,307,755
Re-estimated reinsurance recoverable			1,327,962			1,279,496			1,244,291			1,200,338			1,162,883			1,131,725			1,098,103
Net re-estimated reserves			754,447			730,112			788,262			884,426			975,765			1,101,352			1,209,652
Gross reserves for losses and adjustment expenses
Originally estimated			2,326,000			2,226,000			2,212,368			2,193,439			2,284,542			2,349,981			2,307,755
Gross cumulative amounts paid as of:
One year later			160,978			128,066			128,462			137,968			142,632			152,006
Two years later			260,995			215,176			224,740			243,203			252,379
Three years later			338,243			291,099			306,006			331,731
Four years later			408,643			360,535			379,881
Five years later			475,174			427,307
Six years later			540,329
Gross reserves re-estimated as of:
One year later			2,280,978			2,211,566			2,121,867			2,148,829			2,178,514			2,233,077
Two years later			2,266,495			2,089,850			2,072,205			2,088,437			2,138,648
Three years later			2,157,647			2,049,340			2,024,790			2,084,764
Four years later			2,121,397			2,000,560			2,032,553
Five years later			2,072,866			2,009,608
Six years later			2,082,409
Gross cumulative redundancy:		$	243,591		$	216,392		$	179,815		$	108,675		$	145,894		$	116,904		$	0

Reinsurance

Reinsurance is a transaction between insurance companies in which an original insurer, or ceding company, remits a portion of its premiums to a reinsurer, or assuming company, as payment for the reinsurer assuming a portion of the risk. Reinsurance agreements may be proportional in nature, under which the assuming company shares proportionally in the premiums and losses of the ceding company. This arrangement is known as quota share reinsurance. Reinsurance agreements may also be structured so that the assuming company indemnifies the ceding company against all or a specified portion of losses on underlying insurance policies in excess of a specified amount, which is called an ‘‘attachment level’’ or ‘‘retention’’ in return for a premium, usually determined as a percentage of the ceding company’s primary insurance premiums. This arrangement is known as excess of loss reinsurance. Excess of loss reinsurance may be written in layers, in which a reinsurer or group of reinsurers accepts a band of coverage up to a specified amount. Any liability exceeding the outer limit of the program is retained by the ceding

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company. The ceding company also bears the credit risk of a reinsurers’ insolvency. In accordance with general industry practices, we purchase excess of loss reinsurance to protect against the impact of large, irregularly-occurring losses, which would otherwise cause sudden and unpredictable changes in net income and the capital of our insurance subsidiaries.

Reinsurance is used principally:


	•	to reduce net liability on individual risks;


	•	to provide protection for catastrophic losses; and


	•	to stabilize underwriting results.

Our current reinsurance treaty applies to all loss occurrences during and on policies which are in force between 12:01 a.m. July 1, 2006 and 12:01 a.m. July 1, 2007. The treaty consists of two master interests and liabilities agreements, one excess of loss agreement and one catastrophic loss agreement, entered into between EICN and its current and future affiliates and the subscribing reinsurers. We have the ability to extend the term of the treaty to continue to apply to policies which are in force at the expiration of the treaty generally for a period of 12 months. We may cancel the treaty upon 60 days written notice, generally, if any reinsurer ceases its underwriting operations, becomes insolvent, is placed in conservation, rehabilitation, liquidation, has a receiver appointed or if any reinsurer is unable to maintain a rating by A.M. Best and/or Standard and Poor’s of at least ‘‘A−’’ throughout the term of the treaty. Covered losses which occur prior to expiration or cancellation of the treaty continue to be obligations of the reinsurer, subject to the other conditions in the agreement. The subscribing reinsurers may terminate the treaty only for our breach of the obligations of the treaty. We are responsible for the losses if the reinsurer cannot or refuses to pay.

The treaty includes certain exclusions for which our reinsurers are not liable for losses, including but not limited to, losses arising from the following: war, strikes or civil commotion; nuclear incidents other than incidental or ordinary industrial or educational pursuits or the use, handling or transportation of radioisotopes for medical or industrial use or radium or radium compounds; underground mining except where incidental; oil and gas drilling, refining and manufacturing; manufacturing, storage and transportation of fireworks or other explosive substances or devices; asbestos abatement, manufacturing or distribution; excess policies attaching excess of a self-insured retention or a deductible greater than $25,000; and commercial airlines personnel. The reinsurance coverage includes coverage for acts of terrorism other than losses directly or indirectly caused by, contributed to, resulting from, or arising out of or in connection with nuclear, radiological, biological or chemical pollution, contamination or explosion. We have underwriting guidelines which generally require that insured risks fall within the coverage provided in the reinsurance treaty. Any risks written outside the treaty coverage require the review and approval of our chief underwriting officer and/or chief operating officer. Finally, the treaty includes a mandatory commutation (a contractual obligation where the reinsurer makes a final payment of the present value of unpaid ultimate losses covered during the treaty period and is relieved from any additional obligations on those losses) at 84 months following the expiration or cancellation of the agreement for the reinsurance layer (the reinsurance treaty is comprised of a series of insurance coverage by one or more reinsurers that are stacked on top of each other to bring the total reinsurance coverage to a maximum of $175 million) to $10 million and commutation by mutual agreement in the layers above $10 million; and, the reinsurance layers above $10 million provide for a single reinstatement of the coverage upon exhaustion of the respective layers of coverage.

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The table below provides information about our reinsurers and their participation in our reinsurance program:


All Treaties are Per Occurrence Excess of Loss with a term of July 1, 2006 to June 30, 2007
Reinsurers	A.M. Best Ratings	$6m excess of $4m			$10m excess of $10m			$30m excess of $20m			$50m excess of $50m			$25m excess of $100m			$50m excess of $125m
Allied World Assurance Company Ltd.	A		—	%		—	%		—	%		—	%		20.00	%		—	%
American Reinsurance Company	A		15.00			—			—			—			—			—
Arch Reinsurance Company	A−		—			—			—			8.00			12.00			6.00
Aspen Insurance UK Limited	A		17.50			9.00			11.00			9.17			9.00			14.00
Catlin Insurance Company Ltd.	A		—			7.50			7.50			7.50			7.50			15.00
Endurance Specialty Insurance Ltd.	A−		—			20.00			15.00			20.00			10.00			10.00
Federal Insurance Company	A++		—			—			2.00			5.00			—			—
Hannover Re (Bermuda) Ltd.	A		—			—			—			5.00			10.00			10.00
Hannover Rueckversicherung-AG	A		15.00			15.00			15.00			—			—			—
Lloyds Syndicate #0435 FDY⁽¹⁾	A		—			5.00			—			6.00			—			3.80
Lloyds Syndicate #0570 ATR⁽¹⁾	A		1.00			2.25			3.25			2.50			—			1.25
Lloyds Syndicate #0623 AFB⁽¹⁾	A		—			3.75