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Employers Holdings, Inc. Reports First Quarter Earnings and Announces Second Quarter Dividend

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Employers Holdings, Inc. Reports First Quarter Earnings and Announces Second Quarter Dividend

Key Highlights
(Q 1, 2011 compared to Q 1, 2010 except where noted)
 
● Increased net written premiums 26.8%; increased net premiums earned 4.0%
● Decreased underwriting and other operating expense $6.6 million or 20.4%
● No favorable prior accident year development compared with $11.1 million in
2010; unfavorable prior period reserve development of $0.8 million in 2011
was related to assigned risk (involuntary) business
● Current year loss provision rate of 76.6%, an increase of approximately 6
percentage points primarily as a result of increasing claim costs in California
● Accident year combined ratio before impact of LPT improved nearly 4
percentage points
● $2.4 million tax benefit due to higher percentage of tax-exempt pre-tax income
● Overall net rate flattening; continued positive net rate in California
● Additional pure premium rate filing planned in California
● Expanded rapid quote technology to all 30 states
● Generated book value per share growth from $22.08 at December 31, 2010 to
$22.11 at March 31, 2011

Reno, NV- May 4, 2011—Employers Holdings, Inc. (“EHI” or the “Company”)
(NYSE:EIG) today reported first quarter 2011 net income of $8.3 million or $0.21 per
diluted share compared with $16.1 million or $0.38 per diluted share in the first quarter of
2010, a decrease of $7.8 million or $0.17 per share.
 
Net income includes amortization of the deferred reinsurance gain related to the Loss
Portfolio Transfer (“LPT”) Agreement. Consolidated net income before the impact of the
LPT (the Company’s non-GAAP measure described below) was $3.8 million or $0.10 per
diluted share in the first quarter of 2011 compared with $11.7 million or $0.27 per diluted
share in the first quarter of 2010.
 
As of March 31, 2011, the Company had a calendar year combined ratio of 116.9%
(122.4% before the LPT), an increase of 11 percentage points from the first quarter of
2010 combined ratio of 105.9% (111.3% before the LPT). On an accident quarter basis,
the Company had a combined ratio before the LPT of 121.4% in the first quarter of 2011
compared to 125.3% in the first quarter of 2010, an improvement of 3.9 percentage
points (see Page 12 for the accident year reconciliations).

Douglas D. Dirks, President and Chief Executive Officer of EHI, commented: “Lower
earnings and the higher calendar year combined ratio in the quarter are the direct result
of a 47% increase in losses and loss adjustment expense (LAE). In the current quarter,
we reported no prior period favorable reserve development compared to $11.1 million of
favorable development in the first quarter of 2010. Additionally, we increased our
current period loss provision rate by 6.3 points relative to last year’s first quarter. The
rise in our current year loss provision rate largely reflects increasing medical and
indemnity costs in our largest state, California, which represented over half of our book
of business at the end of the first quarter. We believe rising claims costs are related to
increased litigation, increased medical utilization and higher disability awards, especially
in Southern California. Our increased provision rate reflects both the claims cost trends
reported by the California Workers’ Compensation Insurance Rating Bureau (WCIRB) as
well as our own views on increased frequency and severity. Nationally, continuing high
levels of unemployment have impacted our ability to return injured employees to work,
thereby lengthening duration and increasing total claim costs. Despite these trends, on
an accident year basis, our combined ratio before impact of the LPT improved nearly
four points year over year, as underwriting expense savings offset deteriorating loss
experience.”
 
Dirks continued: “Positives in the quarter include a year over year increase of 26.8% in
written premium and a 4.0% increase in earned premium, both resulting from the
implementation of our growth strategies. We added 5,027 policies since March 31, 2010
for a twelve-month policy count increase of 11.7%. We expanded our rapid quote
technology to all thirty states in our geographic footprint. In addition to expanding
premium and policies, our underwriting and other operating expenses decreased 20.4%,
to $25.7 million in the first quarter of 2011 from $32.3 million in the first quarter of 2010,
as headcount declined by approximately 225 positions since March 31, 2010. We grew
adjusted book value three cents per share since year-end 2010 due to accretive share
repurchases of $8.6 million in the first quarter of 2011.”
 
“Our total payroll exposure declined 2.8% since March 31, 2010, but increased 2.6% in
the first quarter of 2011. Our net rate, which is defined as total premium in-force divided
by total insured payroll, declined 5.3% since March 31, 2010. However, net rate
decreased less than one percent in the first quarter of 2011, largely as a result of
positive net rate in California.”
 
Dirks concluded: “We are pleased with the progress we have made in reducing
expenses while growing policies and premium. In terms of losses, we believe we are
appropriately providing for expected current accident year losses based on our own
data, and the data provided by the rating bureau in California. We will continue to closely
monitor these trends and will adjust our provision rates and loss reserves in future
periods, if warranted. We have increased our filed premium rates in California over 28%
since early 2009 with the most recent increase of 2.5% effective March 15th
 of this year.
Even so, the current claims environment indicates that further increases in rates will be
required. We continue to believe that our underwriting strategy produces fewer claims
and better claims experience than the industry in general. However, even in our lower
hazard business, we are observing increasing indemnity claims frequency and severity
in California. In response to these trends, we expect to file for an additional pure
premium rate increase in California.”

First quarter net premiums written increased $21.4 million or 26.8% to $101.1 million in
2011 from $79.8 million in 2010. First quarter net premiums earned increased $3.1
million or 4.0% to $82.4 million in 2011 from $79.3 million in 2010.
First quarter net investment income of $20.5 million decreased $0.8 million or 3.6% due
to a 0.2 percentage point decrease in the average pre-tax book yield on invested assets
in the first quarter of 2011. The average pre-tax book yield was 4.1% at the end of the
first quarter. The first quarter tax-equivalent yield on invested assets was 5.3% in 2011
compared with 5.5% for the same period in 2010.
 
Realized gains on investments in the first quarter were $0.2 million compared with $0.5
million in the first quarter of 2010.
 
First quarter losses and LAE increased 47.5% to $59.4 million in 2011 from $40.3 million
in 2010. First quarter losses and LAE before the LPT increased 43.2% to $63.9 million
from $44.6 million in the first quarter of 2010. These increases were largely the result of
no favorable prior accident year development in the first quarter of 2011 compared with
$11.1 million in the first quarter of 2010. Unfavorable development of $0.8 million in the
current quarter was related to assigned risk (involuntary) business. Current accident
year loss estimates were 76.6% and 70.3% in the first quarters of 2011 and 2010,
respectively. The increase in the current accident year loss estimate is primarily due to
continued increasing claims costs in California. In April 2011, the WCIRB stated it would
make an informational filing highlighting the cost drivers that indicate a 39.8% increase
in the claims cost benchmark since January 1, 2009, based on an analysis of December
31, 2010 loss experience. This represents a deterioration of more than ten percentage
points in the claims cost benchmark since the WCIRB analysis as of June 30, 2010. The
WCIRB indicated that this further deterioration was due to: (a) continued adverse loss
development on the 2009 accident year; (b) high emerging costs on the 2010 accident
year, primarily due to increased claims frequency; (c) less optimistic forecasts for
statewide wage growth in California; and (d) increased LAE that are likely a result of
certain Workers Compensation Appeals Board decisions.
 
In the first quarter of 2011, commission expense of $10.3 million increased from $9.9
million in the first quarter of 2010 primarily due to higher net premiums earned.
 
First quarter underwriting and other operating expenses decreased 20.4% to $25.7
million from $32.3 million in the first quarter of 2010. These substantial expense savings
were largely the result of cost control efforts and total staff reductions of approximately
225 positions since March 31, 2010. Non-recurring costs associated with restructuring
and integration were $0.9 million in the first quarter of 2010.
 
Dividends to policyholders were $1.0 million and $1.5 million for the first quarters of 2011
and 2010, respectively. This decrease was primarily due to lower premium levels on
dividend policies in Florida and Wisconsin and fewer policies eligible for dividend
payments in 2011.
 
First quarter interest expense decreased to $0.9 million in 2011 from $1.6 million in 2010
primarily due to the expiration of an interest rate swap on the Company’s credit facility in
the third quarter of 2010.
 
The first quarter 2011 income tax benefit was $2.4 million compared with $0.5 million in
the first quarter of 2010. The increased tax benefit was primarily due to higher tax
exempt income as a percentage of pre-tax income relative to the same period last year

In the first quarter of 2011, the Company repurchased 497,536 shares of common stock
at an average price of $17.27 per share for a total of $8.6 million. This week, the Board
of Directors declared a second quarter cash dividend of six cents per share. The
dividend is payable on June 1, 2011, to stockholders of record as of May 18, 2011.
 
The fair market value of invested assets was $2.0 billion at March 31, 2011 with an
average pre-tax book yield of 4.1%, a tax equivalent yield of 5.3% and a duration of 4.9.
A list of portfolio securities by CUSIP as of March 31, 2011, will be included in the
“Investors” section of our web site at www.employers.com.
 
Conference Call and Web Cast, Form 10-Q
 
The Company will host a conference call on Thursday, May 5, 2011 at 10:30 a.m. Pacific
Daylight Time. The conference call will be available via a live web cast on the
Company’s web site at www.employers.com. An archived version will be available
following the call. The conference call replay number is (888) 286-8010 with a passcode
of 90483849. International callers may dial (617) 801-6888.
 
EHI will file its Form 10-Q for the quarterly period ended March 31, 2011, with the
Securities and Exchange Commission (“SEC”) following the call. The Form 10-Q will be
available without charge through the EDGAR system at the SEC's web site and will also
be posted on the Company's web site, www.employers.com, and is accessible through
the “Investors” link.
 
Discussion of Non-GAAP Financial Measures
 
This earnings release includes non-GAAP financial measures used to analyze the
Company’s operating performance for the periods presented.
 
These non-GAAP financial measures exclude impacts related to the LPT Agreement
deferred reinsurance gain. The 1999 LPT Agreement was a non-recurring transaction
that does not result in ongoing cash benefits and, consequently, the Company believes
these non-GAAP measures are useful in providing stockholders and management a
meaningful understanding of the Company’s operating performance. In addition, these
measures, as defined, are helpful to management in identifying trends in the Company’s
performance because the items excluded have limited significance in current and
ongoing operations.
 
The Company strongly urges stockholders and other interested persons not to rely on
any single financial measure to evaluate its business. The non-GAAP measures are not
a substitute for GAAP measures and investors should be careful when comparing the
Company’s non-GAAP financial measures to similarly titled measures used by other
companies.
 
Net Income before impact of the deferred reinsurance gain – LPT Agreement. Net
income less (i) amortization of deferred reinsurance gain—LPT Agreement and (ii)
adjustments to LPT Agreement ceded reserves.
 
Deferred reinsurance gain—LPT Agreement. This reflects the unamortized gain from
the LPT Agreement. Under GAAP, this gain is deferred and amortized using the
recovery method, whereby the amortization is determined by the proportion of actual

In the first quarter of 2011, the Company repurchased 497,536 shares of common stock
at an average price of $17.27 per share for a total of $8.6 million. This week, the Board
of Directors declared a second quarter cash dividend of six cents per share. The
dividend is payable on June 1, 2011, to stockholders of record as of May 18, 2011.
 
The fair market value of invested assets was $2.0 billion at March 31, 2011 with an
average pre-tax book yield of 4.1%, a tax equivalent yield of 5.3% and a duration of 4.9.
A list of portfolio securities by CUSIP as of March 31, 2011, will be included in the
“Investors” section of our web site at www.employers.com.
 
Conference Call and Web Cast, Form 10-Q
 
The Company will host a conference call on Thursday, May 5, 2011 at 10:30 a.m. Pacific
Daylight Time. The conference call will be available via a live web cast on the
Company’s web site at www.employers.com. An archived version will be available
following the call. The conference call replay number is (888) 286-8010 with a passcode
of 90483849. International callers may dial (617) 801-6888.
 
EHI will file its Form 10-Q for the quarterly period ended March 31, 2011, with the
Securities and Exchange Commission (“SEC”) following the call. The Form 10-Q will be
available without charge through the EDGAR system at the SEC's web site and will also
be posted on the Company's web site, www.employers.com, and is accessible through
the “Investors” link.
 
Discussion of Non-GAAP Financial Measures
 
This earnings release includes non-GAAP financial measures used to analyze the
Company’s operating performance for the periods presented.
 
These non-GAAP financial measures exclude impacts related to the LPT Agreement
deferred reinsurance gain. The 1999 LPT Agreement was a non-recurring transaction
that does not result in ongoing cash benefits and, consequently, the Company believes
these non-GAAP measures are useful in providing stockholders and management a
meaningful understanding of the Company’s operating performance. In addition, these
measures, as defined, are helpful to management in identifying trends in the Company’s
performance because the items excluded have limited significance in current and
ongoing operations.
 
The Company strongly urges stockholders and other interested persons not to rely on
any single financial measure to evaluate its business. The non-GAAP measures are not
a substitute for GAAP measures and investors should be careful when comparing the
Company’s non-GAAP financial measures to similarly titled measures used by other
companies.
 
Net Income before impact of the deferred reinsurance gain – LPT Agreement. Net
income less (i) amortization of deferred reinsurance gain—LPT Agreement and (ii)
adjustments to LPT Agreement ceded reserves.
 
Deferred reinsurance gain—LPT Agreement. This reflects the unamortized gain from
the LPT Agreement. Under GAAP, this gain is deferred and amortized using the
recovery method, whereby the amortization is determined by the proportion of actual
In the first quarter of 2011, the Company repurchased 497,536 shares of common stock
at an average price of $17.27 per share for a total of $8.6 million. This week, the Board
of Directors declared a second quarter cash dividend of six cents per share. The
dividend is payable on June 1, 2011, to stockholders of record as of May 18, 2011.
 
The fair market value of invested assets was $2.0 billion at March 31, 2011 with an
average pre-tax book yield of 4.1%, a tax equivalent yield of 5.3% and a duration of 4.9.
A list of portfolio securities by CUSIP as of March 31, 2011, will be included in the
“Investors” section of our web site at www.employers.com.
 
Conference Call and Web Cast, Form 10-Q
 
The Company will host a conference call on Thursday, May 5, 2011 at 10:30 a.m. Pacific
Daylight Time. The conference call will be available via a live web cast on the
Company’s web site at www.employers.com. An archived version will be available
following the call. The conference call replay number is (888) 286-8010 with a passcode
of 90483849. International callers may dial (617) 801-6888.
 
EHI will file its Form 10-Q for the quarterly period ended March 31, 2011, with the
Securities and Exchange Commission (“SEC”) following the call. The Form 10-Q will be
available without charge through the EDGAR system at the SEC's web site and will also
be posted on the Company's web site, www.employers.com, and is accessible through
the “Investors” link.
 
Discussion of Non-GAAP Financial Measures
 
This earnings release includes non-GAAP financial measures used to analyze the
Company’s operating performance for the periods presented.
 
These non-GAAP financial measures exclude impacts related to the LPT Agreement
deferred reinsurance gain. The 1999 LPT Agreement was a non-recurring transaction
that does not result in ongoing cash benefits and, consequently, the Company believes
these non-GAAP measures are useful in providing stockholders and management a
meaningful understanding of the Company’s operating performance. In addition, these
measures, as defined, are helpful to management in identifying trends in the Company’s
performance because the items excluded have limited significance in current and
ongoing operations.
 
The Company strongly urges stockholders and other interested persons not to rely on
any single financial measure to evaluate its business. The non-GAAP measures are not
a substitute for GAAP measures and investors should be careful when comparing the
Company’s non-GAAP financial measures to similarly titled measures used by other
companies.
 
Net Income before impact of the deferred reinsurance gain – LPT Agreement. Net
income less (i) amortization of deferred reinsurance gain—LPT Agreement and (ii)
adjustments to LPT Agreement ceded reserves.
 
Deferred reinsurance gain—LPT Agreement. This reflects the unamortized gain from
the LPT Agreement. Under GAAP, this gain is deferred and amortized using the
recovery method, whereby the amortization is determined by the proportion of actual

Copyright © 2011 EMPLOYERS. All rights reserved. EMPLOYERS® and America’s small business
insurance specialist. ® are registered trademarks of Employers Insurance Company of Nevada. Employers
Holdings, Inc. is a holding company with subsidiaries that are specialty providers of workers’ compensation
insurance and services focused on select, small businesses engaged in low to medium hazard industries.
Insurance subsidiaries include Employers Insurance Company of Nevada, Employers Compensation
Insurance Company, Employers Preferred Insurance Company, and Employers Assurance Company, all
rated A- (Excellent) by A.M. Best Company. Additional information can be found at:
http://www.employers.com.

 

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