SEC Filing | Employers Holdings, Inc.

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q


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

For the quarterly period ended September 30, 2009

OR

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

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

(888) 682-6671
(Registrant’s telephone number, including area code)

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

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

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


Large accelerated filer þ	Accelerated filer o	Non-accelerated filer o	Smaller reporting company o

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


Class		October 30, 2009

Common Stock, $0.01 par value per share		44,004,442 shares outstanding

TABLE OF CONTENTS


		Page No.


PART I – FINANCIAL INFORMATION

Item 1	Consolidated Financial Statements
	Consolidated Balance Sheets as of September 30, 2009 (Unaudited) and December 31, 2008	3
	Unaudited Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2009 and 2008	5
	Unaudited Consolidated Statements of Stockholders’ Equity for the Nine Months Ended September 30, 2009 and 2008	6
	Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2009 and 2008	7
	Unaudited Notes to Consolidated Financial Statements	8
Item 2	Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations	25
Item 3	Quantitative and Qualitative Disclosures About Market Risk	50
Item 4	Controls and Procedures	50

PART II – OTHER INFORMATION

Item 1	Legal Proceedings	51
Item 1A	Risk Factors	51
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	51
Item 3	Defaults Upon Senior Securities	51
Item 4	Submission of Matters to a Vote of Security Holders	51
Item 5	Other Information	52
Item 6	Exhibits	52

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

Employers Holdings, Inc. and Subsidiaries

Consolidated Balance Sheets
(in thousands, except share data)


	As of September 30, 2009		As of December 31, 2008

	(unaudited)
Assets
Available for sale:
Fixed maturity securities at fair value (amortized cost $1,915,852 at September 30, 2009 and $1,870,227 at December 31, 2008)	$	2,046,116	$	1,909,391
Equity securities at fair value (cost $40,252 at September 30, 2009 and $43,014 at December 31, 2008)		65,746		58,526
Short-term investments at fair value (amortized cost $2,998 at September 30, 2009 and $74,952 at December 31, 2008)		3,000		75,024

Total investments		2,114,862		2,042,941

Cash and cash equivalents		212,621		202,893
Accrued investment income		22,874		24,201
Premiums receivable, less bad debt allowance of $9,812 at September 30, 2009 and $7,911 at December 31, 2008		129,842		150,502
Reinsurance recoverable for:
Paid losses		12,841		12,723
Unpaid losses, less allowance of $1,335 at each period		1,045,804		1,075,015
Funds held by or deposited with reinsureds		84,064		88,163
Deferred policy acquisition costs		36,764		41,521
Federal income taxes recoverable		6,312		11,042
Deferred income taxes, net		36,366		80,968
Property and equipment, net		12,509		14,098
Intangible assets, net		16,093		18,218
Goodwill		36,192		36,192
Other assets		22,369		26,621

Total assets	$	3,789,513	$	3,825,098


Liabilities and stockholders’ equity
Claims and policy liabilities:
Unpaid losses and loss adjustment expenses	$	2,443,644	$	2,506,478
Unearned premiums		174,471		196,695
Policyholders’ dividends accrued		8,428		8,737

Total claims and policy liabilities		2,626,543		2,711,910

Commissions and premium taxes payable		20,377		21,847
Accounts payable and accrued expenses		17,919		24,192
Deferred reinsurance gain - LPT Agreement		393,204		406,581
Notes payable		182,000		182,000
Other liabilities		24,864		33,840

Total liabilities	$	3,264,907	$	3,380,370

See accompanying unaudited notes to consolidated financial statements.

Employers Holdings, Inc. and Subsidiaries

Consolidated Balance Sheets
(in thousands, except share data)


	As of September 30, 2009			As of December 31, 2008

	(unaudited)
Commitments and contingencies

Stockholders’ equity:
Common stock, $0.01 par value; 150,000,000 shares authorized; 53,563,299 and 53,528,207 shares issued and 44,248,831 and 48,830,140 shares outstanding at September 30, 2009, and December 31, 2008, respectively		536			535
Preferred stock, $0.01 par value; 25,000,000 shares authorized; none issued		—			—
Additional paid-in capital		310,011			306,032
Retained earnings		257,852			194,509
Accumulated other comprehensive income, net		99,774			32,804
Treasury stock, at cost (9,314,468 shares at September 30, 2009 and 4,698,067 shares at December 31, 2008)		(143,567	)		(89,152	)

Total stockholders’ equity		524,606			444,728

Total liabilities and stockholders’ equity	$	3,789,513		$	3,825,098

See accompanying unaudited notes to consolidated financial statements.

Employers Holdings, Inc. and Subsidiaries

Consolidated Statements of Income
(in thousands, except per share data)


	Three Months Ended September 30,						Nine Months Ended September 30,

	2009			2008			2009			2008

	(unaudited)
Revenues
Net premiums earned	$	98,240		$	73,131		$	314,221		$	222,842
Net investment income		22,334			18,474			68,704			55,915
Realized gains (losses) on investments, net		3,564			(1,504	)		1,060			(3,211	)
Other income		183			295			388			1,155

Total revenues		124,321			90,396			384,373			276,701

Expenses
Losses and loss adjustment expenses		53,395			25,588			166,657			80,344
Commission (benefit) expense		(1,276	)		10,121			25,611			30,465
Dividends to policyholders		1,539			(8	)		5,418			78
Underwriting and other operating expenses		33,688			21,915			102,624			66,536
Interest expense		1,824			—			5,608			—

Total expenses		89,170			57,616			305,918			177,423

Net income before income taxes		35,151			32,780			78,455			99,278
Income tax expense (benefit)		4,594			(289	)		6,698			13,349

Net income	$	30,557		$	33,069		$	71,757		$	85,929


Earnings per common share (Note 15):

Basic	$	0.68		$	0.67		$	1.54		$	1.74

Diluted	$	0.67		$	0.67		$	1.53		$	1.74


Cash dividends declared per common share	$	0.06		$	0.06		$	0.18		$	0.18

Net realized gains on investments
Net realized gains on investments before credit related impairments on fixed maturity securities	$	3,564					$	2,981


Total other-than-temporary impairments on securities		—						(1,921	)
Portion of impairment recognized in other comprehensive income		—						—

Credit related impairments included in net realized losses on investments		—						(1,921	)

Net realized gains on investments, net	$	3,564					$	1,060

See accompanying unaudited notes to the consolidated financial statements.

Employers Holdings, Inc. and Subsidiaries

Consolidated Statements of Stockholders’ Equity
(in thousands, except share data)


											Accumulated Other Comprehensive Income, Net
	Common Stock				Additional Paid-In Capital			Retained Earnings						Treasury Stock, at Cost			Total Stockholders’ Equity

	Shares		Amount

	(unaudited)

Balance, January 1, 2008		53,527,907	$	535	$	302,862		$	104,536		$	46,520		$	(75,000	)	$	379,453
Stock-based compensation (Note 14)		—		—		2,459			—			—			—			2,459
Stock options exercised		300		—		5			—			—			—			5
Acquisition of treasury stock (Note 13)		—		—		—			—			—			(14,152	)		(14,152	)
Dividends to common stockholders		—		—		3			(8,881	)		—			—			(8,878	)
Comprehensive income:
Net income for the period		—		—		—			85,929			—			—			85,929
Change in net unrealized gains on investments, net of taxes		—		—		—			—			(50,208	)		—			(50,208	)

Total comprehensive income																		35,721

Balance, September 30, 2008		53,528,207	$	535	$	305,329		$	181,584		$	(3,688	)	$	(89,152	)	$	394,608


Balance, January 1, 2009		53,528,207	$	535	$	306,032		$	194,509		$	32,804		$	(89,152	)	$	444,728
Stock-based compensation (Note 14)		—		—		4,097			—			—			—			4,097
Vesting of restricted stock units, net of shares withheld to satisfy minimum tax withholding (Note 14)		35,092		1		(124	)		—			—			—			(123	)
Acquisition of treasury stock (Note 13)		—		—		—			—			—			(54,415	)		(54,415	)
Dividends to common stockholders		—		—		6			(8,414	)		—			—			(8,408	)
Comprehensive income:
Net income for the period		—		—		—			71,757			—			—			71,757
Change in net unrealized gains on investments, net of taxes		—		—		—			—			66,970			—			66,970

Total comprehensive income																		138,727

Balance, September 30, 2009		53,563,299	$	536	$	310,011		$	257,852		$	99,774		$	(143,567	)	$	524,606

See accompanying unaudited notes to the consolidated financial statements.

Employers Holdings, Inc. and Subsidiaries

Consolidated Statements of Cash Flows
(in thousands)


	Nine Months Ended September 30,

	2009			2008

	(unaudited)
Operating activities
Net income	$	71,757		$	85,929
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		7,834			5,334
Stock-based compensation		4,097			2,459
Amortization of premium on investments, net		3,668			4,814
Allowance for doubtful accounts – premiums receivable		1,901			(717	)
Deferred income tax expense		9,092			6,284
Realized (gains) losses on investments, net		(1,060	)		3,211
Realized losses on retirement of assets		64			16
Change in operating assets and liabilities:
Accrued investment income		1,327			492
Premiums receivable		18,759			14,894
Reinsurance recoverable on paid and unpaid losses		29,093			25,914
Funds held by or deposited with reinsureds		4,099			5,817
Federal income taxes		4,730			(11,744	)
Unpaid losses and loss adjustment expenses		(62,834	)		(57,310	)
Unearned premiums		(22,224	)		(7,177	)
Accounts payable, accrued expenses and other liabilities		(14,503	)		(2,040	)
Deferred reinsurance gain – LPT Agreement		(13,377	)		(13,908	)
Other		3,944			(7,073	)

Net cash provided by operating activities		46,367			55,195

Investing activities
Purchase of fixed maturities		(165,906	)		(208,730	)
Purchase of equity securities		(11,934	)		(558	)
Proceeds from sale of fixed maturities		56,557			149,487
Proceeds from sale of equity securities		19,475			4,010
Proceeds from maturities and redemptions of investments		131,413			41,462
Cash paid for acquisition, net of cash and cash equivalents acquired		(100	)		(1,260	)
Capital expenditures and other, net		(4,020	)		(4,116	)

Net cash provided by (used in) investing activities		25,485			(19,705	)

Financing activities
Acquisition of treasury stock		(53,593	)		(14,152	)
Cash transactions related to stock compensation		(123	)		5
Dividends paid to stockholders		(8,408	)		(8,878	)
Debt issuance costs		—			(375	)
Proceeds from notes payable		—			150,000

Net cash (used in) provided by financing activities		(62,124	)		126,600


Net increase in cash and cash equivalents		9,728			162,090
Cash and cash equivalents at the beginning of the period		202,893			149,703

Cash and cash equivalents at the end of the period	$	212,621		$	311,793

See accompanying unaudited notes to the consolidated financial statements.

Employers Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements
(Unaudited)

1. Basis of Presentation and Summary of Significant Accounting Policies

Basis of Presentation

Employers Holdings, Inc. (EHI) is a holding company and successor to EIG Mutual Holding Company (EIG), which was incorporated in Nevada in 2005. Unless otherwise indicated, all references to the “Company” refer to EHI, together with its subsidiaries. On October 31, 2008 (Acquisition Date), the Company acquired 100% of the outstanding common stock of AmCOMP Incorporated (AmCOMP), including two insurance subsidiaries, AmCOMP Preferred Insurance Company and AmCOMP Assurance Corporation (the Acquisition) (Note 3). On December 16, 2008, the Florida Commissioner approved the name changes of AmCOMP Preferred Insurance Company and AmCOMP Assurance Corporation to Employers Preferred Insurance Company (EPIC) and Employers Assurance Company (EAC), respectively.

Through its four wholly-owned insurance subsidiaries, Employers Insurance Company of Nevada (EICN), Employers Compensation Insurance Company (ECIC), EPIC and EAC, EHI is engaged in the commercial property and casualty insurance industry, specializing in workers’ compensation products and services. EICN, domiciled in Nevada, ECIC, domiciled in California, and EPIC and EAC, both domiciled in Florida, provide insurance to employers against liability for workers’ compensation claims in 30 states.

The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities Exchange Act of 1934, as amended. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal, recurring adjustments) necessary for a fair presentation of the Company’s consolidated financial position and results of operations for the periods presented have been included. The results of operations for an interim period are not necessarily indicative of the results for an entire year. These financial statements have been prepared consistent with the accounting policies described in the Company’s 2008 Annual Report on Form 10-K for the year ended December 31, 2008 (Annual Report), and should be read together with the Annual Report, except for the change in financial presentation described in Note 2.

In accordance with the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 208, Segment Reporting, the Company considers an operating segment to be any component of its business whose operating results are regularly reviewed by the Company’s chief operating decision makers to make decisions about resources to be allocated to the segment and assess its performance based on discrete financial information. Currently, the Company has one operating segment: workers’ compensation insurance and related services.

Estimates and Assumptions

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

New Accounting Standards

In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles a replacement of FASB Statement No. 162 (SFAS No. 168). SFAS No. 168 establishes the FASB Accounting Standards Codification as the single source of authoritative accounting principles in the preparation of financial statements in conformity with GAAP. SFAS No. 168 explicitly recognizes rules and interpretive releases of the Securities and Exchange Commission (SEC) under federal securities laws as authoritative GAAP for SEC registrants. SFAS No. 168 was effective for financial statements issued for periods ending after September 15, 2009. The Company adopted SFAS No. 168 on July 1, 2009 and it had no material impact on the Company’s consolidated financial condition and results of operations.

In April 2009, the FASB issued FSP FAS 115-2, Recognition and Presentation of Other-Than-Temporary Impairments (FSP FAS 115-2). FSP FAS 115-2 changes the accounting for other-than-temporary impairments (OTTI) on debt securities by: (a) replacing the current requirement that a holder has the positive intent to hold an impaired debt security to recovery with a requirement that a holder does not have the intent to sell an impaired debt security and it is not more likely than not that it will be required to sell the debt security before recovery; (b) requiring the OTTI to be separated into: (i) the amount representing the decrease in cash flows expected to be collected (credit loss), which is recognized in earnings and (ii) the amount representing all other factors, which is recognized in other comprehensive income; and (c) amending existing disclosure requirements, extending those requirements to interim periods and requiring new disclosures intended to provide further disaggregated information as well as information about how the amount of OTTI that was recognized in earnings was determined. Upon adoption, FSP FAS 115-2 requires entities to report a cumulative effect adjustment as of the beginning of the period of adoption to reclassify the non-credit loss component, previously recognized in earnings, from retained earnings to other comprehensive income. FSP FAS 115-2 was effective for interim and annual periods ending after June 15, 2009 and had no impact on the consolidated financial position or results of operations. The Company has included the required disclosures in Note 5. The guidance for FSP FAS 115-2 may now be found in the new codification as a component of ASC 320-10-35, Investments–Debt and Equity Securities.

In April 2009, the FASB issued FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Indentifying Transactions That Are Not Orderly (FSP FAS 157-4). FSP FAS 157-4 provides additional guidance on: (a) estimating fair value when the volume of activity for an asset or liability has significantly decreased in relation to normal market activity for the asset or liability; and (b) identifying circumstances that may indicate that a transaction is not orderly. FSP FAS 157-4 requires additional interim disclosures of the inputs and valuation techniques used to measure fair value. Additionally FSP FAS 157-4 modifies the current fair value disclosure categories for debt and equity securities. FSP FAS 157-4 was effective for interim and annual periods ending after June 15, 2009 and did not have a material impact on the consolidated financial statements. The guidance for FSP FAS 157-4 may now be found in the new codification as a component of ASC 820-10-65-4, Fair Value Measurements and Disclosures.

In April 2009, the FASB issued FSP FAS 107-1, Interim Disclosures About Fair Value of Financial Instruments (FSP FAS 107-1). FSP FAS 107-1 extends the annual disclosure requirements of SFAS 107, Fair Value of Financial Instruments, to interim financial statements of publicly traded companies. FSP FAS 107-1 is effective for interim and annual periods ending after June 15, 2009. The Company has included required disclosures in these Notes to Consolidated Financial Statements. The guidance for FSP FAS 107-1 may now be found in the new codification as a component of ASC 825-10-65-1, Financial Instruments.

In May 2009, the FASB issued SFAS No. 165, Subsequent Events, which sets forth general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. SFAS No. 165 is effective for periods ending after June 15, 2009. SFAS No. 165 had no impact on our consolidated financial condition or results of operations. The guidance for SFAS No. 165 may now be found in the new codification as a component of ASC 855, Subsequent Events.

Reclassifications

Certain prior year information has been reclassified to conform to the current period presentation.

2. Change in Financial Presentation

Insurance companies that write workers’ compensation policies may recognize written premiums using different methodologies. Premiums can be recorded as written at the time the policy installments are billed (Billed Method) or at the inception of the policy recognizing 100% of the annual premium (Annual Method). EPIC, EAC and EICN record premiums using the Annual Method and ECIC has historically recorded premiums using the Billed Method. During the three months ended September 30, 2009, the Company elected to conform its method of recording written premiums for ECIC to the Annual Method in order to be consistent in methodologies across the Company. Prior period amounts have been reclassified for comparative purposes in these consolidated financial statements.

Conforming the method of recording ECIC’s written premiums from the Billed Method to Annual Method has no impact on the accompanying Consolidated Income Statements or Statements of Stockholders’ Equity. The result of conforming the method impacts only premiums receivable and related unearned premium assets and liabilities, which are recorded as of the date the policy becomes effective. The following items in the Consolidated Balance Sheets were affected by the change:


September 30, 2009	As Computed under Annual Method		As Computed under Billed Method		Effect


Premiums receivable	$	129,842	$	75,095	$	54,747
Deferred policy acquisition costs		36,764		28,145		8,619
Total assets		3,789,513		3,726,147		63,366

Unearned premiums		174,471		121,460		53,011
Total claims and policy liabilities		2,626,543		2,573,532		53,011
Commissions and premium taxes payable		20,377		11,758		8,619
Other liabilities		24,864		23,128		1,736
Total liabilities		3,264,907		3,201,541		63,366
Total liabilities and stockholders’ equity		3,789,513		3,726,147		63,366

December 31, 2008


Premiums receivable	$	150,502	$	91,273	$	59,229
Deferred policy acquisition costs		41,521		32,365		9,156
Total assets		3,825,098		3,756,713		68,385

Unearned premiums		196,695		139,310		57,385
Total claims and policy liabilities		2,711,910		2,654,525		57,385
Commissions and premium taxes payable		21,847		12,691		9,156
Other liabilities		33,840		31,996		1,844
Total liabilities		3,380,370		3,311,985		68,385
Total liabilities and stockholders’ equity		3,825,098		3,756,713		68,385

Conforming the method of recording written premiums had no effect on the retained earnings as of September 30, 2009 or December 31, 2008.

The change had no impact on the net change in cash provided by operating activities, but did impact the following items in the Consolidated Statements of Cash Flows.


September 30, 2009	As Computed under Annual Method			As Computed under Billed Method			Effect


Change in operating assets and liabilities:
Premiums receivable	$	18,759		$	14,277		$	4,482
Unearned premiums		(22,224	)		(17,850	)		(4,374	)
Accounts payable, accrued expense and other liabilities		(14,503	)		(14,395	)		(108	)


September 30, 2008


Change in operating assets and liabilities:
Premiums receivable	$	14,894		$	12,507		$	2,387
Unearned premiums		(7,177	)		(4,863	)		(2,314	)
Accounts payable, accrued expense and other liabilities		(2,040	)		(1,967	)		(73	)

3. Acquisition of AmCOMP

On October 31, 2008, EHI acquired 100% of the outstanding common stock of AmCOMP for $188.4 million. The Company believes the Acquisition significantly advances its strategic goals and vision of being the leader in the property and casualty insurance industry specializing in workers’ compensation.

Pro forma financial information

Net income for the three and nine months ended September 30, 2009, presented in the accompanying consolidated statements of income, includes the results of AmCOMP. The financial information in the table below summarizes the combined historical results of operations of EHI and AmCOMP, on a pro forma basis, as though the companies had been combined as of January 1, 2008. The pro forma financial information is presented for information purposes only and is not indicative of the results that would have been achieved if the Acquisition had taken place at the beginning of the period presented, nor is the pro forma information intended to be indicative of the Company’s future results of operations.

The historical financial information has been adjusted to give effect to pro forma items that are directly attributable to the Acquisition and are expected to have a continuing impact on the consolidated results. These items include adjustments for amortization of intangible assets acquired, increases in interest expense and decreases in underwriting and other expenses for integration and restructuring savings. The following table summarizes the pro forma financial information for the stated periods:


	Three Months Ended September 30, 2008		Nine Months Ended September 30, 2008

	(in thousands, except per share data)
Net premiums earned	$	122,321	$	374,319
Net income		28,212		86,433
Earnings per common share—basic		0.58		1.75
Earnings per common share—diluted		0.57		1.75

4. Strategic Restructuring Plan

On January 23, 2009, the Company announced a strategic restructuring plan to achieve the corporate and operational objectives set forth as part of its acquisition and integration of AmCOMP, and in response to then current economic conditions.

The restructuring plan included a staff reduction of 14% of the Company’s total workforce, and consolidation of corporate activities into the Company’s Reno, Nevada headquarters. During the three months ended September 30, 2009, the Company incurred net integration, restructuring and severance charges of $0.6 million. During the nine months ended September 30, 2009, the Company incurred integration and restructuring charges of $4.9 million, including $2.5 million in personnel-related termination costs. These charges are included in underwriting and other operating expense in the consolidated statements of income. As of September 30, 2009, the Company had $0.6 million accrued for future restructuring costs that is included in accounts payable and accrued expenses on the accompanying consolidated balance sheet.

5. Investments

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


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value

	(in thousands)
At September 30, 2009
Fixed maturity securities
U.S. Treasuries	$	156,549	$	9,548	$	(72	)	$	166,025
U.S. Agencies		129,101		8,354		—			137,455
States and municipalities		983,993		69,731		(404	)		1,053,320
Corporate		318,774		26,129		(693	)		344,210
Residential mortgaged-backed securities		278,169		17,558		(769	)		294,958
Commercial mortgaged-backed securities		36,046		616		(296	)		36,366
Asset-backed securities		13,220		562		—			13,782

Total fixed maturity securities		1,915,852		132,498		(2,234	)		2,046,116
Short-term investments		2,998		2		—			3,000

Total fixed maturity and short-term investments		1,918,850		132,500		(2,234	)		2,049,116


Equity securities
Consumer goods		14,739		6,991		(10	)		21,720
Energy and utilities		4,715		4,708		—			9,423
Financial		6,611		2,914		(7	)		9,518
Technology and communications		7,930		6,159		(3	)		14,086
Industrial and other		6,257		4,743		(1	)		10,999

Total equity securities		40,252		25,515		(21	)		65,746

Total investments	$	1,959,102	$	158,015	$	(2,255	)	$	2,114,862


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value

	(in thousands)
At December 31, 2008
Fixed maturity securities
U.S. Treasuries	$	142,942	$	18,344	$	—		$	161,286
U.S. Agencies		125,302		10,566		—			135,868
States and municipalities		975,387		21,654		(18,828	)		978,213
Corporate		248,002		7,716		(5,570	)		250,148
Residential mortgage-backed securities		318,512		12,937		(2,002	)		329,447
Commercial mortgage-backed securities		42,384		2		(4,797	)		37,589
Asset-backed securities		17,698		—		(858	)		16,840

Total fixed maturity securities		1,870,227		71,219		(32,055	)		1,909,391
Short-term investments		74,952		306		(234	)		75,024

Total fixed maturity and short-term investments		1,945,179		71,525		(32,289	)		1,984,415


Equity securities
Consumer goods		12,620		4,642		(333	)		16,929
Energy and utilities		4,947		4,967		(12	)		9,902
Financial		7,082		993		(243	)		7,832
Technology and communications		10,268		2,765		(226	)		12,807
Industrial and other		8,097		3,165		(206	)		11,056

Total equity securities		43,014		16,532		(1,020	)		58,526

Total investments	$	1,988,193	$	88,057	$	(33,309	)	$	2,042,941

The amortized cost and estimated fair value of fixed maturity securities and short-term investments at September 30, 2009, by contractual maturity are shown below. Expected maturities differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.


	Amortized Cost		Estimated Fair Value

	(in thousands)
Due in one year or less	$	118,622	$	120,839
Due after one year through five years		483,065		514,728
Due after five years through ten years		566,097		613,040
Due after ten years		423,631		455,403
Mortgage and asset-backed securities		327,435		345,106

Total	$	1,918,850	$	2,049,116

The following is a summary of investments that have been in a continuous unrealized loss position for less than 12 months and those that have been in a continuous unrealized loss position for 12 months or greater, in each case as of September 30, 2009 and December 31, 2008:


	September 30, 2009

	Less Than 12 Months					12 Months or Greater					Total

	Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value		Estimated Unrealized Losses

	(in thousands)
Fixed maturity securities
U.S. Treasuries	$	5,697	$	(72	)	$	—	$	—		$	5,697	$	(72	)
States and municipalities		4,140		(27	)		16,124		(377	)		20,264		(404	)
Corporate		14,577		(33	)		12,028		(660	)		26,605		(693	)
Residential mortgaged-backed		32		—			4,470		(769	)		4,502		(769	)
Commercial mortgage-backed securities		—		—			7,834		(296	)		7,834		(296	)
Asset-backed securities		—		—			—		—			—		—

Total fixed maturity securities		24,446		(132	)		40,456		(2,102	)		64,902		(2,234	)
Short-term investments		—		—			—		—			—		—

Total fixed maturity and short-term investments		24,446		(132	)		40,456		(2,102	)		64,902		(2,234	)


Equity securities
Consumer goods		2,329		(10	)		—		—			2,329		(10	)
Energy and utilities		—		—			—		—			—		—
Financial		1,484		(7	)		—		—			1,484		(7	)
Technology and communications		360		(3	)		—		—			360		(3	)
Industrial and other		320		(1	)		—		—			320		(1	)

Total equity securities		4,493		(21	)		—		—			4,493		(21	)

Total investments	$	28,939		(153	)	$	40,456	$	(2,102	)	$	69,395	$	(2,255	)


	December 31, 2008

	Less Than 12 Months					12 Months or Greater					Total

	Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value		Estimated Unrealized Losses

	(in thousands)
Fixed maturity securities
U.S. Treasuries	$	—	$	—		$	—	$	—		$	—	$	—
States and municipalities		271,731		(11,206	)		78,811		(7,622	)		350,542		(18,828	)
Corporate		79,397		(4,215	)		6,835		(1,355	)		86,232		(5,570	)
Residential mortgaged-backed		3,790		(1,711	)		2,511		(291	)		6,301		(2,002	)
Commercial mortgage-backed securities		13,854		(1,875	)		23,588		(2,922	)		37,442		(4,797	)
Asset-backed securities		14,741		(456	)		2,098		(402	)		16,839		(858	)

Total fixed maturity securities		383,513		(19,463	)		113,843		(12,592	)		497,356		(32,055	)
Short-term investments		16,887		(234	)		—		—			16,887		(234	)

Total fixed maturity and short-term investments		400,400		(19,697	)		113,843		(12,592	)		514,243		(32,289	)


Equity securities
Consumer goods		2,647		(333	)		—		—			2,647		(333	)
Energy and utilities		46		(12	)		—		—			46		(12	)
Financial		1,970		(243	)		—		—			1,970		(243	)
Technology and communications		2,118		(226	)		—		—			2,118		(226	)
Industrial and other		975		(206	)		—		—			975		(206	)

Total equity securities		7,756		(1,020	)		—		—			7,756		(1,020	)

Total investments	$	408,156		(20,717	)	$	113,843	$	(12,592	)	$	521,999	$	(33,309	)

During the three and nine months ended September 30, 2009, based on reviews of the fixed maturity securities included in the tables above, the Company determined that the unrealized losses were primarily a result of the changes in the prevailing interest rates and not the credit quality of the issuers. The fixed maturity securities, for the three and nine months ended September 30, 2009, whose fair value was less than amortized cost were not determined to be other-than-temporarily impaired given the severity and duration of the impairment, the credit quality of the issuers, the Company’s intent on not selling the securities and that it is not more likely than not that the Company will be required to sell the securities until fair value recovers above cost, or to maturity. The Company recognized impairments of $1.9 million in the fair value of one fixed maturity security for both the three and nine months ended September 30, 2008. This impairment was primarily the result of the credit downgrade of the issuer.

During the nine months ended September 30, 2009, based on reviews of the equity securities included in the tables above, the Company recognized impairments of $1.9 million in the fair values of 26 securities as a result of the severity and duration of the change in fair value of those securities. The Company did not recognize any impairments during the three months ended September 30, 2009, because the Company determined that the unrealized losses were not considered to be other-than-temporary due to the financial condition and near term prospects of the issuers. During the three and nine months ended September 30, 2008, based on review of the equity securities, the Company recognized impairments of $1.9 million and $3.6 million in the fair values of 33 and 46 equity securities, respectively, as a result of the severity and duration of the change in fair value of those securities. For its other equity securities, the Company determined that the unrealized losses were not considered to be other-than-temporary due to the financial condition and near term prospects of the issuers.

Net realized gains (losses) and the change in fair value over cost or amortized cost on fixed maturity and equity securities are determined on a specific-identification basis and were as follows:


	Three Months Ended September 30,						Nine Months Ended September 30,

	2009			2008			2009			2008

	(in thousands)
Net realized gains (losses)
Fixed maturity securities	$	—		$	(649	)	$	(422	)	$	(664	)
Equity securities		3,564			(855	)		1,656			(2,547	)
Short-term investments		—			—			(174	)		—

Total		3,564			(1,504	)		1,060			(3,211	)


Change in fair value over (under) cost or amortized cost
Fixed maturity securities		64,184			(33,163	)		91,100			(54,820	)
Equity securities		5,796			(8,711	)		9,982			(21,926	)
Short-term investments		(111	)		(427	)		(70	)		(498	)

Total	$	69,869		$	(42,301	)	$	101,012		$	(77,244	)


Net investment income was as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,

	2009			2008			2009			2008

	(in thousands)

Fixed maturity securities	$	22,157		$	17,221		$	67,505		$	52,323
Equity securities		336			461			1,063			1,408
Short-term investments and cash equivalents		433			1,353			2,038			3,860

		22,926			19,035			70,606			57,591
Investment expenses		(592	)		(561	)		(1,902	)		(1,676	)

Net investment income	$	22,334		$	18,474		$	68,704		$	55,915

The Company is required by various state laws and regulations to keep securities or letters of credit on deposit with those states in a depository account. At September 30, 2009 and December 31, 2008, securities having a fair value of $564.2 million and $582.1 million, respectively, were on deposit. These laws and regulations govern not only the amount, but also the type of security that is eligible for deposit and in all cases are restricted or limited to fixed maturity securities. Additionally, certain reinsurance contracts require company funds to be held in trust for the benefit of the ceding reinsurer to secure the outstanding liabilities assumed by the Company. The fair value of securities held in trust for reinsurance at September 30, 2009 and December 31, 2008 were $6.1 million and $6.7 million, respectively.

6. Fair Value of Financial Instruments

Estimated fair value amounts, defined as the quoted market price of a financial instrument, have been determined using available market information and other appropriate valuation methodologies. However, judgment is required in developing each of the estimates of fair value where quoted market prices are not available. Accordingly, these estimates are not necessarily indicative of the amounts that could be realized in a current market exchange. The use of different market assumptions or estimating methodologies may have an effect on the estimated fair value amounts.

The estimated fair values of the Company’s financial instruments at September 30, 2009, are as follows:


	Carrying Value		Estimated Fair Value

	(in thousands)
Financial assets
Investments (Note 5)	$	2,114,862	$	2,114,862
Cash and cash equivalents		212,621		212,621
Financial liabilities
Notes payable (Note 10)		182,000		182,000
Derivatives (Note 11)		2,400		2,400

Other financial instruments qualify as insurance-related products and are specifically exempted from fair value disclosure requirements.

As of December 31, 2008, the carrying value of cash and cash equivalents, notes payable, derivatives and investments equaled the estimated fair value on the accompanying consolidated balance sheet. The Company’s estimates of fair value for financial assets and financial liabilities are based on the inputs used in valuation and give the highest priority to quoted prices in active markets. Additionally, it is required that observable inputs be used in the valuations when available. The disclosure of fair value estimates is based on whether the significant inputs into the valuation are observable. In determining the level of the hierarchy in which the estimate is disclosed, the highest priority is given to unadjusted quoted prices in active markets and the lowest priority to unobservable inputs that reflect the Company’s significant market assumptions. The three levels of the hierarchy are as follows:


	•	Level 1—Unadjusted quoted market prices for identical assets or liabilities in active markets that the Company has the ability to access.

	•	Level 2—Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in inactive markets; or valuations based on models where the significant inputs are observable (e.g., interest rates, yield curves, prepayment speeds, default rates, loss severities, etc.) or can be corroborated by observable market data.

	•	Level 3—Valuations based on models where significant inputs are not observable. The unobservable inputs reflect the Company’s own assumptions about the assumptions that market participants would use.

The following methods were used by the Company in estimating the fair value disclosures for financial investments in the accompanying consolidated financial statements and in these notes:

Cash and cash equivalents, premiums receivable, and accrued expenses and other liabilities. The carrying amounts for these financial instruments, as reported in the accompanying consolidated balance sheets, approximate their values.

Notes payable. The Company’s notes payable is composed of floating rate long-term debt. Accordingly, the carrying amount is estimated to approximate fair value.

Derivatives. The fair value of the Company’s interest rate swap is derived by using an industry standard swap valuation model, with market-based inputs for swaps having similar characteristics (Note 11).

Investments. For investments that have quoted market prices in active markets, the Company uses the quoted market prices as fair value and includes these prices in the amounts disclosed in Level 1 of the hierarchy. When quoted market prices are unavailable, the Company estimates fair value based on objectively verifiable information, if available. The fair value estimates determined by using objectively verifiable information are included in the amount disclosed in Level 2 of the hierarchy. If quoted market prices and an estimate determined by using objectively verifiable information are unavailable, the Company produces an estimate of fair value based on internally developed valuation techniques, which, depending on the level of observable market inputs, will render the fair value estimate as Level 2 or Level 3. The Company bases all of its estimates of fair value for assets on the bid price as it represents what a third party market participant would be willing to pay in an arm’s length transaction. The following section describes the valuation methods used by the Company for each type of investment that it holds and is carried at fair value.

Equity securities. The Company utilizes market quotations for equity securities that have quoted prices in active markets.

Fixed maturity securities and short-term investments. The Company’s estimates of fair value measurements for these securities are estimated using relevant inputs, including available relevant market information, benchmark curves, benchmarking of like securities, sector groupings, and matrix pricing. Additionally, an Option Adjusted Spread model is used to develop prepayment and interest rate scenarios. Industry standard models are used to analyze and value securities with embedded options or prepayment sensitivities.

Each asset class is evaluated based on relevant market information, relevant credit information, perceived market movements and sector news. The market inputs utilized in the pricing evaluation include: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, reference data, and industry and economic events. The extent of the use of each market input depends on the asset class and the market conditions. Depending on the security, the priority of the use of inputs may change or some market inputs may not be relevant. For some securities, additional inputs may be necessary.

This method of valuation will only produce an estimate of fair value if there is objectively verifiable information to produce a valuation. If objectively verifiable information is not available, the Company would be required to produce an estimate of fair value using some of the same methodologies, but would have to make assumptions for market based inputs that are unavailable due to market conditions.

Because the fair value estimates of most fixed maturity securities are determined by evaluations that are based on observable market information rather than market quotes, most estimates of fair value for fixed maturity securities and short term investments are based on estimates using objectively verifiable information and are included in the amount disclosed in Level 2 of the hierarchy. The fair value estimates for determining Level 3 pricing include the Company’s assumption about risk assessments and market participant assumptions based on the best information available, including quotes from market makers and other broker/dealers recognized as market participants, using standard or trade derived inputs, new issue data, monthly payment information, cash flow generation, prepayment speeds, spread adjustments and/or rating updates.

The following table presents the items on the accompanying consolidated balance sheet that are stated at fair value and the fair value measurements used (expressed as Levels 1, 2 and 3, respectively) as of September 30, 2009:


	Level 1		Level 2			Level 3

	(in thousands)
Fixed maturity securities
U.S. Treasuries	$	—	$	166,025		$	—
U.S. Agencies		—		137,455			—
States and municipalities		—		1,053,320			—
Corporate		—		344,210			—
Residential mortgage-backed securities		—		294,883			75
Commercial mortgage-backed securities		—		36,366			—
Asset-backed securities		—		8,632			5,150

Total fixed maturity securities		—		2,040,891			5,225
Short-term investments		—		3,000			—

Total fixed maturity securities and short-term investments		—		2,043,891			5,225

Equity securities
Consumer goods		21,720		—			—
Energy and utilities		9,423		—			—
Financial		9,518		—			—
Technology and communications		14,086		—			—
Industrial and other		10,999		—			—

Total equity securities	$	65,746	$	—		$	—

Derivatives
Other liabilities		—		(2,400	)		—

The following table provides a reconciliation of the beginning and ending balances that are measured using Level 3 inputs for the three months ended September 30, 2009:


	Residential Mortgage-backed Securities			Asset- backed Securities			States and Municipalities

	(in thousands)

Balance, June 30, 2009	$	77		$	5,300		$	1,128
Transfers in (out) of Level 3		—			—			(1,128	)
Unrealized gains (losses) in other comprehensive income		6			(150	)		—
Purchase, settlements and issuances, net		(8	)		—			—

Balance, September 30, 2009	$	75		$	5,150		$	—

7. Income Taxes

Income tax expense for interim periods is measured using an estimated effective tax rate for the annual period. During the nine months ended September 30, 2009, the Company recognized net income before taxes of $78.5 million and income tax expense of $6.7 million, an effective tax rate of 8.5%, as compared to the marginal rate of 35%. The lower effective tax rate is primarily attributable to anticipated annualized non-taxable investment income and the non-taxable benefit from the increase in the contingent profit commission on the LPT Agreement (Note 9).

8. Liability for Unpaid Losses and Loss Adjustment Expenses

The following table represents a reconciliation of changes in the liability for unpaid losses and LAE for the nine months ended:


	September 30,

	2009			2008

	(in thousands)

Unpaid losses and LAE, gross of reinsurance, at beginning of period	$	2,506,478		$	2,269,710
Less reinsurance recoverables, excluding bad debt allowance, on unpaid losses and LAE		1,076,350			1,052,641

Net unpaid losses and LAE at beginning of period		1,430,128			1,217,069
Losses and LAE, net of reinsurance, incurred in:
Current period		219,627			147,569
Prior periods		(39,593	)		(53,317	)

Total net losses and LAE incurred during the period		180,034			94,252

Deduct payments for losses and LAE, net of reinsurance, related to:
Current period		48,166			25,860
Prior periods		165,491			99,240

Total net payments for losses and LAE during the period		213,657			125,100

Ending unpaid losses and LAE, net of reinsurance		1,396,505			1,186,221
Reinsurance recoverable, excluding bad debt allowance, on unpaid losses and LAE		1,047,139			1,026,179

Unpaid losses and LAE, gross of reinsurance, at end of period	$	2,443,644		$	2,212,400

Total net losses and LAE included in the above table excludes the impact of the amortization of the deferred reinsurance gain–LPT Agreement (Deferred Gain) and any adjustment to the LPT Agreement ceded reserves (Note 9).

The reduction in the liability for unpaid losses and LAE attributable to insured events of prior periods was $39.6 million and $53.3 million for the nine months ended September 30, 2009 and 2008, respectively. The major sources of this favorable development are actual paid losses being less than expected and the impact of new information on selected claim payments and on emergence patterns used in the projection of future loss payments.

9. LPT Agreement

The Company is a party to a 100% quota share retroactive reinsurance agreement (LPT Agreement) under which $1.5 billion in liabilities for losses and LAE related to claims incurred by EICN prior to July 1, 1995 were reinsured for consideration of $775.0 million. The LPT Agreement provides coverage up to $2.0 billion. The initial Deferred Gain resulting from the LPT Agreement was recorded as a liability in the accompanying consolidated balance sheets and is being amortized using the recovery method, whereby the amortization is determined by the proportion of actual reinsurance recoveries to total estimated recoveries. The Company amortized $4.7 million and $13.4 million of the Deferred Gain for the three and nine months ended September 30, 2009, respectively, and $4.5 million and $13.9 million of the Deferred Gain for the three and nine months ended September 30, 2008, respectively, which is reflected in losses and LAE incurred in the accompanying consolidated statements of income. Any adjustments to the Deferred Gain, as a result of adjustments to the related LPT Agreement reserves, are also recorded in losses and LAE incurred in the accompanying consolidated statements of income. No adjustments occurred in the current periods. The remaining Deferred Gain was $393.2 million and $406.6 million as of September 30, 2009 and December 31, 2008, respectively, which is included in the accompanying Consolidated Balance Sheets as deferred reinsurance gain–LPT Agreement.

In addition, the Company is entitled to receive a contingent profit commission under the LPT Agreement. The contingent profit commission is an amount based on the favorable difference between actual paid losses and loss expense and expected paid losses and loss expense as established in the LPT Agreement. The calculation of actual amounts paid versus expected amounts is determined every five years beginning June 30, 2004 for the first twenty-five years of the agreement. The Company is paid 30% of the favorable difference between the actual and expected losses and loss expense paid at each calculation point. Conversely, the Company could be required to return any previously paid contingent profit commission, plus interest, in the event of unfavorable differences.

The Company accrues the estimated ultimate contingent profit commission to be received through June 30, 2024. Increases or decreases in the estimated contingent profit commission are reflected in commission expenses in the period that the estimate is revised. The estimate was revised to increase the ultimate contingent profit commission by $14.1 million, yielding a net negative commission expense for the three months ended September 30, 2009.

10. Notes Payable

Notes payable is comprised of the following as of September 30, 2009 and December 31, 2008 (in thousands):


Amended Credit Facility, due March 26, 2011 with variable interest as described below	$	150,000
Acquired notes payable:
Dekania Surplus Note, due April 30, 2034 with variable interest of 425 basis points above 90-day LIBOR		10,000
ICONS Surplus Note, due May 26, 2034 with variable interest of 425 basis points above 90-day LIBOR		12,000
Alesco Surplus Note, due December 15, 2034 with variable interest of 405 basis points above 90-day LIBOR		10,000

Balance, September 30, 2009 and December 31, 2008	$	182,000

Effective September 30, 2008, EHI and Wells Fargo Bank, National Association (Wells Fargo) entered into a Second Amended and Restated Secured Revolving Credit Facility (Amended Credit Facility). The Amended Credit Facility provides the Company with: (a) a $150.0 million line of credit through December 31, 2009; (b) a $100.0 million line of credit from January 1, 2010 through December 31, 2010; and (c) a $50.0 million line of credit from January 1, 2011 through March 26, 2011. Amounts outstanding bear interest at a rate equal to, at the Company’s option: (a) a fluctuating rate of 1.25% above Wells Fargo’s prime rate or (b) a fixed rate that is 1.25% above the LIBOR rate then in effect. The Company paid a non-refundable commitment fee of $0.4 million, which is being amortized over the contractual life of the Amended Credit Facility. In addition, the Company is required to pay a quarterly commitment fee equal to a per annum rate of 0.10% on any portion of the Amended Credit Facility that is unused. The Amended Credit Facility contains customary non-financial covenants and requires EHI to maintain $7.5 million of cash and cash equivalents.

On September 30, 2008, EHI borrowed $150.0 million through the Amended Credit Facility. The proceeds borrowed under the Amended Credit Facility were used to finance the acquisition of AmCOMP and for general working capital purposes. The LIBOR rate on the Amended Credit Facility at September 30, 2009 was 0.25% and interest paid during the nine months ended September 30, 2009, including the interest rate swap (Note 11), totaled $4.4 million. The Amended Credit Facility is secured by fixed maturity securities and cash and cash equivalents, which had a fair value of $211.7 million at September 30, 2009.

Notes Payable Acquired in the Acquisition

EPIC has a $10.0 million surplus note outstanding to Dekania CDO II, Ltd., issued as part of a pooled transaction (Dekania Surplus Note). The note matures in 2034 and became callable by the Company in the second quarter of 2009. The terms of the note provide for quarterly interest payments at a rate 425 basis points in excess of the 90-day LIBOR. Both the payment of interest and repayment of the principal under this note, as well as the surplus notes described in the succeeding two paragraphs, are subject to the prior approval of the Florida Department of Financial Services. Interest paid during the three and nine months ended September 30, 2009 totaled $0.1 million and $0.4 million, respectively.

EPIC has a $12.0 million surplus note outstanding to ICONS, Inc., issued as part of a pooled transaction (ICONS Surplus Note). The note matures in 2034 and became callable by the Company in the second quarter of 2009. The terms of the note provide for quarterly interest payments at a rate 425 basis points in excess of the 90-day LIBOR. Interest paid during the three and nine months ended September 30, 2009 totaled $0.1 million and $0.5 million, respectively.

EPIC has a $10.0 million surplus note outstanding to Alesco Preferred Funding V, LTD, issued as part of a pooled transaction (Alesco Surplus Note). The note matures in 2034 and becomes callable by the Company in the fourth quarter of 2009. The terms of the note provide for quarterly interest payments at a rate 405 basis points in excess of the 90-day LIBOR. Interest paid during the three and nine months ending September 30, 2009 totaled $0.1 million and $0.4 million, respectively.

11. Derivatives

Interest Rate Swap

On September 30, 2008, the Company, in connection with the borrowings made under the Amended Credit Facility (Note 10), executed an interest rate swap with Wells Fargo with a notional amount of $100.0 million. Execution of the interest rate swap established a fixed interest rate of 4.84% on the notional amount through September 30, 2010. The Company uses its interest rate swap to mitigate the risks associated with unexpected cash outflows resulting from shifts in variable interest rates. As of September 30, 2009 and December 31, 2008, the interest rate swap had a negative fair value of $2.4 million and $3.9 million, respectively, and is included in other liabilities on the accompanying consolidated balance sheets. The corresponding unrealized losses of $2.4 million and $3.9 million are included in accumulated other comprehensive income, net.

12. Accumulated Other Comprehensive Income

Accumulated other comprehensive income, net, is comprised of unrealized appreciation on investments classified as available-for-sale and unrealized depreciation on interest rate swap, net of deferred tax expense. The following table summarizes the components of accumulated other comprehensive income:


	September 30,

	2009			2008

	(in thousands)

Net unrealized gain (loss) on investments, before taxes	$	155,760		$	(5,674	)
Net unrealized loss on interest rate swap, before taxes		(2,400	)		—
Deferred tax (expense) benefit		(53,586	)		1,986

Total accumulated other comprehensive income (loss), net of taxes	$	99,774		$	(3,688	)

The following table summarizes the changes in the components of total comprehensive income for the stated periods:


	Three Months Ended September 30,					Nine Months Ended September 30,

	2009		2008			2009		2008

	(in thousands)

Unrealized gains (losses) arising during the period, before taxes	$	73,757	$	(43,805	)	$	103,540	$	(80,455	)
Less: income tax expense (benefit)		25,503		(15,331	)		35,881		(28,159	)

Unrealized gains (losses) arising during the period, net of taxes		48,254		(28,474	)		67,659		(52,296	)
Less reclassification adjustment:
Gains (losses) realized in net income		3,564		(1,504	)		1,060		(3,211	)
Income tax expense (benefit)		1,247		(526	)		371		(1,123	)

Reclassification adjustment for gains (losses) realized in net income		2,317		(978	)		689		(2,088	)

Other comprehensive income (loss)		45,937		(27,496	)		66,970		(50,208	)
Net income		30,557		33,069			71,757		85,929

Total comprehensive income	$	76,494	$	5,573		$	138,727	$	35,721

13. Stockholders’ Equity

Stock Repurchase Program

On February 21, 2008, the EHI Board of Directors authorized a stock repurchase program (the 2008 Program). The 2008 Program authorized the Company to repurchase up to $100.0 million of the Company’s common stock through June 30, 2009. On February 25, 2009, the EHI Board of Directors extended the 2008 Program through December 31, 2009. From inception of the 2008 Program through September 30, 2009, the Company repurchased 5,403,196 shares at a cost of $68.6 million, or $12.69 per share. EHI expects that shares may be repurchased from time to time at prevailing market prices in open market or private transactions. There can be no assurance that the Company will continue to undertake any repurchase of its common stock pursuant to the program.

For the three and nine months ended September 30, 2009, 1,547,106 and 4,616,401 shares of common stock were repurchased under the 2008 Program at an average cost of $14.42 and $11.79 per share, respectively. As of September 30, 2009, the 9,314,468 shares of common stock repurchased by the Company since its initial public offering in February 2007 are reported as treasury stock, at cost, in the accompanying consolidated balance sheets. As of September 30, 2009, average cost of common stock repurchased through the Company’s stock repurchase programs was $15.41 per share.

14. Stock-Based Compensation

The Amended and Restated Equity and Incentive Plan provides for the grant, in the sole discretion of the Compensation Committee of the Board of Directors, of stock options (including incentive stock options and nonqualified stock options), stock appreciation rights, restricted stock, restricted stock units, stock-based performance awards and other stock-based awards. In the second quarter of 2009 and 2008, nonqualified stock options and restricted stock units were granted. As of September 30, 2009, nonqualified stock options, restricted stock units, and performance share awards have been granted.

Net stock-based compensation expense recognized in the accompanying consolidated statements of income is as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,

	2009		2008		2009		2008

	(in thousands)

Stock-based compensation related to:
Nonqualified stock options	$	488	$	375	$	1,291	$	878
Restricted stock units		426		301		1,047		601
Performance shares		1,146		296		1,759		980

Total		2,060		972		4,097		2,459
Less: related tax benefit		719		333		1,315		851

Net stock-based compensation expense	$	1,341	$	639	$	2,782	$	1,608

Nonqualified Stock Options

On May 28, 2009, the Company awarded 531,082 options to certain officers of the Company. These options have a service vesting period of four years and vest 25% on May 29, 2010, and 25% on each of the subsequent three anniversaries of such date. The options are subject to accelerated vesting in the following circumstances: death or disability of the holder, or in connection with a change of control of the Company. The options expire seven years from the date of grant. The per share exercise price of these options is equal to the fair value of the stock on the grant date, or $11.84.

The fair value of the stock options granted is estimated using a Black-Scholes option pricing model that uses the assumptions noted in the following table. During the nine months ended September 30, 2009, the expected stock price volatility used to value the options granted in 2009 was based on the volatility of the Company’s historical stock price since February of 2007. During the nine months ended September 30, 2008, the expected stock price volatility used to value the options granted in 2008 was based on a weighted average of the Company’s historical stock price volatility since February of 2007 and the historical volatility of peer companies’ stock for a period of time equal to the expected term of the options. The expected term of the options granted in 2009 and 2008 were calculated using the ‘plain-vanilla’ calculation provided in the guidance of the SEC’s Staff Accounting Bulletin No. 107. The dividend yield was calculated using amounts authorized by the Board of Directors. The risk-free interest rate is the yield on the grant date of the options of U.S. Treasury zero coupon securities with a maturity comparable to the expected term of the options.

The fair value of the stock options was calculated using the following weighted average assumptions for the stated periods:


	Nine Months Ended September 30, 2009				Nine Months Ended September 30, 2008

Expected volatility			51.0	%			34.9	%
Expected life (in years)			4.8				4.8
Dividend yield			2.0	%			1.3	%
Risk-free interest rate			2.5	%			3.4	%
Weighted average grant date fair value of options granted – per option		$	4.59			$	6.01

Changes in outstanding stock options for the nine months ended September 30, 2009 were as follows:


	Number of Options			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life

						(in years)
Options outstanding at January 1, 2009		1,024,085		$	18.72		5.9
Granted		531,082			11.84		6.6
Exercised		—			—
Expired		(4,139	)		17.84
Forfeited		(38,113	)		18.73

Options outstanding at September 30, 2009		1,512,915			16.30		5.7

Exercisable at September 30, 2009		410,763			18.46		4.9

Restricted Stock Units

On May 29, 2009, 24,984 restricted stock units (RSUs) awarded to the non-employee members of the Board of Directors during 2008 vested with an intrinsic value of $0.3 million. Five of the Board members elected to defer settlement in common shares and the vested RSUs will be settled in common stock six months following the awardee’s termination of service from the Board of Directors. Prior to settlement, dividend equivalents are paid with respect to these vested RSUs and are credited as additional vested RSUs. On March 25, June 3 and September 3, 2009, in connection with the Company’s dividends to its stockholders, an additional 136, 182 and 161 RSUs, respectively, were credited to the holders of vested RSUs.

Additionally, on May 29, 2009, 35,874 RSUs, awarded to certain officers of the Company during 2008 vested with an intrinsic value of $0.4 million. Of the 35,874 RSUs vested, 10,151 shares of common stock were withheld to satisfy minimum employee tax withholding.

On May 28, 2009, the Company awarded the non-employee members of the Board of Directors, in the aggregate, 40,536 RSUs. These RSUs vest on May 28, 2010, except for accelerated vesting in the case of death or disability of the Director or in connection with a change of control. Vested RSUs will be settled in common stock within 30 days after the vesting date or can be deferred until nine months following the awardee’s termination of service from the Board of Directors, at the awardee’s election. In the event of a deferral election, dividend equivalents are paid with respect to vested RSUs and are credited as additional vested RSUs. The aggregate fair value of the RSUs on the date of grant was $0.5 million.

Additionally, on May 28, 2009, the Company awarded 176,871 RSUs to certain officers of the Company. The RSUs have a service vesting period of four years and vest 25% on May 28, 2010 and 25 % on each of the subsequent three anniversaries of such date. The RSUs are subject to accelerated vesting in certain limited circumstances, such as: death or disability of the holder, or in connection with a change of control of the company. The fair value of the RSUs on the date of grant was $2.1 million.

Changes in outstanding RSUs for the nine months ended September 30, 2009 were as follows:


	Number of RSUs			Weighted Average Grant Date Fair Value


RSUs outstanding at January 1, 2009		199,881		$	18.92
Granted		217,886			11.84
Forfeited		(7,334	)		19.21
Vested		(45,243	)		19.21

RSUs outstanding at September 30, 2009		365,190			14.66

Vested but unsettled RSUs at September 30, 2009		40,094			17.69

15. Earnings Per Share

Basic earnings per share includes no dilution and is computed by dividing income applicable to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflect the

potential dilution of securities that could share in the earnings of equity. Diluted earnings per common share includes common shares assumed issued under the “treasury stock method,” which reflects the potential dilution that would have occurred had shares been repurchased from the proceeds of potentially dilutive shares.

The following table presents the net income and the weighted average common shares outstanding used in the earnings per common share calculations for the periods presented:


	Three Months Ended September 30,				Nine Months Ended September 30,

	2009		2008		2009		2008

	(in thousands, except share and per share data)
Net income available to common stockholders – basic and diluted	$	30,557	$	33,069	$	71,757	$	85,929

Weighted average number of common shares outstanding – basic		45,113,973		49,005,235		46,706,063		49,339,966
Effect of dilutive securities:
Performance share awards		128,976		66,246		96,111		48,454
Unvested restricted stock units		49,334		3,433		9,577		1,174

Dilutive potential common share		178,310		69,679		105,688		49,628

Weighted average number of common shares outstanding – diluted		45,292,283		49,074,914		46,811,751		49,389,594

The Company’s outstanding options have been excluded in computing the diluted earnings per share for the three and nine months ended September 30, 2009 and 2008 because their inclusion would be anti-dilutive.

16. Subsequent Events

We have evaluated subsequent events through November 5, 2009, the date which our financial statements have been issued and were available to be issued.

On November 4, 2009, the Board of Directors authorized a share repurchase program for up to $50 million of the Company’s common stock. The Company expects that shares may be purchased at prevailing market prices from January 1, 2010 through December 31, 2010 through a variety of methods, including open market or private transactions, in accordance with applicable laws and regulations. The timing and actual number of shares repurchased will depend on a variety of factors, including the share price, corporate and regulatory requirements and other market and economic conditions. Repurchases under the 2010 Stock Repurchase Program may be commenced or suspended from time to time without prior notice, and the program may be suspended or discontinued at any time.

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

You should read the following discussion and analysis in conjunction with our consolidated financial statements and the related notes thereto included in Item 1 of Part I. Unless otherwise indicated, all references to “we,” “us,” “our,” “the Company” or similar terms refer to Employers Holdings, Inc. (EHI), together with its subsidiaries. The information contained in this quarterly report is not a complete description of our business or the risks associated with an investment in our common stock. We urge you to carefully review and consider the various disclosures made by us in this quarterly report and in our other reports filed with the Securities and Exchange Commission (SEC), including our 2008 Annual Report on Form 10-K for the year ended December 31, 2008 (Annual Report).

The discussion under the heading “Risk Factors” in our Annual Report, as updated by the discussion in Part II, Item 1A of this quarterly report and similar discussions in our other SEC filings, describe some of the important risk factors that may affect our business, results of operations and financial condition. You should carefully consider those risks in addition to the other information in this report and in our other filings with the SEC before deciding to purchase, hold, or sell our common stock.

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 include those related to our expected financial position, business, financing plans, litigation, future premiums, revenues, earnings, pricing, investments, business relationships, expected losses, loss reserves, acquisitions, competition, and rate increases with respect to our business and the insurance industry in general. Statements that include the words “expect,” “intend,” “plan,” “believe,” “project,” “estimate,” “may,” “should,” “continue,” “potential,” “forecast,” “anticipate,” “will” and similar statements of a future or forward-looking nature identify forward-looking statements.

All forward-looking statements address matters that involve risks and uncertainties. Accordingly, there are or will be important factors that could cause our actual results to differ materially from those indicated in these statements. We believe that these factors include, but are not limited to, the following:


	•	impact of the unprecedented volatility and uncertainty in the financial markets;

	•	adequacy and accuracy of our pricing methodologies;

	•	our dependence on several concentrated geographic areas and on the workers’ compensation market;

	•	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 market;

	•	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 the availability, cost or quality of reinsurance and failure of our reinsurers to pay claims timely or at all;

	•	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;

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

	•	failure of our information technology or communication systems;

	•	adverse state and federal judicial decisions;

	•	litigation and government proceedings;

	•	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 demand for our products;

	•	the operations acquired from AmCOMP Incorporated (AmCOMP) will not be integrated successfully; and

	•	disruption from the AmCOMP transaction making it more difficult to maintain relationships with customers, employees, agents and producers.

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.

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 our Annual Report, as updated by the discussion in Part II, Item 1A of this quarterly 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.

Overview

EHI is a Nevada holding company and is the successor to EIG Mutual Holding Company (EIG), which was incorporated in Nevada in 2005. EHI’s principal executive offices are located at 10375 Professional Circle, in Reno, Nevada. Our insurance subsidiaries are:


		State of Domicile

Employers Insurance Company of Nevada (EICN)		Nevada
Employers Compensation Insurance Company (ECIC)		California
Employers Preferred Insurance Company (EPIC)		Florida
Employers Assurance Company (EAC)		Florida

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. We distribute our products almost exclusively through independent agents and brokers and through our strategic partnerships and alliances. We operate in a single reportable segment and conduct operations in 30 states. Each of our insurance subsidiaries is rated A- (Excellent) by A.M. Best.

Our strategy has historically been to target businesses located primarily in several western states, with concentrations in California and Nevada. On October 31, 2008, we acquired AmCOMP, which increased our premiums by approximately two-thirds, added nearly 10,000 additional policies, expanded our geographic reach and added a concentration of business in Florida. One percent of our pre-acquisition premiums were written in the states where AmCOMP produced business. We believe this acquisition significantly advances our strategic goals and our vision of being the leader in the property and casualty insurance industry specializing in workers’ compensation. We also believe the transaction will result in meaningful synergies and expense-related efficiencies.

In January 2009, we began implementation of a strategic restructuring plan to achieve the corporate and operational objectives of the acquisition and integration of AmCOMP, and in response to then current economic conditions. The restructuring plan included net staff reductions of approximately 150 employees, or 14% of our total workforce, and consolidation of corporate functions into our Reno, Nevada headquarters. The restructuring, which consisted of office consolidations, rebranding and staff reductions, was largely completed in the first half of 2009. We are continuing with our integration plan, including consolidation of our claims and underwriting systems, and expect completion in early 2010.

In June 2009, Standard and Poor’s added the Company to the S&P SmallCap 600 Index, which we believe is one of the preferred small-capitalization market indices in the United States.

Our results of operations incorporate the acquired operations of AmCOMP from November 1, 2008.

Revenues

We derive our revenues primarily from the following:

Net Premiums Earned. Net premiums earned increased for the nine months ended September 30, 2009, as compared to 2008. The increase was attributable to additional premiums from our newly acquired subsidiaries, EPIC and EAC.

Previously, we have used two accepted methodologies for recording written premiums. Three of our insurance subsidiaries, EPIC, EAC and EICN, have historically recorded written premiums using an annual method, where 100% of the estimated annual premium is recorded at the inception of the policy. ECIC has historically recorded written premiums using a billed method, where premiums are recorded at the time policy installments are billed. On September 1, 2009, we conformed the method of recording written premiums for ECIC to an annual method in order to be consistent across the Company. Conforming the method had no impact on the income statement, equity or net cash flows. The change only affects the balance sheet accounts for premiums receivable and related unearned premium assets and liabilities. The change to written premiums has been applied to all periods presented and did not have a material effect on any periods presented.

Overall, direct premiums written increased 31.2% for the nine months ended September 30, 2009, compared to the same period of 2008, primarily attributable to the acquisition of AmCOMP. Excluding the impact from our newly acquired subsidiaries, direct premiums written would have decreased for the nine months ended September 30, 2009, as compared to 2008. The decrease reflects the impact of price competition, economic contraction and our commitment to disciplined pricing objectives and underwriting guidelines. The economic contraction has disproportionately impacted Nevada and Florida, and we have seen lower estimated payrolls, upon which our premiums are based, and lower numbers of jobs in certain sectors, such as construction and tourism, in those states. These factors have contributed to Nevada falling from our second largest state to fifth largest, in terms of direct premiums written.

California, our largest market, represented 46.8% of our business for the nine months ended September 30, 2009. In California, we reduced our rates 38.5% from January 1, 2006, through December 31, 2008. This compared to the recommendation of the California Commissioner of Insurance (California Commissioner) of a 45.0% rate reduction for the same period. In October 2008, in response to a recommendation by the California Workers’ Compensation Insurance Rating Bureau (WCIRB) to increase advisory rates by 16.0%, the California Commissioner approved a 5.0% average increase in advisory pure premium rates on new and renewal policies beginning January 1, 2009. Effective February 1, 2009, we increased our overall average rate in California by 10.0% on new and renewal policies.

In April 2009, the WCIRB submitted a revised recommendation to increase advisory pure premium rates 23.7% effective July 1, 2009. The recommendation was based upon two principal components. First, the WCIRB’s evaluation of December 31, 2008 loss experience produced an indicated increase in the claims cost benchmark of 16.9%, indicating increased medical costs. Second, a rate increase of 5.8% was directly attributable to additional costs arising from recent Workers’ Compensation Appeals Board decisions. On July 8, 2009, the California Commissioner rejected the recommendation of the WCIRB and left advisory pure premium rates unchanged. On August 15, 2009, we increased our rates by an average of 10.5% for all new and renewal policies.

In August 2009, the WCIRB made a recommendation to increase advisory pure premium rates approximately 22.8% effective January 1, 2010. The recommendation was based upon two principal components. First, the WCIRB’s evaluation of March 31, 2009 loss experience produced an indicated increase in the claims cost benchmark of 16.0%, reflecting increased medical costs. Second, a rate increase of 5.8% was directly attributable to additional costs arising from recent Workers’ Compensation Appeals Board decisions. The California Commissioner has not issued a decision on the recommendation of the WCIRB as of the date of this filing.

We anticipate filing a rate increase for new and renewal policies in California effective on or after February 15, 2010. The average rate we charge does not necessarily indicate the rate charged to individual policyholders because an insured’s experience modification factor is subject to revision annually and our underwriters may increase or decrease rates based upon individual risk characteristics.

We expect that approximately 15% of our business will be generated in “administered pricing” states, primarily Florida and Wisconsin. In administered pricing states, rate changes are adopted by the respective state’s Commissioner of Insurance (Commissioner) who sets the rates that we are allowed to charge in those states.

In 2003, Florida enacted workers’ compensation reforms. The reforms have resulted in significant declines in claim frequency, an improvement in loss development and a reduction in the cost of claims. As a result, the Florida Commissioner approved an 18.4% rate decrease for all new and renewal policies effective January 1, 2008 and an 18.6% rate decrease for all new and renewal policies effective January 1, 2009.

In February 2009, the Florida Commissioner approved a 6.4% increase in workers’ compensation rates to be effective April 1, 2009, for new and renewal business. This rate increase was the result of the impact of an October 2008 Florida Supreme Court decision that materially impacted the statutory caps on attorney fees that were part of the 2003 reforms. In June 2009, the Florida Commissioner approved a 6.0% decrease in workers’ compensation rates effective July 1, 2009, for new and renewal policies and the unexpired portions of outstanding policies with an anniversary date from April 1, 2009 through June 30, 2009. This rate decrease was due to the impact of Florida House Bill 903, which restored the statutory caps on attorney fees, and effectively reversed the April 1, 2009 rate increase.

In August 2009, the National Council on Compensation Insurance (NCCI) recommended a 6.8% overall rate decrease in Florida, effective January 1, 2010, for new and renewal policies. According to the NCCI, this decrease is the result of significant reductions in claims frequency, although the NCCI has noted that the pace of improvement has moderated. The Florida Commissioner approved this rate decrease, making the cumulative rate decrease since the reforms of 2003 63.2%.

In July 2008, the Wisconsin Commissioner approved a 2.9% overall rate increase on new and renewal policies effective October 1, 2008. On May 14, 2009, the Wisconsin Compensation Rating Bureau recommended an overall rate increase of 0.4% for new and renewal policies effective October 1, 2009. On July 29, 2009, the Wisconsin Commissioner approved the recommended increase.

The following table sets forth our direct premiums written by state and as a percentage of total direct premiums written for:


	Three Months Ended September 30,											Nine Months Ended September 30,

State	2009⁽¹⁾		Percentage of 2009 Total			2008⁽¹⁾			Percentage of 2008 Total			2009⁽¹⁾		Percentage of 2009 Total			2008⁽¹⁾		Percentage of 2008 Total

	(in thousands, except percentages)

California	$	42,894		51.2	%	$	57,013			75.5	%	$	142,205		46.8	%	$	172,829		74.7	%
Florida		3,087		3.7			(14	)		—			22,121		7.3			298		0.1
Wisconsin		3,487		4.2			—			—			18,138		6.0			—		—
Illinois		6,397		7.6			1,014			1.3			16,999		5.6			2,196		0.9
Nevada		4,763		5.7			8,822			11.7			15,713		5.2			30,187		13.0
Texas		3,011		3.6			675			0.9			13,817		4.5			1,275		0.6
Georgia		2,464		2.9			—			—			9,273		3.1			—		—
Tennessee		2,547		3.0			—			—			9,152		3.0			—		—
Indiana		1,759		2.1			—			—			8,783		2.9			—		—
Kentucky		3,240		3.9			—			—			7,432		2.4			—		—
Virginia		1,602		1.9			—			—			6,211		2.0			—		—
Colorado		1,530		1.8			2,369			3.1			5,216		1.7			8,395		3.6
Other		7,070		8.4			5,642			7.5			28,634		9.5			16,214		7.1

Total	$	83,851		100.0	%	$	75,521			100.0	%	$	303,694		100.0	%	$	231,394		100.0	%



(1)	On September 1, 2009, we changed our method of recording ECIC written premiums to an annual method. As a result, the method of calculating 2008 written premiums has been conformed for this change to be comparable to 2009 written premiums. The direct premiums written for all periods presented are calculated assuming written premiums are 100% of the estimated annual premium. Historically, written premiums for ECIC were recorded using a billed method, where premiums were recorded at the time policy installments were billed.

In January 2009, we began writing business in Iowa and currently write business in 30 states and are licensed to write business in six additional states and the District of Colombia.

We market and sell our worker’s compensation insurance primarily through independent agents and brokers, and through strategic partnerships and alliances. Our strategic partnerships and alliances generated $53.1 million, or 17.5% of our direct premiums written, for the nine months ended September 30, 2009, as compared to $63.3 million, or 27.4%,

for the same period in 2008. The decrease was primarily attributable to increased overall premium related to the acquisition, as well as $10.2 million lower direct premiums written, period over period.

The number of policies in-force, at the specified dates, was as follows:


States	September 30, 2009		December 31, 2008		September 30, 2008


California		28,144		27,942		27,615
Nevada		4,300		5,221		5,468
Florida		2,749		3,112		149
Texas		1,645		1,747		214
Wisconsin		927		892		—
Other		7,083		6,685		2,656

Total		44,848		45,599		36,102

Policy count decreased 1.6% during the first nine months of 2009, with the decreases primarily occurring in Nevada and Florida. Nevada policy count decreased 921, or 17.6%, while Florida policy count decreased 363, or 11.7%. However, we experienced policy count growth in the majority of states, particularly in the Midwest and Southeast, which partially offset the declines in Nevada and Florida. For example, Illinois, Georgia, and Virginia each had a greater than 14% increase in policy count for the nine months ended September 30, 2009. The decline in policies in Florida and Nevada was the result of increased pricing competition and the continuing economic contraction.

During the 12 months ended September 30, 2009, our overall policy count increased by 8,746 policies, or 24.2%, primarily attributable to the acquisition. California continued its policy count growth with an increase of 529, or 1.9%. For the same 12 month period, Nevada’s policy count continued its decline, with a decrease of 1,168 or 21.4%.

Premium revenues in 2009 reflect additional premiums from the acquisition, cumulative rate increases of 21.6% in California, the overall net 2009 rate decrease in Florida of 18.6%, rate reductions in several other states, as well as the impacts of competitive pressures and lower payrolls due to the economic contraction. We believe our policy count in the majority of our states will continue to grow, particularly in the Midwest and Southeast where we believe our A- (Excellent) A.M. Best rating will lead to an increase in new business submissions. We emphasize disciplined pricing objectives and underwriting guidelines and we believe we are well positioned to continue to grow profitably. However, we cannot be certain how these trends will ultimately impact our consolidated financial position and results of operations.

Net Investment Income and Realized Gains (Losses) on Investments. We invest our holding company assets, statutory surplus and the funds supporting our insurance liabilities (including unearned premiums and unpaid losses and loss adjustment expenses (LAE)) in cash and cash equivalents, short-term investments, fixed maturity securities and equity securities. Net investment income includes interest and dividends earned on our invested assets and amortization of premiums and discounts on our fixed maturity securities less bank service charges and custodial and portfolio management fees. Realized gains and losses on our investments are reported separately from our net investment income. Realized gains and losses on investments include the gain or loss on a security at the time of sale compared to its original cost (equity securities) or amortized cost (fixed maturity securities). Realized losses are also recognized when securities are written down as a result of an other-than-temporary impairment (OTTI).

We have established a high quality/short duration bias in our investment portfolio, and the high underlying credit quality of our municipal bond holdings helped to mitigate the effects of the deterioration in the financial markets. The performance of our investment portfolio, with its diversified structure and quality bias, has been exceptionally strong and our realized and unrealized losses have been minimal, considering the unprecedented volatility and uncertainty in the financial markets.

Expenses

Our expenses consist of the following:

Losses and Loss Adjustment Expenses (LAE). Losses and LAE represent our largest expense item and include claim payments made, estimates for future claim payments and changes in those estimates for current and prior periods and costs associated with investigating, defending, and adjusting claims. The quality of our financial reporting depends in large part on accurately predicting our losses and LAE, which are inherently uncertain as they are estimates of the ultimate cost of individual claims based on actuarial estimation techniques. In states other than Nevada, we have a short

operating history and must rely on a combination of industry experience and our specific experience to establish our best estimate of losses and LAE reserves. The interpretation of historical data can be impacted by external forces, principally legislative changes, economic fluctuations and legal trends. In recent years, we experienced lower losses and LAE in California than we anticipated due to factors such as regulatory reform designed to reduce loss costs in that market. However, there is uncertainty about whether recent paid loss trends in California will continue. The WCIRB’s most recent evaluation of loss experience takes into consideration increasing medical cost. We have established reserves for losses based on our current best estimate of loss costs, taking into consideration of medical cost and incurred loss trends. As we continue to gain experience in markets other than Nevada, we rely more on our own loss experience and place less reliance on industry experience.

Commission Expense. Commission expense includes direct commissions to our agents and brokers for the premiums that they produce for us. Also included in commission expense are incentive payments, other direct marketing costs and fees. Commission expense is net of contingent commission income related to the LPT Agreement. Commissions paid to our agents and brokers are deferred and amortized to commission expense in our consolidated statements of income as the premiums generating these commissions are earned.

We are entitled to receive a contingent profit commission under the LPT Agreement. The contingent profit is an amount based on the favorable difference between actual paid losses and loss expenses and expected paid losses and loss expenses under the LPT Agreement. Loss expenses are deemed to be 7% of total losses paid and are paid to us as compensation for management of the LPT claims. The reinsurers pay us 30% of any favorable difference in actual amounts paid compared to contractually expected amounts to be paid under the agreement. The calculation of the contingent profit commission, which is based on actual amounts paid versus expected amounts is determined every five years beginning June 30, 2004 for the first twenty-five years of the agreement. We are required to return any previously paid contingent profit commission, with interest, through June 30, 2024 in the event of unfavorable differences between actual and expected paid losses and loss expenses.

We estimate ultimate contingent profit commission through June 30, 2024 and record it as commission expense. Increases or decreases in the estimated contingent profit commission are reflected in commission expense in the period that the estimate is revised. For both the three and nine months ended September 30, 2009, we decreased commission expenses by $14.1 million as a result of an increase in contingent profit commissions and received $5.7 million from the reinsurers. Estimated total losses and loss adjustment expenses covered by the LPT, and to be paid through June 30, 2024 were reduced by approximately $40 million from the previous estimate. Pursuant to the LPT Agreement, actual amounts paid for losses under the LPT for the period July 1, 1999 through June 30, 2009, were $467.8 million as compared to contractually expected losses and loss expenses of $550 million.

Dividends to Policyholders. In administered pricing states such as Florida and Wisconsin, insurance rates are set by state insurance regulators. Rate competition generally is not permitted in these states and, consequently, policyholder dividend programs are an important competitive factor. In Florida and Wisconsin, and to a much more limited extent in several of our other states, we offer dividend programs to eligible policyholders under which a portion of the premium paid by a policyholder may be returned in the form of a dividend. Eligibility for these programs varies based upon the nature of the policyholder’s operations, expected premium paid, loss experience and existing controls intended to minimize workers’ compensation claims and costs. An estimated provision for policyholders’ dividends is accrued as the related premiums are earned. Such dividends do not become a fixed liability until declared by the respective Boards of Directors of our insurance subsidiaries. Additionally, Florida statutes require payment of additional policyholders’ dividends to Florida policyholders pursuant to a formula based on underwriting results (Florida Dividends). Our ultimate obligation for Florida Dividends is dependent on our filings with the Florida Office of Insurance Regulation and on our prescribed loss reserves included in our annual statutory financial statements.

Underwriting and Other Operating Expenses. Underwriting and other operating expenses includes the costs to acquire and maintain an insurance policy (excluding commissions) consisting of premium taxes and certain other general expenses that vary with, and are primarily related to, producing new or renewal business. These acquisition costs are deferred and amortized to underwriting and other operating expense in the consolidated statements of income as the related premiums are earned. Other underwriting expenses consist of general administrative expenses such as salaries and benefits, rent, office supplies, depreciation and all other operating expenses not otherwise classified separately, and fees and assessments of boards, bureaus and statistical agencies for policy service and administration items such as manuals, rating plans and experience data.

Our underwriting and other operating expense is a reflection of our operating efficiency in producing, underwriting and administering our business. Policy acquisition costs are variable based on premiums earned. However, underwriting

and other costs are more fixed in nature and become a larger percentage of net premiums earned as premiums trend lower.

As a result of the restructuring plan, we now anticipate one-time pre-tax expenditures of approximately $7.5 million for 2009 related to the integration of operations acquired from AmCOMP which includes $1.4 million of capitalized costs. Additionally, we expect to achieve pre-tax cost savings of approximately $12.0 million in 2009 and annualized pre-tax cost savings of $20.0 to $22.0 million beginning in 2010. For the nine months ended September 30, 2009, we have incurred one-time pre-tax integration and restructuring charges, not including capitalized costs, of approximately $4.9 million, including $2.5 million of severance benefits.

Interest Expense. We incur interest expenses on $32.0 million in acquired surplus notes and the $150 million Second Amended and Restated Secured Credit Facility (Amended Credit Facility). Interest expense is paid quarterly in arrears on the surplus notes. The expense for each interest payment on the surplus notes is based on the three-month LIBOR rate plus 405 to 425 basis points.

Interest expense is paid quarterly in arrears on the Amended Credit Facility. The interest expense is based on the 30-day LIBOR rate plus 125 basis points. Additionally, we have an interest rate swap agreement on the Amended Credit Facility. Interest paid on the Amended Credit Facility and the interest rate swap was $4.4 million for the nine months ended September 30, 2009.

Results of Operations

Three Months Ended September 30, 2009 and 2008

The following table summarizes our consolidated financial results for the three months ended September 30, 2009 and 2008:


	2009⁽⁴⁾			2008			Increase (Decrease) 2009 over 2008			Percentage Increase (Decrease) 2009 over 2008

	(in thousands, except for percentages)
Selected Financial Data
Gross premiums written⁽¹⁾	$	84,842		$	75,857		$	8,985			11.8	%
Net premiums written⁽¹⁾		82,790			73,076			9,714			13.3

Net premiums earned	$	98,240		$	73,131		$	25,109			34.3	%
Net investment income		22,334			18,474			3,860			20.9
Realized gains (losses) on investments, net		3,564			(1,504	)		5,068			n/a
Other income		183			295			(112	)		(38.0	)

Total revenues		124,321			90,396			33,925			37.5

Losses and LAE		53,395			25,588			27,807			108.7
Commission (benefit) expense		(1,276	)		10,121			(11,397	)		n/a
Dividends to policyholders		1,539			(8	)		1,547			n/a
Underwriting and other operating expenses		33,688			21,915			11,773			53.7
Interest expense		1,824			—			1,824			n/a
Income tax expense (benefit)		4,594			(289	)		4,883			n/a

Total expenses		93,764			57,327			36,437			63.6


Net income	$	30,557		$	33,069		$	(2,512	)		(7.6	)


Selected Operating Data
Losses and LAE ratio		54.3	%		35.0	%		19.3	%
Commission expense ratio		(1.3	)		13.8			(15.1	)
Dividends to policyholders ratio		1.6			—			1.6
Underwriting and other operating expenses ratio		34.3			30.0			4.3
Combined ratio⁽²⁾		88.9			78.8			10.1
Net income before impact of the deferred reinsurance gain—LPT Agreement⁽³⁾	$	25,889		$	28,520		$	(2,632	)		(9.2	)



(1)	On September 1, 2009, we changed our method of recording ECIC written premiums to an annual method. As a result, the method of calculating 2008 written premiums has been conformed for this change to be comparable to 2009 written premiums. The gross and net premiums written for all periods presented are calculated assuming the written premiums are 100% of the estimated annual premium. Historically, written premiums for ECIC were recorded using a billed method, where premiums were recorded at the time policy installments were billed.

(2)	The combined ratio is calculated by dividing the sum of losses and LAE, commission expense, dividends to policyholders and underwriting and other operating expenses by net premiums earned. Because we only have one operating segment, holding company expenses are included in our calculation of the combined ratio.

(3)	We define net income before impact of the deferred reinsurance gain—LPT Agreement as net income less: (a) amortization of deferred reinsurance gain—LPT Agreement and (b) adjustments to LPT Agreement ceded reserves. Deferred reinsurance gain—LPT Agreement reflects the unamortized gain from our LPT Agreement. Under GAAP, this gain is deferred and is being amortized using the recovery method, whereby the amortization is determined by the proportion of actual reinsurance recoveries to total estimated recoveries, and the amortization is reflected in losses and LAE. We periodically reevaluate the remaining direct reserves subject to the LPT Agreement. Our reevaluation results in corresponding adjustments, if needed, to reserves, ceded reserves, reinsurance recoverables and the deferred reinsurance gain, with the net effect being an increase or decrease, as the case may be, to net income. Net income before impact of the deferred reinsurance gain—LPT Agreement is not a measurement of financial performance under GAAP, but rather reflects the difference in accounting treatment between statutory and GAAP, and should not be considered in isolation or as an alternative to net income before income taxes and net income or any other measure of performance derived in accordance with GAAP.

	We present net income before impact of the deferred reinsurance gain—LPT Agreement because we believe that it is an important supplemental measure of operating performance to be used by analysts, investors and other interested parties in evaluating us. The LPT Agreement was a non-recurring transaction which does not result in ongoing cash benefits, and, consequently, we believe this


	presentation is useful in providing a meaningful understanding of our operating performance. In addition, we believe this non-GAAP measure, as we have defined it, is helpful to our management in identifying trends in our performance because the excluded item has limited significance in our current and ongoing operations.

The table below shows the reconciliation of net income to net income before impact of the deferred reinsurance gain—LPT Agreement for the three months ended:


	September 30,

	2009		2008

	(in thousands)

Net income	$	30,557	$	33,069
Less impact of the deferred reinsurance gain—LPT Agreement		4,668		4,549

Net income before impact of the deferred reinsurance gain—LPT Agreement	$	25,889	$	28,520


(4)	The table below reflects the impact to our results of operations from the acquisition of AmCOMP for the three months ended September 30:


	2009

	(in thousands)

Selected Financial Data
Gross premiums written	$	29,700
Net premiums written		29,223

Net premiums earned	$	39,849
Net investment income		5,235
Realized losses on investments		—
Other income		80

Total revenues		45,164

Losses and LAE		28,294
Commission expense		4,115
Dividends to policyholders		1,534
Underwriting and other operating expenses		11,197
Underwriting and other operating expenses—integration and restructuring		—
Interest expense		394
Income tax benefit		(148	)

Total expenses		45,386

Net loss	$	(222	)

Net Income

Net income decreased $2.5 million, or 7.6%, for the three months ended September 30, 2009, compared to the same period of 2008. The change in net income was primarily driven by a $27.8 million increase in losses and LAE and a $11.8 million increase in underwriting and other operating expenses, partially offset by a $25.1 million increase in net premiums earned and an $11.4 million decrease in commission expense related to the $14.1 million increase in the LPT contingent profit commission. Net income increased $0.2 million as a result of the acquired operations of AmCOMP. Net income includes amortization of deferred reinsurance gain—LPT Agreement of $4.7 million and $4.5 million for the three months ended September 30, 2009 and 2008, respectively. Excluding the impact of the LPT Agreement, net income would have been $25.9 million and $28.5 million for the three months ended September 30, 2009 and 2008, respectively.

Revenues

Net premiums earned increased 34.3% for the three months ended September 30, 2009, compared to the same period of 2008. The increase was attributable to net premiums earned from our newly acquired Florida insurance subsidiaries, EPIC and EAC, which contributed $39.8 million to net premiums earned for the quarter. This increase was partially offset by lower direct premiums written in certain markets, primarily California and Nevada, which had $14.1 million

and $4.1 million lower direct premiums written in the third quarter of 2009 compared to the third quarter of 2008, respectively, as a result of rate reductions, competition and impacts of the economic contraction. The acquired operations, particularly in Florida, have also been affected by the economic contraction, as evidenced by lower estimated payrolls, upon which our premiums are based, combined with rate reductions.

Our average in-force policy size increased 13.5% to $9,087 from $8,006, at September 30, 2009 and 2008, respectively. Excluding the impact of the acquisition, our average in-force policy size would have decreased $1,191, or 14.9%, to $6,815 at September 30, 2009, as compared to September 30, 2008, primarily due to declining payrolls.

Net investment income increased 20.9% for the three months ended September 30, 2009. The increase in net investment income was primarily related to the increase in invested assets. Fixed maturity securities acquired in the acquisition accounted for a 25.2% increase in invested assets for the three months ended September 30, 2009, compared to the same period of 2008. The average pre-tax book yield on invested assets decreased to 4.4% at September 30, 2009, as compared to 4.5% at September 30, 2008. The tax equivalent yield on invested assets increased to 5.6% at September 30, 2009, as compared to 5.3% at September 30, 2008.

For the three months ended September 30, 2009, realized gains on investments were $3.6 million, compared to realized losses of $1.5 for the same period of 2008. The realized gains are attributable to the sale of previously impaired equity securities. The realized losses for the three months ended September 30, 2008 were the result of other-than-temporary impairments on equity securities and one fixed maturity security of $3.8 million, which were partially offset by gains of $2.3 million realized on the sale of equity securities in 2008.

Expenses

Losses and LAE increased $27.8 million, for the three months ended September 30, 2009, compared to the three months ended September 30, 2008, primarily as a result of the acquisition. Excluding the impact of the acquisition, losses and LAE would have decreased 1.9%, attributable to a decrease in earned premium. The quarter over prior year quarter change in overall net premiums earned reduced losses and LAE by approximately $18.9 million. Losses and LAE were 54.3% and 35.0% of net premiums earned for the three months ended September 30, 2009 and 2008, respectively. Additionally, our current accident year loss estimates were 69.7% and 75.4% for the three months ended September 30, 2009 and 2008, respectively. During the third quarter of 2009, favorable prior accident year loss development decreased $14.6 million, to $10.4 million, compared to the third quarter of 2008.

The table below reflects the losses and LAE reserve adjustments for the three months ended:


	September 30,

	2009		2008

	(in millions)

Prior accident year favorable development, net	$	10.4	$	25.0


LPT amortization of the deferred reinsurance gain	$	4.7	$	4.5
LPT reserve favorable change	$	—	$	—

There was no adjustment to the direct reserves subject to the LPT Agreement in either period. Excluding the impact from the LPT Agreement, losses and LAE would have been $58.1 million and $30.1 million, or 59.1% and 41.2%, of net premiums earned for the three months ended September 30, 2009 and 2008, respectively.

Commission expense decreased $11.4 million, for the three months ended September 30, 2009, compared to the three months ended September 30, 2008, resulting in a negative commission expense for the quarter of $1.3 million. The change is primarily attributable to a $14.1 million increase in the accrual for the LPT contingent profit commission, partially offset by the increased commission expense attributable to the acquisition. Excluding the impact of the LPT contingent profit commission, commission expense would have been 13.0% and 13.8% of net premiums earned for the three months ended September 30, 2009 and 2008, respectively. Excluding the impact of the acquisition and the LPT contingent profit commission, our commission expense would have decreased approximately $1.4 million, or 13.8%, primarily attributable to a decrease in net premiums earned.

Dividends to policyholders increased $1.5 million for the three months ended September 30, 2009, directly attributable to the acquired operations of AmCOMP, particularly the policyholders’ dividend plans in Florida and Wisconsin, which are administered pricing states.

Underwriting and other operating expenses increased 53.7% for the three months ended September 30, 2009, as compared to the same period of 2008. The increase was primarily related to the acquired operations of AmCOMP. The acquired operations contributed $11.2 million to our underwriting expenses for the third quarter of 2009. Excluding the impact of the acquisition and one-time integration and restructuring charges, our underwriting and other operating expenses would have remained flat. In 2008, there was a $1.6 million decrease in the allowance for bad debts. During the three months ended September 30, 2009, we incurred net one-time integration and restructuring charges of $0.6 million.

Interest expense increased $1.8 million for the three months ended September 30, 2009. We first incurred debt on September 30, 2008. For the quarter ended September 30, 2008, we had no debt or related interest expense.

Income taxes increased $4.9 million for the third quarter of 2009 compared to the third quarter 2008. The increase was primarily due to a tax benefit in the three months ended September 30, 2008, related to the final reversal of the liability for previously unrecognized tax benefits of $10.6 million, including interest. The effective tax rate for the three months ended September 30, 2009, was 13.1%, as compared to a tax benefit rate of 0.9%, for the same period of 2008.

Combined Ratio

The combined ratio increased 10.1 percentage points for the three months ended September 30, 2009, to 88.9%, compared to 78.8% for the three months ended September 30, 2008. The acquired operations of AmCOMP resulted in an increase in the combined ratio of 16.6 percentage points. Excluding the impact of the acquired operations, the net improvement in the combined ratio was attributable to the increase in the LPT contingent profit commission, partially offset by the decrease in the prior accident year loss development.

Results of Operations

Nine Months Ended September 30, 2009 and 2008

The following table summarizes our consolidated financial results for the nine months ended September 30, 2009 and 2008:


	2009⁽⁴⁾			2008			Increase (Decrease) 2009 over 2008			Percentage Increase (Decrease) 2009 over 2008

	(in thousands, except for percentages)
Selected Financial Data
Gross premiums written⁽¹⁾	$	306,270		$	232,431		$	73,839			31.8	%
Net premiums written⁽¹⁾		298,159			224,317			73,842			32.9

Net premiums earned	$	314,221		$	222,842		$	91,379			41.0	%
Net investment income		68,704			55,915			12,789			22.9
Realized gains (losses) on investments, net		1,060			(3,211	)		4,271			n/a
Other income		388			1,155			(767	)		(66.4	)

Total revenues		384,373			276,701			107,672			38.9

Losses and LAE		166,657			80,344			86,313			107.4
Commission (benefit) expense		25,611			30,465			(4,854	)		(15.9	)
Dividends to policyholders		5,418			78			5,340			n/a
Underwriting and other operating expenses		102,624			66,536			36,088			54.2
Interest expense		5,608			—			5,608			n/a
Income tax expense		6,698			13,349			(6,651	)		(49.8	)

Total expenses		312,616			190,772			121,844			63.9


Net income	$	71,757		$	85,929		$	(14,172	)		(16.5	)


Selected Operating Data
Losses and LAE ratio		53.0	%		36.0	%		17.0	%
Commission expense ratio		8.2			13.7			(5.5	)
Dividends to policyholders ratio		1.7			—			n/a
Underwriting and other operating expenses ratio		32.7			29.9			2.8
Combined ratio⁽²⁾		95.6			79.6			16.0
Net income before impact of the deferred reinsurance gain—LPT Agreement⁽³⁾	$	58,380		$	72,021		$	(13,641	)		(18.9	)



⁽¹⁾	On September 1, 2009, we changed our method of recording ECIC written premiums to an annual method. As a result, the method of calculating 2008 written premiums has been conformed for this change to be comparable to 2009 written premiums. The gross and net premiums written for all periods presented are calculated assuming the written premiums are 100% of the estimated annual premium. Historically, written premiums for ECIC were recorded using a billed method, where premiums were recorded at the time policy installments were billed.

⁽²⁾	The combined ratio is calculated by dividing the sum of losses and LAE, commission expense, dividends to policyholders and underwriting and other operating expenses by net premiums earned. Because we only have one operating segment, holding company expenses are included in our calculation of the combined ratio.

⁽³⁾	We define net income before impact of the deferred reinsurance gain—LPT Agreement as net income less: (a) amortization of deferred reinsurance gain—LPT Agreement and (b) adjustments to LPT Agreement ceded reserves. Deferred reinsurance gain—LPT Agreement reflects the unamortized gain from our LPT Agreement. Under GAAP, this gain is deferred and is being amortized using the recovery method, whereby the amortization is determined by the proportion of actual reinsurance recoveries to total estimated recoveries, and the amortization is reflected in losses and LAE. We periodically reevaluate the remaining direct reserves subject to the LPT Agreement. Our reevaluation results in corresponding adjustments, if needed, to reserves, ceded reserves, reinsurance recoverables and the deferred reinsurance gain, with the net effect being an increase or decrease, as the case may be, to net income. Net income before impact of the deferred reinsurance gain—LPT Agreement is not a measurement of financial performance under GAAP, but rather reflects the difference in accounting treatment between statutory and GAAP, and should not be considered in isolation or as an alternative to net income before income taxes and net income or any other measure of performance derived in accordance with GAAP.

	We present net income before impact of the deferred reinsurance gain—LPT Agreement because we believe that it is an important supplemental measure of operating performance to be used by analysts, investors and other interested parties in evaluating us. The LPT


	Agreement was a non-recurring transaction which does not result in ongoing cash benefits, and, consequently, we believe this presentation is useful in providing a meaningful understanding of our operating performance. In addition, we believe this non-GAAP measure, as we have defined it, is helpful to our management in identifying trends in our performance because the excluded item has limited significance in our current and ongoing operations.

	The table below shows the reconciliation of net income to net income before impact of the deferred reinsurance gain—LPT Agreement for the nine months ended:


	September 30,

	2009		2008

	(in thousands)
Net income	$	71,757	$	85,929
Less impact of the deferred reinsurance gain—LPT Agreement		13,377		13,908

Net income before impact of the deferred reinsurance gain—LPT Agreement	$	58,380	$	72,021


⁽⁴⁾	The table below reflects the impact to our results of operations from the acquisition of AmCOMP for the nine months ended September 30:


	2009

	(in thousands)
Selected Financial Data
Gross premiums written	$	123,038
Net premiums written		119,948

Net premiums earned	$	128,422
Net investment income		15,958
Realized losses on investments		(155	)
Other income		74

Total revenues		144,299

Losses and LAE		92,194
Commission expense		13,012
Dividends to policyholders		5,402
Underwriting and other operating expenses		35,201
Underwriting and other operating expenses—integration and restructuring		1,747
Interest expense		1,315
Income tax benefit		(2,283	)

Total expenses		146,588

Net loss	$	(2,289	)

Net Income

Net income decreased $14.2 million, or 16.5%, for the nine months ended September 30, 2009, compared to the same period of 2008. The change in net income was primarily driven by an $86.3 million increase in losses and LAE and a $36.1 million increase in underwriting and other operating expenses, partially offset by a $91.4 million increase in net premiums earned. Net income decreased $2.3 million as a result of the acquired operations of AmCOMP. Net income includes amortization of deferred reinsurance gain—LPT Agreement of $13.4 million and $13.9 million for the nine months ended September 30, 2009 and 2008, respectively. Excluding the impact of the LPT Agreement, net income would have been $58.4 million and $72.0 million for the nine months ended September 30, 2009 and 2008, respectively.

Revenues

Net premiums earned increased 41.0% for the nine months ended September 30, 2009, compared to the same period of 2008. The increase was primarily attributable to net premiums earned from our newly acquired Florida insurance subsidiaries, EPIC and EAC, which contributed $128.4 million to net premiums earned for the nine months ended September 30, 2009. This increase was partially offset by lower direct premiums written in certain markets, primarily California and Nevada, which had $30.6 million and $14.5 million lower direct premiums written in the first nine months

of 2009 compared to the same period of 2008, respectively, as a result of rate reductions, competition and impacts of the economic contraction. The acquired operations, particularly in Florida, have also been affected by economic contraction, as indicated by lower estimated payrolls, upon which our premiums are based, combined with rate reductions.

Net investment income increased 22.9% for the nine months ended September 30, 2009. The increase in net investment income was related to the increase in invested assets. Fixed maturity securities acquired from the acquisition accounted for a 25.2% increase in invested assets for the nine months ended September 30, 2009, compared to the same period of 2008. The average pre-tax book yield on invested assets remained constant at 4.6% at September 30, 2009, as compared to the same period 2008. The tax equivalent yield on invested assets increased to 5.6% at September 30, 2009, as compared to 5.3% at September 30, 2008. This was primarily due to the increase in the duration of our fixed maturity securities.

For the nine months ended September 30, 2009, realized gains on investments were $1.1 million, compared to realized losses of $3.2 for the same period of 2008. The realized gains are attributable to the sale of previously impaired equity securities. Realized gains for the first nine months of 2009 were partially offset by the other-than-temporary impairments in the first two quarters of 2009, totaling $1.9 million. The realized losses for the nine months ended September 2008 were the result of other-than-temporary impairments of $5.5 million on one fixed maturity and equity securities in our investment portfolio, which were partially offset by realized gains of $2.3 million on the sale of equity securities.

Expenses

Losses and LAE increased $86.3 million for the nine months ended September 30, 2009, compared to the nine months ended September 30, 2008, primarily as a result of the acquisition. Excluding the impact of the acquisition, losses and LAE would have decreased 7.3%, attributable to the decrease in earned premium. The change in overall net premiums earned reduced losses and LAE by approximately $60.5 million. Losses and LAE were 53.0% and 36.0% of net premiums earned for the nine months ended September 30, 2009 and 2008, respectively. During the nine months ended September 30, 2009, favorable prior accident year loss development decreased $13.7 million, to $39.6 million, compared to the same period of 2008. Additionally, our current accident year loss estimates were 69.9% and 66.2% for the nine months ended September 30, 2009 and 2008, respectively.

The table below reflects the losses and LAE reserve adjustments for the nine months ended:


	September 30,

	2009		2008

	(in millions)

Prior accident year favorable development, net	$	39.6	$	53.3


LPT amortization of the deferred reinsurance gain	$	13.4	$	13.9
LPT reserve favorable change	$	—	$	—

There was no adjustment to the direct reserves subject to the LPT Agreement in either period. Excluding the impact from the LPT Agreement, losses and LAE would have been $180.0 million and $94.2 million, or 57.3% and 42.3%, of net premiums earned for the nine months ended September 30, 2009 and 2008, respectively.

Commission expense decreased $4.9 million or 15.9%, for the nine months ended September 30, 2009, compared to the nine months ended September 30, 2008. The decrease is primarily attributable to a $14.1 million increase in the LPT contingent profit commission, partially offset by increased commission expense attributable to the acquisition. Excluding the impact of the LPT contingent profit commission, commission expense would have been 12.6% and 13.7% of net premiums earned for the nine months ended September 30, 2009 and 2008, respectively. Excluding the impact of the acquisition and the LPT contingent profit commission, our commission expense would have decreased approximately $3.8 million, or 12.4%, primarily attributable to a decrease in net premiums earned.

Dividends to policyholders increased $5.4 million for the nine months ended September 30, 2009, directly related to the acquired operations of AmCOMP, particularly the policyholders’ dividend plans in Florida and Wisconsin, which are administered pricing states.

Underwriting and other operating expenses increased 54.2% for the nine months ended September 30, 2009, as compared to the same period in 2008, primarily related to the acquired operations of AmCOMP. The acquired operations contributed $35.2 million to our underwriting expenses for the nine months ended September 30, 2009. Excluding the impact of the acquisition and one-time integration and restructuring charges, our underwriting and other operating expenses would have decreased $4.0 million, primarily due to declining compensation expense not related to restructuring and a decline in premium taxes due to lower net premiums earned. Additionally, during the nine months ended September 30, 2009, we incurred total one-time integration and restructuring charges of $4.9 million, including $2.5 million in severance expenses related to our corporate restructuring.

Interest expense increased $5.6 million for the nine months ended September 30, 2009. For the nine months ended September 30, 2008, we had no debt or related interest expense.

Income taxes decreased 49.8% for the nine months ended September 30, 2009, compared to the same period of 2008. The effective tax rate for the nine months ended September 30, 2009 was 8.5%, as compared to 13.4% for the same period of 2008. The decrease was primarily due to a $20.8 million decrease in pre-tax income, the impact of tax-exempt investment income and change in the LPT contingent profit commission of $14.1 million, which is not subject to income tax. This favorable change was partially offset by the final reversal of the liability for previously unrecognized tax benefits in the amount of $10.6 million, including interest for the nine months ended September 30, 2008.

Tax-exempt income as a percentage of pre-tax income was 37.5% and 26.4% for the nine months ended September 30, 2009 and 2008, respectively. While we expect the levels of tax-preferred investment income to remain relatively stable during 2009, we cannot be certain how changes to pre-tax income may ultimately impact our effective rate in future periods.

Combined Ratio

The combined ratio increased 16.0 percentage points for the nine months ended September 30, 2009, to 95.6%, compared to 79.6% for the nine months ended September 30, 2008. The acquired operations of AmCOMP resulted in an increase in the combined ratio of 13.4 percentage points. Also increasing the combined ratio was the decrease of the favorable prior accident year loss development period over period. The remainder of the increase was primarily the result of lower premiums earned for the period due to rate cuts, competitive pressures, and overall economic conditions, partially offset by the increase in the LPT contingent profit commission.

Liquidity and Capital Resources

Parent Company. We are a holding company and substantially all of our operations have historically been conducted through our insurance subsidiaries, EICN and ECIC. On October 31, 2008, we completed the acquisition of AmCOMP and, as a result, added two new insurance subsidiaries: EPIC and EAC. Dividends to EHI from our insurance subsidiaries are contingent upon our subsidiaries’ earnings and subject to business considerations and regulatory requirements. The primary uses of cash are to pay stockholder dividends, repurchase common stock, pay interest and principal payments on outstanding debt obligations and support general operating expenses.

Historically, we have met our cash requirements and financed our growth principally from underwriting operations, asset maturities, and investment income. The acquisition of AmCOMP was funded through a combination of available cash and funds provided by the Amended Credit Facility.

Our insurance subsidiaries are subject to insurance regulations, which restrict their ability to distribute dividends. The maximum amount that may be paid in 2009 by our insurance subsidiaries to EHI without prior approval by state regulators is $17.7 million. On July 31, 2009, a dividend of $17.7 million was paid by EPIC to Employers Group, Inc. (EGI), its immediate holding company, and subsequently from EGI to EHI.

In February 2008, EHI’s Board of Directors authorized a stock repurchase program (the 2008 Program). The program authorized us to repurchase up to $100 million of our common stock through June 30, 2009. In February 2009, the Board of Directors extended this program through December 31, 2009. Shares may be repurchased from time to time at prevailing market prices in open market or private transactions, in accordance with applicable laws and regulations, and subject to market conditions and other factors. The repurchases may be commenced or suspended from time to time without prior notice. There can be no assurance that we will continue to undertake any repurchase of our common stock pursuant to the 2008 Program. From inception of the 2008 Program through September 30, 2009, we have repurchased 5,403,196 shares of common stock, at the average price paid including commissions of $12.69 per share, for a total of approximately $68.6 million.

On November 4, 2009, the EHI Board of Directors authorized a share repurchase program for up to $50 million of the Company’s common stock. The Company expects that shares may be purchased at prevailing market prices from January 1, 2010 through December 31, 2010 through a variety of methods, including open market or private transactions, in accordance with applicable laws and regulations. The timing and actual number of shares repurchased will depend on a variety of factors, including the share price, corporate and regulatory requirements and other market and economic conditions. Repurchases under the 2010 Stock Repurchase Program may be commenced or suspended from time to time without prior notice, and the program may be suspended or discontinued at any time.

Operating Subsidiaries. The primary sources of cash for our insurance operating subsidiaries are funds generated from underwriting operations, asset maturities and income received from investments. The primary uses of cash are to pay claims and operating expenses, to purchase investments, and to pay dividends to the parent holding company subject to state insurance laws and regulations.

Our net cash flows are generally invested in marketable securities. We closely monitor the duration of our investments and investment purchases, and sales are executed with the objective of having adequate funds available for the payment of claims at the subsidiary level and for the subsidiaries to pay dividends to EHI. Because our investment strategy focuses on asset and liability durations, and not on cash flows, asset sales may be required to satisfy obligations or rebalance asset portfolios. At September 30, 2009, our investment portfolio had an effective duration of 5.08, as compared to 4.74 at December 31, 2008, with individual maturities extending out 40 years.

The purchase of reinsurance protects us against the costs of severe claims and catastrophic events. On July 1, 2009, we entered into a new reinsurance program that is effective through July 1, 2010. The reinsurance program consists of two agreements, one excess of loss agreement and one catastrophic loss agreement. The reinsurance program provides coverage up to $200.0 million per loss occurrence, subject to certain exclusions. Our loss retention for the program year beginning July 1, 2009, is $5.0 million. The coverage is subject to an aggregate loss cession limitation in the first layer ($5.0 million in excess of our $5.0 million retention) of $20.0 million. Additionally, in the second through fifth layers of our reinsurance program, our ultimate net loss shall not exceed $10.0 million for any one life, and we are permitted one reinstatement for each layer upon the payment of additional premium. We believe that our reinsurance program meets our needs and that we are sufficiently capitalized for the above described retention.

Our insurance subsidiaries are required to have securities on deposit for the protection of injured workers in accordance with various state laws and regulations. At September 30, 2009, investments with a fair value of $564.2 million were on deposit to comply with such laws and regulations. Based on December 31, 2008, statutory financial statements, we were able to reduce our California deposits by approximately $43 million in the third quarter of 2009.

As of September 30, 2009, we had cash, short-term investments and fixed maturity securities that will mature over the next 24 months of approximately $480.0 million. We plan to repay $50 million of the line of credit provided by the Amended Credit Facility on or before each of December 31, 2009 and 2010 and March 26, 2011. Additionally, we expect one-time integration and restructuring expenditures of approximately $7.5 million in 2009, of which $1.2 million is remaining. Other capital expenditures may include such things as stock repurchases, future stockholder dividends, and support of our growth strategy. We believe that our liquidity needs over the next 24 months will be met with cash from operations, maturing investments and prudent use of credit.

Cash Flows

We monitor cash flows at both the consolidated and subsidiary levels and project future cash needs using trend and variance analyses.

The table below shows our net cash flows for the nine months ended:


	September 30,

	2009			2008

	(in thousands)

Cash and cash equivalents provided by (used in):
Operating activities	$	46,367		$	55,195
Investing activities		25,485			(19,705	)
Financing activities		(62,124	)		126,600

Net increase in cash and cash equivalents	$	9,728		$	162,090

Net cash provided by operating activities decreased $8.8 million for the nine months ended September 30, 2009, compared to the same period of 2008.

Items increasing net cash provided by operations included:


	•	increased net premiums received of $79.9 million;

	•	increased investment income of $12.5 million;


	•	decreased commission paid of $0.8 million, including $5.7 million received related to the LPT contingent profit commission; and

	•	decreased income taxes paid of $25.9 million.

Items decreasing net cash provided by operations included increased payments for:

	•	losses and LAE of $89.8 million;

	•	underwriting and other operating expenses of $33.0 million;

	•	policyholder dividends of $5.6 million; and

	•	interest expense of $5.2 million on the Amended Credit Facility and surplus notes.

A portion of the increase in underwriting expenses paid was related to one-time integration and restructuring expenses incurred in the first nine months of 2009.

Net cash provided by investing activities was $25.5 million for the nine months ended September 30, 2009, as compared to $19.7 million of net cash used for the same period of the prior year. The difference was primarily attributable to a reduction in the purchase of fixed maturities, as cash was used for the repurchase of our common stock.

Net cash used in financing activities was $62.1 million for the nine months ended September 30, 2009, as compared to $126.6 million of net cash provided for the same period in 2008. The majority of cash used by financing activities was to repurchase approximately $53.6 million of our common stock and pay dividends to stockholders. In 2008, the cash was provided by proceeds from our Amended Credit Facility, which cash was later used for the acquisition of AmCOMP.

Investments

We employ an investment strategy that emphasizes asset quality and considers the durations of fixed maturity securities against anticipated claim payments and expenditures, other liabilities and capital needs. Our investment portfolio is structured so that investments mature periodically over time in reasonable relation to current expectations of future claim payments. Currently, we make claim payments from positive cash flow from operations and use excess cash to invest in operations, invest in marketable securities, return capital to our stockholders and fund our growth strategy. As of September 30, 2009, the amortized cost of our investment portfolio was $1.96 billion and the fair value was $2.11 billion.

At September 30, 2009, our investment portfolio, which is classified as available-for-sale, was made up almost entirely of investment grade fixed maturity securities whose fair values may fluctuate due to interest rate changes. We strive to limit interest rate risk by managing the duration of our fixed maturity securities. As of September 30, 2009, our fixed maturity securities (excluding cash and cash equivalents) had a duration of 5.08. To minimize interest rate risk, our portfolio is weighted toward short-term and intermediate-term bonds; however, our investment strategy balances consideration of duration, yield and credit risk. Our current investment guidelines require that the minimum weighted average quality of our fixed maturity securities portfolio shall be “AA.” As of September 30, 2009, our fixed maturity securities portfolio had an average quality of “AA+,” with approximately 77.1% of the carrying value of our investment portfolio rated “AA” or better. Agency-backed mortgage pass-throughs totaled $290.5 million, or 13.7%, of the total portfolio. We had no subprime mortgage debt securities or derivative securities relating thereto as of September 30, 2009.

We carry our portfolio of equity securities on our balance sheet at fair value. In order to minimize our exposure to equity price risk and the resulting increases and decreases to our assets, we invest primarily in equity securities of mid-to-large capitalization issuers and seek to diversify our equity holdings across several industry sectors. At September 30, 2009, the equity allocation of our investment portfolio was 3.1%, slightly above our target of 3%.

Given the economic uncertainty and continued market volatility, we believe our allocation best meets our strategy to preserve capital for policyholders, provide sufficient income to support insurance operations, and to effectively grow book value over a long-term investment horizon.

Our investment guidelines have been modified to meet our consolidated business strategy. The revised guidelines incorporate lower fixed income duration parameters, a reduction in target equity balances, a lower target weight for the tax-exempt municipal fixed income sector and revised benchmark compositions. Our overall investment philosophy is to maximize total investment returns within the constraints of prudent portfolio risk. We employ Conning Asset

Management (Conning) to act as our independent investment advisor. Conning follows our written investment guidelines based upon strategies approved by the EHI Board of Directors. In addition to the construction and management of the portfolio, we utilize the investment advisory services of Conning. These services include investment accounting and company modeling using Dynamic Financial Analysis (DFA). The DFA tool is utilized in developing a tailored set of portfolio targets and objectives that are used in constructing an optimal portfolio.

The following table shows the fair values of various categories of invested assets, the percentage of the total fair value of our invested assets represented by each category and the tax equivalent yield based on the fair value of each category of invested assets as of September 30, 2009:


Category	Estimated Fair Value		Percentage of Total			Yield

	(in thousands, except percentages)

U.S. Treasuries	$	166,025		7.9	%		3.9	%
U.S. Agencies		137,455		6.5			4.4
States and municipalities		1,053,320		49.8			5.8
Corporate securities		344,210		16.3			6.2
Residential mortgaged-backed securities		294,958		13.9			5.7
Commercial mortgaged-back securities		36,366		1.7			5.2
Asset-backed securities		13,782		0.7			5.3
Short-term investments		3,000		0.1			6.6
Equity securities		65,746		3.1			4.3

Total investments	$	2,114,862		100.0	%

Weighted average yield							5.6

The average credit rating for our fixed maturity portfolio, using ratings assigned by Standard & Poor’s, was AA+ at September 30, 2009. The following table shows the ratings distribution of our fixed income portfolio as of September 30, 2009, as a percentage of total market value:


Rating	Percentage of Total Market Value

“AAA”		41.3	%
“AA”		35.7	%
“A”		17.6	%
“BBB”		5.4	%

Total		100.0	%

We regularly assess individual securities as part of our ongoing portfolio management, including the identification of declines in fair values. All securities in an unrealized loss position are reviewed to determine whether the impairment is other-than-temporary. Factors considered in determining whether a decline is other-than-temporary include the length of time and the extent to which fair value has been below cost, historical and projected company financial performance and near-term prospects of the issuer, the outlook for industry sectors, credit ratings and macro-economic changes and our intent on not selling the securities and given that it is not more likely than not that we will be required to sell the securities until fair value recovers above cost, or to maturity.

For the nine months ended September 30, 2009, we recognized an impairment of $1.9 million in the fair value of equity securities in our investment portfolio. The impairment was recognized as a result of the severity and duration of the decline in the market values of these securities primarily due to market conditions. We determined that the remaining unrealized losses on securities in our investment portfolio were not considered to be other-than-temporary due to the financial condition and the near term prospects of the issuers and/or the interest rate environment and not the credit quality of the issuers. Based on our review as described above, we believe that we have appropriately identified other-than-temporary declines in fair value of our remaining unrealized losses at September 30, 2009.

The cost or amortized cost, gross unrealized gains, gross unrealized losses and estimated fair value of our investments at September 30, 2009, were as follows:


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value

	(in thousands)
Fixed maturity securities
U.S. Treasuries	$	156,549	$	9,548	$	(72	)	$	166,025
U.S. Agencies		129,101		8,354		—			137,455
States and municipalities		983,993		69,731		(404	)		1,053,320
Corporate		318,774		26,129		(693	)		344,210
Residential mortgaged-backed securities		278,169		17,558		(769	)		294,958
Commercial mortgaged-backed securities		36,046		616		(296	)		36,366
Asset-backed securities		13,220		562		—			13,782

Total fixed maturity securities		1,915,852		132,498		(2,234	)		2,046,116
Short-term investments		2,998		2		—			3,000

Total fixed maturity and short-term investments		1,918,850		132,500		(2,234	)		2,049,116


Equity securities
Consumer goods		14,739		6,991		(10	)		21,720
Energy and utilities		4,715		4,708		—			9,423
Financial		6,611		2,914		(7	)		9,518
Technology and communications		7,930		6,159		(3	)		14,086
Industrial and other		6,257		4,743		(1	)		10,999

Total equity securities		40,252		25,515		(21	)		65,746

Total investments	$	1,959,102	$	158,015	$	(2,255	)	$	2,114,862

Fixed income risk premiums and credit spread reductions in non-Treasury fixed income sectors, particularly in corporates and municipals, during the nine months ended September 30, 2009, resulted in a $91.1 million increase in net unrealized gains in our fixed maturity securities portfolio from $39.2 million at December 31, 2008 to $130.3 million at September 30, 2009.

We are required by various state laws and regulations to keep securities in a depository account. At September 30, 2009 and 2008, securities having a fair value of $564.2 million and $518.3 million, respectively, were on deposit. These laws and regulations govern not only the amount, but also the type of security that is eligible for deposit and in all cases are restricted or limited to fixed maturity securities. Additionally, certain reinsurance contracts require company funds to be held in trust for the benefit of the ceding reinsurer to secure the outstanding liabilities assumed by us. The fair value of securities held in trust for reinsurance at September 30, 2009 and 2008, was $6.1 million and $5.0 million, respectively. The Amended Credit Facility is secured by fixed maturity securities and cash and cash equivalents, which had a fair value of $211.7 million and $186.7 million at September 30, 2009 and 2008, respectively.

Contractual Obligations and Commitments

The following table identifies our long-term debt and contractual obligations as of September 30, 2009:


	Payment Due By Period

	Total		Less Than 1 Year		1-3 Years		4-5 Years		More Than 5 Years

	(in thousands)

Operating Leases	$	35,855	$	3,187	$	13,149	$	9,518	$	10,001
Purchased Liabilities		7,825		745		4,963		1,921		196
Notes Payable⁽¹⁾		220,524		52,049		104,661		2,918		60,896
Capital Leases		304		213		56		35		—
Losses and LAE reserves ⁽²⁾⁽³⁾		2,443,644		246,702		302,932		213,458		1,680,552

Total Contractual Obligations	$	2,708,152	$	302,896	$	425,761	$	227,850	$	1,751,645



⁽¹⁾	Notes payable obligations reflect payments for the principal and estimated interest expense that is based on LIBOR rates plus a margin. The estimated interest expense was based on the contractual obligations of the debt outstanding as of September 30, 2009. The interest rates range from 1.54% to 5.50%. The Amended Credit Facility has principal payments of $50 million due December 31, 2009, December 31, 2010 and March 26, 2011.

⁽²⁾	The losses and LAE reserves are presented gross of our reinsurance recoverables on unpaid losses, which are as follows for each of the periods presented above:


	Recoveries Due By Period

	Total			Less Than 1 Year			1-3 Years			4-5 Years			More Than 5 Years

	(in thousands)

Reinsurance Recoverables	$	(1,047,139	)	$	(43,953	)	$	(85,073	)	$	(82,237	)	$	(835,876	)

⁽³⁾

Estimated losses and LAE reserve payment patterns have been computed based on historical information. As a result, our calculation of losses and LAE reserve payments by period is subject to the same uncertainties associated with determining the level of reserves and to the additional uncertainties arising from the difficulty of predicting when claims (including claims that have not yet been reported to us) will be paid. For a discussion of our reserving process, see “—Critical Accounting Policies-Reserves for Losses and Loss Adjustment Expenses.” Actual payments of losses and LAE by period will vary, perhaps materially, from the above table to the extent that current estimates of losses and LAE reserves vary from actual ultimate claims amounts as a result of variations between expected and actual payout patterns.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

Critical Accounting Policies

These unaudited interim consolidated financial statements include amounts based on informed estimates and judgments of management for those transactions that are not yet complete. Such estimates and judgments affect the reported amounts in the financial statements. Those estimates and judgments that were most critical to the preparation of the financial statements involved the following: (a) reserves for losses and loss adjustment expenses; (b) reinsurance recoverables; (c) recognition of premium income; (d) deferred policy acquisition costs; (e) deferred income taxes; and (f) valuation of investments. These estimates and judgments require the use of assumptions about matters that are highly uncertain and therefore are subject to change as facts and circumstances develop. If different estimates and judgments had been applied, materially different amounts might have been reported in the financial statements. Our accounting policies are discussed under “Critical Accounting Policies” in the Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report. Additional information regarding our accounting policy for reserves for loss and loss adjustment expenses and reinsurance recoverables follows.

Reserves for Losses and Loss Adjustment Expenses

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 September 30, 2009, our reserves for unpaid losses and LAE, net of reinsurance, were $1.40 billion.

Accounting for workers’ compensation insurance requires us to estimate the liability for the expected ultimate cost of unpaid losses and LAE, referred to as loss reserves, as of a balance sheet date. Our estimate of loss reserves is intended to equal the difference between the expected ultimate losses and LAE of all claims that have occurred as of a balance sheet date and amounts already paid. Management establishes the loss reserve based on its own analysis of emerging claims experience and environmental conditions in our markets and a review of the results of various actuarial projection methods and their underlying assumptions. Our aggregate carried reserve for unpaid losses and LAE is a point estimate, which is the sum of our reserves for each accident year in which we have exposure. This aggregate carried reserve calculated by us represents our best estimate of our outstanding unpaid losses and LAE.

Although claims for which reserves are established may not be paid for several years or more, we do not discount loss reserves in our financial statements for the time value of money.

The three main components of our reserves for unpaid losses and LAE are case reserves, “incurred but not reported” or IBNR reserves, and LAE reserves.

Case reserves are estimates of future claim payments based upon periodic case-by-case evaluation and the judgment of our claims adjusting staff, as applied at the individual claim level. Our claims examiners determine these case reserves for reported claims on a claim-by-claim basis, based on the examiner’s judgment and experience and on our case reserving practices. We update and monitor our case reserves frequently to appropriately reflect current information.

IBNR is an actuarial estimate of future claim payments beyond those considered in the case reserve estimates, relating to claims arising from accidents that occurred during a particular time period on or prior to the balance sheet date. Thus, IBNR is the compilation of the estimated ultimate losses for each accident year less amounts that have been paid and case reserves. IBNR reserves, unlike case reserves, do not apply to a specific claim, but rather apply to the entire body of claims arising from a specific time period. IBNR primarily provides for costs due to:


	•	future claim payments in excess of case reserves on recorded open claims;

	•	additional claim payments on closed claims; and

	•	the cost of claims that have not yet been reported to us.

Most of our IBNR reserves relate to estimated future claim payments over and above our case reserves on recorded open claims. For workers’ compensation, most claims are reported to the employer and to the insurance company relatively quickly, and relatively small amounts are paid on claims that already have been closed (which we refer to as “reopenings”). Consequently, late reporting and reopening of claims are a less significant part of IBNR for our insurance subsidiaries.

LAE reserves are our estimate of the diagnostic, legal, administrative and other similar expenses that we will pay in the future to manage claims that have occurred on or before the balance sheet date. LAE reserves are established in the aggregate, rather than on a claim-by-claim basis.

A portion of our losses and LAE obligations are ceded to unaffiliated reinsurers. We establish our losses and LAE reserves both gross and net of ceded reinsurance. The determination of the amount of reinsurance that will be recoverable on our losses and LAE reserves includes both the reinsurance recoverable from our excess of loss reinsurance policies, as well as reinsurance recoverable under the terms of the LPT Agreement. Our reinsurance arrangements also include an intercompany pooling arrangement between EICN, ECIC, EPIC and EAC whereby each of the insurance subsidiaries cedes some of its premiums, losses, and LAE to the other, but this intercompany pooling arrangement does not affect our consolidated financial statements.

Our reserve for unpaid losses and LAE (gross and net), as well as the above-described main components of such reserves were as follows:


	September 30, 2009		December 31, 2008

	(in thousands)

Case reserves	$	893,769	$	886,789
IBNR		1,236,793		1,293,313
LAE		313,082		326,376

Gross unpaid losses and LAE		2,443,644		2,506,478
Less: Reinsurance recoverables on unpaid losses and LAE, gross		1,047,139		1,076,350

Net unpaid losses and LAE	$	1,396,505	$	1,430,128

Actuarial methodologies are used by workers’ compensation insurance companies, including us, to analyze and estimate the aggregate amount of unpaid losses and LAE. As mentioned above, management considers the results of various actuarial projection methods and their underlying assumptions among other factors in establishing the reserves for unpaid losses and LAE.

Judgment is required in the actuarial estimation of unpaid losses and LAE. The judgments include the selection of methodologies to project the ultimate cost of claims; the selection of projection parameters based on historical company data, industry data, and other benchmarks; the identification and quantification of potential changes in parameters from historical levels to current and future levels due to changes in future claims development expectations caused by internal or external factors; and the weighting of differing reserve indications that result from alternative methods and assumptions. The adequacy of our ultimate loss reserves, which are based on estimates, is inherently uncertain and represents a significant risk to our business, which we attempt to mitigate through our claims management process and by monitoring and reacting to statistics relating to the cost and duration of claims. However, no assurance can be given as to whether the ultimate liability will be more or less than our loss reserve estimates.

We retain an independent actuarial consulting firm (Consulting Actuary) to perform comprehensive studies of our losses and LAE liability on a semi-annual basis. The role of our Consulting Actuary is to conduct sufficient analyses to produce a range of reasonable estimates, as well as a point estimate, of our unpaid losses and LAE liability, and to present those results to our actuarial staff and to management.

For purposes of analyzing claim payment and emergence patterns and trends over time, we compile and aggregate our claims data by grouping the claims according to the year or quarter in which the claim occurred (“accident year” or “accident quarter”), since each such group of claims is at a different stage of progression toward the ultimate resolution and payment of those claims. The claims data is aggregated and compiled separately for different types of claims and/or claimant benefits. For our Nevada business, where a substantial detailed historical database is available from the Nevada State Industrial Insurance System (the Fund), (from which our Nevada insurance subsidiary, EICN, assumed assets, liabilities and operations in 2000), these separate groupings of benefit types include death, permanent total disability, permanent partial disability, temporary disability, medical care and vocational rehabilitation. Third party subrogation recoveries are separately analyzed and projected.

Both the Consulting Actuary and the internal actuarial staff select and apply a variety of generally accepted actuarial methods to our data. The methods applied vary somewhat according to the type of claim benefit being analyzed. The primary methods utilized in recent evaluations are: Paid Bornhuetter-Ferguson Method; Reported Bornhuetter-Ferguson Method; Paid Development Method; Reported Development Method; Frequency-Severity Method; and Initial Expected Loss Method. Each of the methods requires the selection and application of parameters and assumptions. The key parameters and assumptions are: the pattern with which our aggregate claims data will be paid or will emerge over time; claims cost inflation rates; and trends in the frequency of claims, both overall and by severity of claim. Of these, we believe the most important are the pattern with which our aggregate claims data will be paid or emerge over time and claims cost inflation rates.

Management along with internal actuarial staff and the Consulting Actuary separately analyze LAE and estimate unpaid LAE. This analysis relies primarily on examining the relationship between the aggregate amounts that has been spent on LAE historically, as compared with the dollar volume of claims activity for the corresponding historical calendar periods. Based on these historical relationships, and judgmental estimates of the extent to which claim

management resources are focused more intensely on the initial handling of claims than on the ongoing management of claims, the Consulting Actuary selects a range of future LAE estimates that is a function of the projected future claim payment activity. The portion of unpaid LAE that will be recoverable from reinsurers is estimated based on the contractual reinsurance terms.

Based on the results of the analyses conducted, the stability of the historical data, and the characteristics of the various claims segments analyzed, the Consulting Actuary selects a range of estimated unpaid losses and LAE and a point estimate of unpaid losses and LAE, for presentation to internal actuarial staff and management. The selected range is intended to represent the range in which it is most likely that the ultimate losses will fall. This range is narrower than the range of indications produced by the individual methods applied because it is not likely, although it is possible, that the high or low result will emerge for every state, benefit type and accident year. The actuarial point estimate of unpaid losses and LAE is based on a judgmental selection for each benefit type from within the range of results indicated by the different actuarial methods.

Management formally establishes loss reserves for financial statement purposes on a quarterly basis. In doing so, we make reference to the most current analyses of our Consulting Actuary, including a review of the assumptions and the results of the various actuarial methods used by the Consulting Actuary. Comprehensive studies are conducted as of June 30 and December 31 by both internal actuarial staff and the Consulting Actuary. On the alternate quarters, the preceding study results are updated for actual claim payment activity during the quarter.

The Consulting Actuary provides the following analyses using information provided by the Company:


	•	claim frequency and claim severity trends indicated by the claim activity as well as any emerging claims environment or operational issues that may indicate changing trends; and

	•	workers’ compensation industry trends as reported by industry rating bureaus, the media, and other similar sources.

Management determines the IBNR and LAE components of our loss reserves by establishing a point in the range of the Consulting Actuary’s most recent analysis of unpaid losses and LAE with the selection of the point based on management’s own view of recent and future claim emergence patterns, payment patterns, and trends information obtained from internal actuarial staff pertaining to:


	•	view of the markets in which we are operating, including economic, business and political conditions;

	•	the characteristics of the business we have written in recent quarters;

	•	recent and pending recoveries from reinsurance;

	•	our view of trends in the future costs of managing claims; and

	•	other similar considerations as we view relevant.

The aggregate carried reserve calculated by management represents our best estimate of our outstanding unpaid losses and LAE. We believe that we should be conservative in our reserving practices due to the “long tail” nature of workers’ compensation claims payouts, the susceptibility of those future payments to unpredictable external forces such as medical cost inflation and other economic conditions, and the actual variability of loss reserve adequacy that we have observed in the workers’ compensation insurance industry.

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


	For the Nine Months Ended September 30, 2009			For the Year Ended December 31, 2008

	(in thousands)
Unpaid losses and LAE, gross of reinsurance, at beginning of period	$	2,506,478		$	2,269,710
Less reinsurance recoverables, excluding bad debt allowance, on unpaid losses and LAE		1,076,350			1,052,641

Net unpaid losses and LAE at beginning of period		1,430,128			1,217,069
Losses and LAE, net of reinsurance, acquired in business combinations		—			247,006
Losses and LAE, net of reinsurance, incurred in:
Current period		219,627			226,643
Prior periods		(39,593	)		(71,707	)

Total net losses and LAE incurred during the period		180,034			154,936
Deduct payments for losses and LAE, net of reinsurance, related to:
Current period		48,166			53,397
Prior periods		165,491			135,486

Total net payments for losses and LAE during the period		213,657			188,883

Ending unpaid losses and LAE, net of reinsurance		1,396,505			1,430,128
Reinsurance recoverable, excluding bad debt allowance, on unpaid losses and LAE		1,047,139			1,076,350

Unpaid losses and LAE, gross of reinsurance, at end of period	$	2,443,644		$	2,506,478

Estimates of incurred losses and LAE attributable to insured events of prior years decreased due to continued favorable development in such prior accident years (actual losses and LAE paid and current projections of unpaid losses and LAE were less than we originally anticipated). The reduction in the estimated liability for unpaid losses and LAE related to prior years was $39.6 million for the nine months ended September 30, 2009 and $71.7 million for the year ended December 31, 2008.

The major sources of favorable development include: (a) actual paid losses have been less than expected and (b) the impact of new information on selected patterns of claims emergence and claim payment used in the projection of future loss payments.

We review our loss reserves each quarter and, as previously discussed, our Consulting Actuary assists our review by performing a comprehensive actuarial analysis and projection of unpaid losses and LAE twice each year. We may adjust our reserves based on the results of our reviews and these adjustments could be significant. If we change our estimates, these changes are reflected in our results of operations during the period in which they are made. Our overall actual claims and LAE experience and emergence in recent years have been more favorable than anticipated in prior evaluations. Our insurance subsidiaries have been operating in a period of drastically changing environmental conditions in our major markets, entry into new markets, and operational changes. During periods characterized by such changes, at each evaluation, the actuaries and management must make judgments as to the relative weight to accord to long-term historical and recent company data, external data, evaluations of environmental changes and other factors in selecting the methods to use in projecting ultimate losses and LAE, the parameters to incorporate in those methods, and the relative weights to accord to the different projection indications. Since the loss reserves are providing for claim payments that will emerge over many years, if management’s projections and loss reserves were established in a manner that reacted quickly to each new emerging trend in the data or in the environment, there would be a high likelihood that future adjustments, perhaps significant in magnitude, would be required to correct for trends that turned out not to be persistent. At each balance sheet evaluation, some losses and LAE projection methods have produced indications above the loss reserve selected by management and some losses and LAE projection methods have produced indications lower than the loss reserve selected by management. At each evaluation, management has given weight to new data, recent indications, and evaluations of environmental conditions and changes that implicitly reflect management’s expectation as to the degree to which the future will resemble the most recent information and most recent changes, as compared with long-term claim payment, claim emergence, and claim cost inflation patterns.

As patterns and trends recur consistently over a period of quarters or years, management gives greater implicit weight to these recent patterns and trends in developing our future expectations. In our view, in establishing loss reserves at each historical balance sheet date, we have used prudent judgment in balancing long-term data and recent information.

It is likely that ultimate losses and LAE will differ from the loss reserves recorded in our September 30, 2009 balance sheet. Actual losses and LAE payments could be greater or less than our projections, perhaps significantly.

Our reserve estimates reflect expected increases in the costs of contested claims and assume we will not be subject to losses from significant new legal liability theories. While it is not possible to predict the impact of changes in this environment, if expanded legal theories of liability emerge, our IBNR claims may differ substantially from our IBNR reserves. Our reserve estimates assume that there will not be significant future changes in the regulatory and legislative environment. The impact of potential changes in the regulatory or legislative environment is difficult to quantify in the absence of specific, significant new regulation or legislation. In the event of significant new regulation or legislation, we will attempt to quantify its impact on our business.

The range of potential variation of actual ultimate losses and LAE from our current reserve for unpaid losses and LAE is difficult to estimate because of the significant environmental changes in the markets, particularly California and Florida, and because our insurance subsidiaries do not have a lengthy operating history in the markets outside Nevada.

Loss Portfolio Transfer (LPT)

Under the LPT Agreement, $1.525 billion in liabilities for incurred but unpaid losses and LAE related to claims incurred by EICN prior to July 1, 1995 was ceded for consideration of $775.0 million in cash. The estimated remaining liabilities subject to the LPT Agreement were approximately $899.0 million and $929.6 million as of September 30, 2009 and December 31, 2008, respectively. Losses and LAE paid with respect to the LPT Agreement totaled approximately $478.4 million and $447.9 million as of September 30, 2009 and December 31, 2008, respectively.

We account for the LPT Agreement as retroactive reinsurance. Upon entry into the LPT Agreement, an initial deferred reinsurance gain was recorded as a liability in our consolidated balance sheet. This gain is being amortized using the recovery method, whereby the amortization is determined by the proportion of actual reinsurance recoveries to total estimated recoveries, and the amortization is reflected in losses and LAE. In addition, we are entitled to receive a contingent commission under the LPT Agreement. The contingent commission is estimated based on both actual results to date and projections of expected ultimate losses under the LPT Agreement. Increases and decreases in the estimated contingent commission are reflected in our commission expense in the period that the estimate is revised.

New Accounting Standards

FAS 115-2 may now be found in the new codification as a component of ASC 320-10-35, Investments–Debt and Equity Securities.

In May 2009, the FASB issued SFAS No. 165, Subsequent Events, which sets forth general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. SFAS No. 165 is effective for periods ending after June 15, 2009. SFAS No. 165 had no impact on our consolidated financial condition or results of operations. We evaluated subsequent events through November 5, 2009. The guidance for SFAS No. 165 may now be found in the new codification as a component of ASC 855, Subsequent Events.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk is the risk of potential economic loss principally arising from adverse changes in the fair value of financial instruments. The major components of market risk affecting us are credit risk, interest rate risk and equity price risk. We have not experienced any material changes in credit or equity price risk since December 31, 2008.

Interest Rate Risk

Our investment portfolio consists primarily of fixed maturity securities with a fair value of $2.05 billion at September 30, 2009. The primary market risk exposure to our fixed maturity securities portfolio is interest rate risk, which we limit by managing the duration of our investment portfolio.

Fixed maturity securities include residential mortgage-backed securities, which totaled $295.0 million, or 14.0% of the total portfolio as of September 30, 2009. Agency-backed mortgage pass-throughs totaled $290.5 million, 98.5% of the mortgage-backed securities portion of the portfolio, or 13.7%, of the total portfolio.

The following table summarizes our interest rate risk illustrating the sensitivity of the fair value of fixed maturity securities to selected hypothetical changes in interest rates as of September 30, 2009. The selected scenarios are not predictions of future events, but rather illustrate the effect that such events may have on the fair value of our fixed maturity securities portfolio and stockholders’ equity.


	Hypothetical Change in Interest Rates	Estimated Increase (Decrease) in Fair Value

		(in thousands, except percentages)
300	basis point rise	$	(275,502	)	(13.5	)%
200	basis point rise		(190,914	)	(9.3	)
100	basis point rise		(98,794	)	(4.8	)
50	basis point decline		51,108		2.5
100	basis point decline		103,132		5.0

Item 4. Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act) as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report to provide assurance that information we are required to disclose in reports that are filed or submitted under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in the rules and forms specified by the SEC.

There have not been any changes in our internal controls over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

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

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

Issuer Purchase of Equity Securities

The following table summarizes the repurchase of our common stock for the three months ended September 30, 2009:


Period	Total Numbers of Shares Purchased	Average Price Paid Per Share ⁽¹⁾		Total Number of Shares Purchased as Part of Publicly Announced Program	Maximum Number (or Approximate Dollar Value) of Shares that May Yet be Purchased Under the Program ⁽²⁾

					(millions)
July 1—July 31, 2009	478,200	$	13.17	478,200	$	47.4
August 1—August 31, 2009	491,834		14.86	491,834		40.1
September 1—September 30, 2009	577,072		15.08	577,072		31.4

Total Repurchase	1,547,106	$	14.42	1,547,106




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

⁽²⁾	On February 21, 2008, the Board of Directors authorized a stock repurchase program of up to $100.0 million of our common stock through June 30, 2009. On February 25, 2009, the Board of Directors extended this program through December 31, 2009. The shares may be repurchased from time to time at prevailing market prices in open market or private transactions. The repurchases may be commenced or suspended from time to time without prior notice. There can be no assurance that we will continue to undertake any repurchase of our common stock pursuant to the program.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Submission of Matters to a Vote of Security Holders

None.

Item 5. Other Information

The following is provided pursuant to Item 5.03 of Form 8-K, "Amendments to Articles of Incorporation or Bylaws; Change in Fiscal Year." Effective November 4, 2009, the Company's Board of Directors amended the Company's Bylaws. The Bylaws were amended to, among other things, expand the information required to be provided to the Company by a stockholder proposing business or making a director nomination. A summary of the material amendments to the Bylaws follows:

	1.	Article I, Sections 9 and 10 were amended to require a stockholder (a) proposing business at an annual meeting or (b) nominating a person for election to the Board of Directors at an annual or special meeting of stockholders to disclose additional information regarding the stockholder. In addition to other matters, the notice to the Company must disclose the stockholder's (i) name and address and a description of the proposal or certain information about the director nominee; (ii) ownership of derivative securities and information regarding any other transaction, agreement, arrangement or understanding involving the stockholder with the effect or intent of mitigating losses, managing risk or benefiting from share price changes, or increasing or decreasing the voting power or economic interest of such stockholder or any of its affiliates or associates; and (iii) other interests in the proposed business or nomination. A stockholder proposing business or making a nomination must update the notice provided to the Company to the extent that the information contained in the notice changes in any material respect as of the record date for the applicable stockholder meeting.

	2.	Article I, Sections 9 and 10 were amended to provide that the Company is required to re-open the advance notice window for business proposed by a stockholder to be brought before an annual meeting and nominations of directors if the date of the annual meeting is not set for within 25 (rather than 30) days of the anniversary date of the prior year's meeting.

	3.	Article I, Section 9 of the Bylaws was amended to make clear that the advance notice applies to any business proposed to be brought before an annual meeting of stockholders, other than any proposal made pursuant to Rule 14a-8 of the SEC.

The foregoing description of the amendments to the Bylaws does not purport to be complete and is qualified in its entirety by reference to the full text of the Bylaws, a copy of which is attached hereto as Exhibit 3.1 and is incorporated herein by reference.

Item 6. Exhibits


Exhibit No.		Included Herewith	Incorporated by Reference Herein

	Description of Exhibit		Form	Exhibit	Filing Date

3.1	Amended and Restated By laws of Employers Holdings, Inc.	X
31.1	Certification of Douglas D. Dirks Pursuant to Section 302	X
31.2	Certification of William E. Yocke Pursuant to Section 302	X
32.1	Certification of Douglas D. Dirks Pursuant to Section 906	X
32.2	Certification of William E. Yocke Pursuant to Section 906	X

SIGNATURES

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


EMPLOYERS HOLDINGS, INC.

Date:	November 5, 2009	By:		/s/ Douglas D. Dirks

			Name:	Douglas D. Dirks
			Title:	President and Chief Executive Officer
				(Principal Executive Officer)

Date:	November 5, 2009	By:		/s/ William E. Yocke

			Name:	William E. Yocke
			Title:	Executive Vice President and Chief Financial Officer
				(Principal Financial and Accounting Officer)

-- Converted by SEC Publisher, created by BCL Technologies Inc., for SEC Filing

EXHIBIT 3.1

AMENDED AND RESTATED BYLAWS
OF
EMPLOYERS HOLDINGS, INC.

ARTICLE I
STOCKHOLDERS

Section 1. Annual Meeting. The annual meeting of Employers Holdings, Inc. (the “Corporation”), shall be held at such date and time as shall be determined by the board of directors of the Corporation (the “Board of Directors”).

Section 2. Special Meetings. Unless otherwise required by law, special meetings of the stockholders of the Corporation may be called only by the Chairman of the Board of Directors, the President, or a majority of the Board of Directors. The ability of the stockholders to call a special meeting of stockholders is hereby specifically denied. Business transacted at all special meetings of the stockholders of the Corporation shall be confined to the purpose or purposes stated in the notice of the meeting.

Section 3. Place of Meeting. Every meeting of the stockholders, whether an annual or a special meeting, shall be held at the principal office of the Corporation or at such other place within or without the State of Nevada as may be selected by the Board of Directors.

Section 4. Notice of Meetings. Written notice of the place, date and time of any stockholders' meeting, whether annual or special, and the purpose or purposes for which the meeting is called shall be given to each stockholder entitled to vote thereat, by mailing the same to the stockholder at the address of the stockholder that appears upon the records of the Corporation not less than 10 nor more than 60 days prior to the date of such meeting. Any meeting of the stockholders may be adjourned from time to time by the presiding officer at the meeting to reconvene at the same or some other place, and notice need not be given of any such adjourned meeting if the time and place, if any, thereof and the means of remote communications, if any, by which stockholders and proxyholders may be deemed to be present in person and vote at such adjourned meeting are announced at the meeting at which the adjournment is taken. At the adjourned meeting, the Corporation may transact any business which might have been transacted at the original meeting. If the adjournment is for more than thirty (30) days, or if after the adjournment a new record date is fixed for the adjourned meeting, notice of the adjourned meeting in accordance with the requirements of this Section 4 shall be given to each stockholder of record entitled to notice of and to vote at the meeting.

Section 5. Voting Power of Stockholders. Each stockholder entitled to vote at any meeting of the stockholders may vote either in person or by proxy filed with the Secretary of the Corporation at or before such meeting. A stockholder may authorize another person or

persons to act for such stockholder as proxy at any such meeting and in any manner permitted under applicable Nevada law. Unless a higher vote is required by applicable law, the Corporation's Amended and Restated Articles of Incorporation (the “Articles of Incorporation”) or these Bylaws, if a quorum is present, action by the stockholders on a matter other than the election of directors is approved if the number of votes cast in favor of the action exceeds the number of votes case in opposition to the action.

Section 6. Quorum. Unless otherwise required by applicable law, the Articles of Incorporation or these Bylaws, a majority of the voting power of the issued and outstanding stock of the Corporation entitled to vote, including the voting power that is represented in person or by proxy, regardless of whether any such proxy has authority to vote on all matters, shall constitute a quorum for the transaction of business at any annual or special meeting of the stockholders duly and properly called. A quorum, once established, shall not be broken by the withdrawal of enough votes to leave less than a quorum. If, however, such quorum of stockholders shall not be present or represented at any meeting of the stockholders, the presiding officer at the meeting shall have power to adjourn the meeting from time to time, in the manner provided in Section 4 hereof, until the requisite number of stockholders shall be present. At any subsequently reconvened meeting at which the requisite number of shares shall be represented, any business may be transacted which might have been transacted at the meeting as originally noticed.

Section 7. Inspector of Election. At every meeting of the stockholders, the Chairman of the Board or his designee shall appoint not fewer than two persons who are neither officers nor directors, as inspectors to receive and canvass the votes given at the meeting, and certify the result to him or her. At the next meeting of the Board of Directors, the Chairman of the Board shall lay before the Board of Directors the results so certified, and thereupon such proceedings shall be had as the subject matter decided by the election or the vote may require.

Section 8. Record Date. The directors may fix in advance a date, which shall be not less than 10 nor more than 60 days before the date of any meeting of stockholders or the date for the payment of any dividend or the making of any distribution to stockholders or the last day on which the dissent of stockholders may be effectively expressed for any purpose, as the record date for determining the stockholders having the right to notice of, and to vote at, such meeting and any adjournment thereof or the right to receive such dividend or distribution or the right to give such dissent.

Section 9. Nature of Business at Meetings of Stockholders. No business (other than nominations for election to the Board of Directors, which must comply with the provisions of Section 10 of this Article I) may be transacted at an annual meeting of stockholders, other than business that is either (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors (or any duly authorized committee thereof), (b) otherwise properly brought before the annual meeting by or at the direction of the Board of Directors (or any duly authorized committee thereof), or (c) otherwise properly brought before the annual meeting by any stockholder of the Corporation (i) who is a stockholder of record on the date of the giving of the notice provided for in this Section 9 of this Article I and on the record date for the determination of stockholders entitled to notice of and to vote at such annual

meeting and (ii) who complies with the notice procedures set forth in this Section 9 of this Article I.

In addition to any other applicable requirements, for business to be properly brought before an annual meeting by a stockholder, such stockholder must have given timely notice thereof in proper written form to the Secretary of the Corporation.

To be timely, a stockholder's notice to the Secretary of the Corporation must be delivered to or be mailed and received at the principal executive offices of the Corporation not less than ninety (90) days nor more than one hundred twenty (120) days prior to the anniversary date of the immediately preceding annual meeting of stockholders; provided, however, that in the event that the annual meeting is called for a date that is not within twenty-five (25) days before or after such anniversary date, notice by the stockholder in order to be timely must be so received not later than the close of business on the tenth (10th) day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure of the date of the annual meeting was made, whichever first occurs. In no event shall the adjournment or postponement of an annual meeting, or the public announcement of such an adjournment or postponement, commence a new time period (or extend any time period) for the giving of a stockholder's notice as described above.

To be in proper written form, a stockholder's notice to the Secretary of the Corporation must set forth the following information: (a) as to each matter such stockholder proposes to bring before the annual meeting, a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, and (b) as to the stockholder giving notice and the beneficial owner, if any, on whose behalf the proposal is being made, (i) the name and address of such person, (ii) (A) the class or series and number of all shares of stock of the Corporation which are owned beneficially or of record by such person and any affiliates or associates of such person, (B) the name of each nominee holder of shares of all stock of the Corporation owned beneficially but not of record by such person or any affiliates or associates of such person, and the number of such shares of stock of the Corporation held by each such nominee holder, (C) whether and the extent to which any derivative instrument, swap, option, warrant, short interest, hedge or profit interest or other transaction has been entered into by or on behalf of such person, or any affiliates or associates of such person, with respect to stock of the Corporation, and (D) whether and the extent to which any other transaction, agreement, arrangement or understanding (including any short position or any borrowing or lending of shares of stock of the Corporation) has been made by or on behalf of such person, or any affiliates or associates of such person, the effect or intent of any of the foregoing being to mitigate loss to, or to manage risk or benefit of stock price changes for, such person, or any affiliates or associates of such person, or to increase or decrease the voting power or pecuniary or economic interest of such person, or any affiliates or associates of such person, with respect to stock of the Corporation; (iii) a description of all agreements, arrangements, or understandings (whether written or oral) between or among such person, or any affiliates or associates of such person, and any other person or persons (including their names) in connection with the proposal of such business and any material interest of such person or any affiliates or associates of such person, in such business, including any anticipated benefit therefrom to such person, or any affiliates or associates of such person, (iv) a representation that the stockholder

giving notice intends to appear in person or by proxy at the annual meeting to bring such business before the meeting; and (v) any other information relating to such person that would be required to be disclosed in a proxy statement or other filing required to be made in connection with the solicitation of proxies by such person with respect to the proposed business to be brought by such person before the annual meeting pursuant to Section 14 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the rules and regulations promulgated thereunder.

A stockholder providing notice of business proposed to be brought before an annual meeting shall further update and supplement such notice, if necessary, so that the information provided or required to be provided in such notice pursuant to this Section 9 of this Article I shall be true and correct as of the record date for determining the stockholders entitled to receive notice of the annual meeting and such update and supplement shall be delivered to or be mailed and received by the Secretary of the Corporation at the principal executive offices of the Corporation not later than five (5) business days after the record date for determining the stockholders entitled to receive notice of the annual meeting.

No business shall be conducted at the annual meeting of stockholders except business brought before the annual meeting in accordance with the procedures set forth in this Section 9 of this Article I; provided, however, that, once business has been properly brought before the annual meeting in accordance with such procedures, nothing in this Section 9 of this Article I shall be deemed to preclude discussion by any stockholder of any such business. If the chairman of an annual meeting determines that business was not properly brought before the annual meeting in accordance with the foregoing procedures, the chairman shall declare to the meeting that the business was not properly brought before the meeting and such business shall not be transacted.

Nothing contained in this Section 9 of this Article I shall be deemed to affect any rights of stockholders to request inclusion of proposals in the Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act (or any successor provision of law).

Section 10. Nomination of Directors. Only persons who are nominated in accordance with the following procedures shall be eligible for election as directors of the Corporation, except as may be otherwise provided in the Articles of Incorporation with respect to the right of holders of preferred stock of the Corporation to nominate and elect a specified number of directors in certain circumstances. Nominations of persons for election to the Board of Directors may be made at any annual meeting of stockholders, or at any special meeting of stockholders called for the purpose of electing directors, (a) by or at the direction of the Board of Directors (or any duly authorized committee thereof) or (b) by any stockholder of the Corporation (i) who is a stockholder of record on the date of the giving of the notice provided for in this Section 10 of this Article I and on the record date for the determination of stockholders entitled to notice of and to vote at such annual meeting or special meeting and (ii) who complies with the notice procedures set forth in this Section 10 of this Article I.

In addition to any other applicable requirements, for a nomination to be made by a stockholder, such stockholder must have given timely notice thereof in proper written form to the Secretary of the Corporation.

To be timely, a stockholder's notice to the Secretary of the Corporation must be delivered to or be mailed and received at the principal executive offices of the Corporation (a) in the case of an annual meeting, not less than ninety (90) days nor more than one hundred twenty (120) days prior to the anniversary date of the immediately preceding annual meeting of stockholders; provided, however, that in the event that the annual meeting is called for a date that is not within twenty-five (25) days before or after such anniversary date, notice by the stockholder in order to be timely must be so received not later than the close of business on the tenth (10th) day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure of the date of the annual meeting was made, whichever first occurs; and (b) in the case of a special meeting of stockholders called for the purpose of electing directors, not later than the close of business on the tenth (10th) day following the day on which notice of the date of the special meeting was mailed or public disclosure of the date of the special meeting was made, whichever first occurs. In no event shall the adjournment or postponement of an annual meeting or a special meeting called for the purpose of electing directors, or the public announcement of such an adjournment or postponement, commence a new time period (or extend any time period) for the giving of a stockholder's notice as described above.

To be in proper written form, a stockholder's notice to the Secretary of the Corporation must set forth the following information: (a) as to each person whom the stockholder proposes to nominate for election as a director (i) the name, age, business address and residence address of such person, (ii) the principal occupation or employment of such person, (iii) (A) the class or series and number of all shares of stock of the Corporation which are owned beneficially or of record by such person and any affiliates or associates of such person, (B) the name of each nominee holder of shares of all stock of the Corporation owned beneficially but not of record by such person or any affiliates or associates of such person, and the number of such shares of stock of the Corporation held by each such nominee holder, (C) whether and the extent to which any derivative instrument, swap, option, warrant, short interest, hedge or profit interest or other transaction has been entered into by or on behalf of such person, or any affiliates or associates of such person, with respect to stock of the Corporation, and (D) whether and the extent to which any other transaction, agreement, arrangement or understanding (including any short position or any borrowing or lending of shares of stock of the Corporation) has been made by or on behalf of such person, or any affiliates or associates of such person, the effect or intent of any of the foregoing being to mitigate loss to, or to manage risk or benefit of stock price changes for, such person, or any affiliates or associates of such person, or to increase or decrease the voting power or pecuniary or economic interest of such person, or any affiliates or associates of such person, with respect to stock of the Corporation; and (iv) any other information relating to such person that would be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for election of directors pursuant to Section 14 of the Exchange Act, and the rules and regulations promulgated thereunder; and (b) as to the stockholder giving the notice, and the beneficial owner, if any, on whose behalf the nomination is being made, (i) the name and record address of such person; (ii) (A) the class or series and number of all shares of stock of the Corporation which are owned beneficially or of record by such person and any affiliates or associates of such person, (B) the name of each nominee holder of shares of the Corporation owned beneficially but not of record by such person or any affiliates or associates of such person, and the number of shares of stock of the Corporation held by each such nominee holder, (C) whether and the extent to which any

derivative instrument, swap, option, warrant, short interest, hedge or profit interest or other transaction has been entered into by or on behalf of such person, or any affiliates or associates of such person, with respect to stock of the Corporation, and (D) whether and the extent to which any other transaction, agreement, arrangement or understanding (including any short position or any borrowing or lending of shares of stock of the Corporation) has been made by or on behalf of such person, or any affiliates or associates of such person, the effect or intent of any of the foregoing being to mitigate loss to, or to manage risk or benefit of stock price changes for, such person, or any affiliates or associates of such person, or to increase or decrease the voting power or pecuniary or economic interest of such person, or any affiliates or associates of such person, with respect to stock of the Corporation; (iii) a description of all agreements, arrangements, or understandings (whether written or oral) between such person, or any affiliates or associates of such person, and any proposed nominee or any other person or persons (including their names) pursuant to which the nomination(s) are being made by such person, and any material interest of such person, or any affiliates or associates of such person, in such nomination, including any anticipated benefit therefrom to such person, or any affiliates or associates of such person; (iv) a representation that the stockholder giving notice intends to appear in person or by proxy at the annual meeting or special meeting to nominate the persons named in its notice; and (v) any other information relating to such person that would be required to be disclosed in a proxy statement or other filings required to be made in connection with the solicitation of proxies for election of directors pursuant to Section 14 of the Exchange Act and the rules and regulations promulgated thereunder. Such notice must be accompanied by a written consent of each proposed nominee to being named as a nominee and to serve as a director if elected.

A stockholder providing notice of any nomination proposed to be made at an annual meeting or special meeting shall further update and supplement such notice, if necessary, so that the information provided or required to be provided in such notice pursuant to this Section 10 of this Article I shall be true and correct as of the record date for determining the stockholders entitled to receive notice of the annual meeting or special meeting, and such update and supplement shall be delivered to or be mailed and received by the Secretary of the Corporation at the principal executive offices of the Corporation not later than five (5) business days after the record date for determining the stockholders entitled to receive notice of such annual meeting or special meeting.

No person shall be eligible for election as a director of the Corporation unless nominated in accordance with the procedures set forth in this Section 10 of this Article I. If the Chairman of the meeting determines that a nomination was not made in accordance with the foregoing procedures, the Chairman shall declare to the meeting that the nomination was defective and such defective nomination shall be disregarded.

Section 11. No Stockholder Action Without a Meeting. Any action required or permitted to be taken by the stockholders of the Corporation must be effected at a duly called annual or special meeting of stockholders of the Corporation, and the ability of the stockholders to consent in writing to the taking of any action without a meeting is hereby specifically denied.

ARTICLE II
DIRECTORS

Section 1. Powers. The Board of Directors shall manage and control the business and affairs of the Corporation.

Section 2. Number. The Board of Directors shall consist of not less than one person, and the exact number of directors constituting the Board of Directors shall be fixed from time to time by resolution adopted by a majority of the Board of Directors then in office.

Section 3. Classes. The directors shall be divided into three classes, designated Class I, Class II and Class III. Each class shall consist, as nearly as may be possible, of one-third of the total number of directors constituting the entire Board of Directors. The term of the Class I directors shall terminate on the date of the 2007 annual meeting; the term of the Class II directors shall terminate on the date of the 2008 annual meeting; and the term of the Class III directors shall terminate on the date of the 2009 annual meeting. At each succeeding annual meeting of stockholders beginning in 2007, successors to the class of directors whose term expires at that annual meeting shall be elected for a three-year term. If the number of directors is changed, any increase or decrease shall be apportioned among the classes so as to maintain the number of directors in each class as nearly equal as possible, and any additional director of any class elected to fill a vacancy resulting from an increase in such class shall hold office for a term that shall coincide with the remaining term of that class, but in no case will a decrease in the number of directors shorten the term of any incumbent director.

Section 4. Term. Each member of the Board of Directors shall hold office until such director's successor shall have been duly elected and qualified or until they have resigned or are removed from office or their office is otherwise vacated.

Section 5. Place of Meetings. Meetings of the Board of Directors, whether annual or special, may be held within or without the State of Nevada.

Section 6. Annual Meetings. Unless otherwise determined by the Chairman of the Board and noticed to the Board, the Board of Directors shall meet each year immediately after the annual meeting of the stockholders, at the same place as the meeting of the stockholders for the purpose of organization, election of officers and consideration of any other business that may properly be brought before the meeting. No notice of any kind to either old or new Board members for this annual meeting shall be necessary.

Section 7. Other Meetings. Other regular meetings may be held at such times as may be determined from time to time by the Board of Directors. Special meetings of the Board of Directors may be called by the Chairman of the Board or the President and Chief Executive Officer and shall be called by the Secretary on the written request of a majority of the Board of Directors then in office. Notice of special meetings setting forth the time and place of such meeting shall be given to each director then in office through the following means: personally or telephonically, by electronic mail, facsimile or by other means of written communication at least 24 hours before the meeting. Notice of a meeting need not be given to

any director who attends the meeting without protesting, prior to the conclusion thereof, the lack of notice.

Section 8. Voting. Any action required to be taken shall be authorized by a majority of the directors present at any meeting at which a quorum is present.

Section 9. Quorum. At all meetings of the Board of Directors, a majority of the Board of Directors then in office shall be necessary and sufficient to constitute a quorum for the transaction of business, but if, at any meeting, less than a quorum shall be present, a majority of those present may adjourn the meeting from time to time.

Section 10. Chairman of the Board. The Chairman of the Board shall be a director and shall preside at all meetings of the Board of Directors and of the stockholders at which the Chairman shall be present. The Chairman shall designate a director or officer to preside at any such meeting where the Chairman is absent. The Chairman of the Board shall have such other duties as the Board of Directors shall determine from time to time.

Section 11. Compensation of Directors. Board members who are not salaried officers of the Corporation shall receive such compensation as shall be fixed from time to time by resolution of the Board of Directors; and, in addition, the directors who are not salaried officers of the Corporation shall be entitled to reimbursement of the expenses properly incurred by them in attending and returning from meetings of the Board, any committee appointed by the Board, general meetings of the Corporation, or in connection with the business of the Corporation or their duties as directors generally.

Section 12. Resignation of Directors. Any director may resign at any time upon written notice to the Corporation. Such resignation shall take effect at the time specified therein, and if no time be specified, at the time of its receipt by the Chairman of the Board, the President and Chief Executive Officer or the Secretary. The acceptance of a resignation shall not be necessary to make it effective, unless so specified therein.

Section 13. Removal. Any director or one or more of the incumbent directors may be removed from office by vote of stockholders representing not less than two-thirds of the voting power of the issued and outstanding stock of the Corporation entitled to vote.

Section 14. Increase in Number of Directors and Vacancies. Subject to the terms of any one or more classes or series of Preferred Stock, any vacancy on the Board of Directors that results from an increase in the number of directors shall be filled by the vote of a majority of the Board of Directors then in office, provided that a quorum is present, and any other vacancy occurring on the Board of Directors may be filled by the vote of a majority of the Board of Directors then in office, even if less than a quorum, or by a sole remaining director. Any director of any class elected to fill a vacancy resulting from an increase in the number of directors of such class shall hold office for a term that shall coincide with the remaining term of that class. Any director elected to fill a vacancy not resulting from an increase in the number of directors shall have the same remaining term as that of his or her predecessor.

Section 15. Action Without a Meeting. Any action required or permitted to be taken at any meeting of the Board of Directors or any committee thereof may be taken without a meeting if all Board members or members of such committee, as the case may be, consent in writing to the adoption of a resolution authorizing the action. Such resolutions and the written consents thereto by the Board or committee members shall be filed with the minutes of the proceedings of the Board or such committee as the case may be.

Section 16. Committees. The Board of Directors may designate one or more committees and may delegate any of its powers to such committee. Each committee shall consist of one or more of the directors of the Corporation. Each member of a committee must meet the requirements for membership, if any, imposed by applicable law and the rules and regulations of any securities exchange on which the securities of the Corporation are listed for trading. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of any such committee. Subject to the rules and regulations of any securities exchange on which the securities of the Corporation are listed for trading, in the absence or disqualification of a member of a committee, and in the absence of a designation by the Board of Directors of an alternate member to replace the absent or disqualified member, the member or members thereof present at any meeting and not disqualified from voting, whether or not such member or members constitute a quorum, may unanimously appoint another qualified member of the Board of Directors to act at the meeting in the place of any absent or disqualified member. Any committee, to the extent permitted by law and provided in the resolution establishing such committee, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers which may require it, but no such committee shall have the power or authority of the Board of Directors in reference to (i) adopting an agreement of merger or consolidation under Sections 92A.005 to 92A.270, inclusive, of the Nevada Revised Statutes, (ii) approving the sale, lease or exchange of all of the Corporation's property and assets under Section 78.565 of the Nevada Revised Statutes, (iii) amending the Articles of Incorporation of the Corporation, (iv) recommending to the stockholders a dissolution of the Corporation or a revocation of a dissolution, or (v) declaring a dividend. Each committee shall keep regular minutes and report to the Board of Directors when required. Notwithstanding anything to the contrary contained in this Article II, the resolution of the Board of Directors establishing any committee of the Board of Directors and/or the charter of any such committee may establish requirements or procedures relating to the governance and/or operation of such committee that are different from, or in addition to, those set forth in these Bylaws and, to the extent that there is any inconsistency between these Bylaws and any such resolution or charter, the terms of such resolution or charter shall be controlling. Except as otherwise provided in this Section 16, the meetings and proceedings of any committee shall be governed by the provisions of these Bylaws regulating the meetings and proceedings of the Board of Directors, so far as the same are applicable and are not superseded by directions imposed by the Board of Directors.

Section 17. Participation by Telephone. Any one or more Board members or members of any committee thereof may participate in a meeting of the Board or such committee by means of a conference telephone or similar communications equipment by means of which all

persons participating in the meeting can hear each other at the same time. Participation by such means shall constitute presence in person at a meeting.

ARTICLE III
OFFICERS

Section 1. Officers. The Board of Directors shall select and appoint the Chairman of the Board, the President and Chief Executive Officer, the Treasurer, the Secretary

and any other officers as it deems advisable from time to time. The Board of Directors shall vote on the appointment of any and all such officers at the regular meeting of the Board held after each annual meeting of the stockholders. Each officer shall have such authority and perform such duties as may be prescribed from time to time by the Board of Directors, or, in the event of its failure so to prescribe, by the President and Chief Executive Officer. The Chairman of the Board shall be chosen from among the directors and other officers may, but need not, be directors. One person may hold more than one office, except that no one person shall hold simultaneously (i) the offices of (A) President and Chief Executive Officer and (B) Secretary; or (ii) the offices of (A) Chairman of the Board and (B) Secretary.

Section 2. President and Chief Executive Officer. The President and Chief Executive Officer shall, subject only to the direction and control of the Board of Directors, have responsibility for the general management of the business affairs and property of the Corporation, and of its several officers, and shall have such duties and responsibilities and shall report to such persons as the Board of Directors shall determine from time to time.

Section 3. Secretary. The Secretary shall keep the minutes of all meetings of the Board of Directors and its committees and the minutes of all meetings of the Corporation in books provided for that purpose and the Secretary shall attend to the giving or serving of all notices of the Corporation. The Secretary may sign with the President and Chief Executive Officer, or a Vice President, in the name of the Corporation, all contracts authorized by the Board of Directors or by any committee of the Board of Directors, and, when so ordered by the Board of Directors or such committee, the Secretary shall affix the seal of the Corporation thereto. The Secretary shall have charge of such books and papers as the Board of Directors shall direct, all of which shall at all reasonable times be open to the examination of any director, upon request at the office of the Corporation during business hours; and shall in general perform all the duties incident to the office of the Secretary, subject to the control of the Board of Directors, the Chairman of the Board, and the President and Chief Executive Officer.

Section 4. Treasurer. The Treasurer shall keep the financial accounts of the Corporation and shall deposit all monies and other valuable effects in the name and to the credit of the Corporation. The Treasurer shall disburse the funds of the Corporation as may be designated by the Board of Directors and shall render to the Board of Directors and the President and Chief Executive Officer whenever they may require it, an account of his or her transactions as Treasurer and of the financial condition of the Corporation.

Section 5. Compensation of Officers. The officers of the Corporation shall be entitled to receive such compensation for their services as may from time to time be determined, or pursuant to authority granted, by the Board of Directors.

Section 6. Removal of Officers. Any officer of the Corporation may be removed from office, with or without cause, by a vote of a majority of the directors then in office. The removal of an officer shall be without prejudice to his or her contract rights, if any. Election or appointment of an officer shall not of itself create contract rights.

Section 7. Resignation. Any officer of the Corporation may resign at any time. Such resignation shall be in writing and shall take effect at the time specified therein, and if no time be specified, at the time of its receipt by the Secretary. The acceptance of a resignation shall not be necessary in order to make it effective, unless so specified therein. The resignation of an officer shall be without prejudice to the contract rights of the Corporation, if any.

Section 8. Filling of Vacancies. A vacancy in any office shall be filled by, or pursuant to authority granted by, the Board of Directors.

ARTICLE IV
MISCELLANEOUS PROVISIONS

Section 1. Fiscal Year. The fiscal year of the Corporation shall begin on the first day of January and terminate on the thirty-first day of December in each year.

Section 2. Contracts, Checks, Drafts. The Board of Directors may authorize any officer or officers, agent or agents, in the name of and on behalf of the Corporation to enter into any contract or execute or deliver any instrument. All checks, drafts or other orders for the payment of money, notes or other evidences of indebtedness issued in the name of the Corporation, shall be signed by such officer or officers, agent or agents of the Corporation, and in such manner as shall be designated from time to time by resolution of the Board of Directors.

Section 3. Deposits. All funds of the Corporation shall be deposited from time to time to the credit of the Corporation in such bank or banks, trust companies or other depositories as the Board of Directors may select, and, for the purpose of such deposit, checks, drafts, warrants and other orders for the payment of money which are payable to the order of the Corporation, may be endorsed for deposit, assigned and delivered by any officer of the Corporation, or by such agents of the Corporation as the Board of Directors, the Chairman of the Board, or the President and Chief Executive Officer, may authorize for that purpose.

Section 4. Manner of Giving Notice. Notice by mail shall be deemed to have been given at the time a written notice is deposited in the United States mail, postage prepaid, subject to any prior periods called for herein. Any other written notice shall be deemed to have been given at the time it is personally delivered to the recipient or is delivered to a common carrier for transmission, or actually transmitted by the person giving the notice by electronic means, to the recipient. Oral notice shall be deemed to have been given at the time it is communicated, in person or by telephone or wireless device, to the recipient or to a person at the office of the recipient who the person giving the notice has reason to believe will promptly communicate it to the intended recipient. Any stockholder of the Corporation, director, officer, or Board committee member may waive any notice required to be given under these Bylaws. Whenever in the Corporation's Articles of Incorporation or these Bylaws notice is required or permitted to be given by mail, the affidavit or other sworn certificate of the person who mailed

such notice, filed with the Secretary of the Corporation, shall constitute conclusive evidence that such notice has been given and mailed.

Section 5. Construction. These Bylaws are to be construed to be consistent with applicable law, and if such construction is not possible then the invalidity of a Bylaw or a portion thereof shall not affect the validity of the remainder of the Bylaws, which shall remain in full force and effect.

Section 6. Certificate of Stock. Shares of the Corporation's stock may be certificated or uncertificated, as provided under Nevada law. All certificates of stock of the Corporation shall be numbered and shall be entered in the books of the Corporation as they are issued. They shall exhibit the holder's name and number of shares and shall be signed by at least two of the Chairman, President, Chief Executive Officer, Treasurer or Secretary. Any or all of the signatures on the certificate may be a facsimile.

Section 7. Transfers of Stock. Transfers of stock shall be made on the books of the Corporation only by the record holder of such stock, or by attorney lawfully constituted in writing, and, in the case of stock represented by a certificate, upon surrender of the certificate.

ARTICLE V INDEMNIFICATION OF OFFICERS AND DIRECTORS

AGAINST LIABILITIES AND EXPENSES

Section 1. Definitions. For the purposes of this Article (other than sections 7, 10 and 11 hereof), "agent" means any person who is or was a director or officer of the Corporation or is or was serving at the request of the Corporation as a director, officer, employee or agent of another foreign or domestic company, partnership, joint venture, trust or other enterprise, or was a director or officer of a foreign or domestic company which was a predecessor company of the Corporation or of another enterprise at the request of the predecessor company. For the purposes of this Article, "proceeding" means any threatened, pending, or completed action or proceeding, whether civil, criminal, administrative or investigative; and "expenses" include, without limitation, attorneys' fees and any expenses of establishing a right to indemnification under Sections 4 or 5(b) of Article V.

Section 2. Indemnification in Actions by Third Parties. The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any proceeding (other than an action by or in the right of the Corporation to procure a judgment in its favor) by reason of the fact that the person is or was an agent of the Corporation, against expenses, judgments, fines, settlements, and other amounts actually and reasonably incurred in connection with the proceeding, to the fullest extent permitted or authorized by applicable law, if that person (i) is not liable pursuant to NRS 78.138, or (ii) acted in good faith and in a manner which that person reasonably believed to be in or not opposed to the best interests of the Corporation, and, in the case of a criminal proceeding, had no reasonable cause to believe the conduct of the person was unlawful. The termination of any proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent shall not, of itself, create a presumption that the person is liable pursuant to NRS 78.138 or did not act in good faith and in a manner which the

person reasonably believed to be in or not opposed to the best interests of the Corporation, or that the person had reasonable cause to believe that the person's conduct was unlawful.

Section 3. Indemnification in Actions by or in the Right of the Corporation. The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending, or completed action by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that the person is or was an agent of the Corporation, against expenses actually and reasonably incurred by that person in connection with the defense or settlement of the action, to the fullest extent permitted or authorized by applicable law, if the person (i) is not liable pursuant to NRS 78.138, or (ii) acted in good faith and in a manner which that person reasonably believed to be in or not opposed to the best interests of the Corporation. No indemnification shall be made under this Section 3 for any claim, issue or matter as to which such a person has been adjudged by a court of competent jurisdiction, after exhaustion of all appeals therefrom, to be liable to the Corporation or for amounts paid in settlement to the Corporation, unless and only to the extent that the court in which the action or suit was brought or other court of competent jurisdiction determines upon application that in view of all of the circumstances of the case, the person is fairly and reasonably entitled to indemnity for such expenses as the court deems proper.

Section 4. Indemnification Against Expenses. To the extent that an agent of the Corporation has been successful on the merits in defense of any proceedings referred to in Sections 2 or 3 of Article V or in defense of any claim, issue or matter therein, the agent shall be indemnified against expenses actually and reasonably incurred by the agent in connection therewith.

Section 5. Required Determinations. Except as provided in Section 4 or 6 of Article V, any indemnification under Article V shall be made by the Corporation only if authorized in the specific case, upon a determination that indemnification of the agent is proper in the circumstances because the agent has met the applicable standard of conduct set forth in Sections 2 or 3 of Article V by:

(a) A majority vote of a quorum consisting of directors who are not parties of such proceeding;

(b) The court in which the proceeding is or was pending upon application made by the Corporation or the agent or the attorney or other person rendering services in connection with the defense, whether or not the application by the agent, attorney, or other person is opposed by the Corporation;

(d) Independent legal counsel in a written opinion, if a majority vote of a quorum consisting of directors who were not parties to the action, suit or proceeding so orders; or

(e) Independent legal counsel in a written opinion, if a quorum consisting of directors who were not parties to the action, suit or proceeding cannot be obtained.

Section 6. Advance of Expenses. Expenses of agents incurred in defending a civil or criminal action, suit or proceeding shall be paid by the Corporation as they are incurred and in advance of the final disposition of the action, suit or proceeding, upon receipt of an undertaking by or on behalf of the agent to repay the amount if it is ultimately determined by a court of competent jurisdiction that he is not entitled to be indemnified by the Corporation. This provision does not affect any rights to advancement of expenses to which Corporation personnel other than directors may be entitled under contract or otherwise by law.

Section 7. Other Indemnification. The indemnification authorized by Article V shall not be deemed exclusive of any additional rights to indemnification for breach of duty to the Corporation and its stockholders while acting in the capacity of a director or officer of the Corporation to the extent the additional rights to indemnification are authorized in Sections 78.138, 78.7502, and 78.751 of the Nevada Revised Statutes or any other applicable law. The indemnification provided by this section for acts, omissions, or transactions while acting in the capacity of, or while serving as, a director or officer of the Corporation but not involving breach of duty to the Corporation and its stockholders shall not be deemed exclusive of any other rights to which those seeking indemnification may be entitled under any bylaw, agreement, vote of the stockholders or disinterested directors, or otherwise to the extent the additional rights to indemnification are authorized in the Corporation's Articles of Incorporation. An article provision authorizing the indemnification in excess of that permitted by Chapter 78 of the Nevada Revised Statutes or to the fullest extent permissible under Nevada law or the substantial equivalent thereof shall be construed to be a provision for additional indemnification for breach of duty to the Corporation and its stockholders. The rights to indemnity hereunder shall continue as to a person who has ceased to be a director, officer, employee, or agent and shall inure to the benefit of the heirs, executors, and administrators of the person. Nothing contained in Article V shall affect any right to indemnification to which persons other than the directors and officers may be entitled by contract or otherwise.

Section 8. Forms of Indemnification Not Permitted. No indemnification or advance shall be made under Article V, except as provided in Section 4 or Section 5(b), in circumstances where it appears:

(a) That it would be inconsistent with a provision of the Articles of Incorporation, these Bylaws, or an agreement in effect at the time of the accrual of the alleged cause of action asserted in the proceeding in which the expenses were incurred or other amounts were paid, which prohibits or otherwise limits indemnification; or

(b) That it would be inconsistent with any condition expressly imposed by a court in approving a settlement.

Section 9. Insurance. The Corporation shall have power to purchase and maintain insurance on behalf of any agent or other employee of the Corporation against any liability asserted against or incurred by the agent in that capacity or arising out of the agent's status as such whether or not the Corporation would have the power to indemnify the agent against that liability under the provisions of Article V.

Section 10. Amendment to General Corporation Law. The Corporation may also indemnify its directors, officers, employees, and agents under other or additional circumstances and in other or additional amounts in accordance with amendments to the Nevada Revised Statutes as enacted from time to time.

Section 11. Indemnification of Employees and Agents. The Corporation may, to the extent authorized from time to time by the Board of Directors, provide rights to indemnification and to the advancement of expenses to employees and agents of the Corporation similar to those conferred in this Article V to directors and officers of the Corporation.

ARTICLE VI
AMENDMENTS

Section 1. Amendments. The Board of Directors shall have the exclusive authority to adopt, make, repeal, alter, amend or rescind these Bylaws by the affirmative vote of a majority of the Board of Directors then in office.

Exhibit 31.1

CERTIFICATIONS


I, Douglas D. Dirks, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Employers Holdings, Inc.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:

	(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

	(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

	(c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

	(d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

	(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

	(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


Date: November 5, 2009		/s/ Douglas D. Dirks

		Douglas D. Dirks
		President and Chief Executive Officer
		Employers Holdings, Inc.

Exhibit 31.2

CERTIFICATIONS


I, William E. Yocke, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Employers Holdings, Inc.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:

	(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

	(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

	(c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

	(d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

	(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

	(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


Date: November 5, 2009		/s/ William E. Yocke

		William E. Yocke
		Executive Vice President and
		Chief Financial Officer
		Employers Holdings, Inc.

Exhibit 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350

as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Form 10-Q of Employers Holdings, Inc. (the Company) for the quarter ended September 30, 2009, as filed with the Securities and Exchange Commission on the date hereof (the Report), the undersigned hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge:


	(1)	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and

	(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.


			/s/ Douglas D. Dirks

	Name:		Douglas D. Dirks
	Title:		President and Chief Executive Officer
			Employers Holdings, Inc.

Date: November 5, 2009

Exhibit 32.2

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350

as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


	(1)	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and

	(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.


			/s/ William E. Yocke

	Name:		William E. Yocke
	Title:		Executive Vice President and
			Chief Financial Officer
			Employers Holdings, Inc.

Date: November 5, 2009