EMPLOYERS HOLDINGS, INC. – 10-Q – 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 EHI, together with its subsidiaries. In
this Quarterly Report on Form 10-Q, the Company and its management discuss and
make statements based on currently available information regarding their
intentions, beliefs, current expectations, and projections of, among other
things, the Company's future performance, economic or market conditions,
including the evolving nature of the COVID-19 pandemic, current levels of
inflation, labor market expectations, catastrophic events or geo-political
conditions, legislative or regulatory actions or court decisions taken in
response to the COVID-19 pandemic or otherwise, business growth, retention
rates, loss costs, claim trends and the impact of key business initiatives,
future technologies and planned investments. Certain of these statements may
constitute "forward-looking" statements as that term is defined in the Private
Securities Litigation Reform Act of 1995.  Forward-looking statements can be
identified by the fact that they do not relate strictly to historical or current
facts and are often identified by words such as "may," "will," "could," "would,"
"should," "expect," "plan," "anticipate," "target," "project," "intend,"
"believe," "estimate," "predict," "potential," "pro forma," "seek," "likely," or
"continue," or other comparable terminology and their negatives. The Company and
its management caution investors that such forward-looking statements are not
guarantees of future performance. Risks and uncertainties are inherent in the
Company's future performance. Factors that could cause the Company's actual
results to differ materially from those indicated by such forward-looking
statements include, among other things, those discussed or identified from time
to time in the Company's public filings with the SEC, including the risks
detailed in the Company's Annual Reports on Form 10-K and in Part II, Item 1A of
this report. Except as required by applicable securities laws, the Company
undertakes no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events, or otherwise.

Overview

We are a Nevada holding company. Through our insurance subsidiaries, we provide
workers' compensation insurance coverage to select, small businesses primarily
in low to medium hazard industries. Workers' compensation insurance is provided
under a statutory system wherein most employers are required to provide coverage
for their employees' medical, disability, vocational rehabilitation, and/or
death benefit costs for work-related injuries or illnesses. We provide workers'
compensation insurance throughout the United States, with a concentration in
California, where 45% of our in-force premiums are generated. Our revenues are
primarily comprised of net premiums earned, net investment income, and net
realized and unrealized gains on investments.

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

Our strategy is to pursue profitable growth opportunities across market cycles
and maximize total investment returns within the constraints of prudent
portfolio management. We pursue profitable growth opportunities by focusing on
disciplined underwriting and claims management, utilizing medical provider
networks designed to produce superior medical and indemnity outcomes,
establishing and maintaining strong, long-term relationships with independent
insurance agencies, and developing important alternative distribution channels.
We believe that developing and implementing new technologies and capabilities
will fundamentally transform and enhance the digital experience of our
customers, including: (i) continued investments in new

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technology, data analytics, and process improvement capabilities focused on
improving the agent experience and enhancing agent efficiency; and (ii) the
further development of digital insurance solutions, including direct-to-customer
workers' compensation coverage. We also continue to execute a number of ongoing
business initiatives, including: achieving internal and customer-facing business
process excellence; diversifying our risk exposure across geographic markets and
industry groups; and utilizing a multi-company pricing platform and
territory-specific pricing.

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

The effects of the COVID-19 pandemic have continued to cause disruptions in
business activity due to supply chain interruptions, challenges with the labor
market, inflationary pressures, and overall general economic instability. All
states, including California, where we generated 45% of our in-force premiums as
of June 30, 2022, have experienced adverse economic impacts from the lingering
uncertainties of the COVID-19 pandemic. Certain classes of business that we
insure, especially those related to the restaurant and hospitality industries,
continue to be affected by these challenges.

Nonetheless, we closed another quarter with a record number of policies
in-force, which demonstrates that small businesses have endured the pandemic.
Our year-over-year new and renewal business premiums have increased, in addition
to audit premium increases, which are driving our premium growth. As labor
market shortages improve, we expect that rising payrolls will continue to bring
further improvement to our top line. Our strong balance sheet and operational
flexibility have allowed us to successfully navigate through the ongoing impacts
of the COVID-19 pandemic, and we have continued to pursue and advance the
significant investments that we have made in delivering a superior customer
experience for our independent and digital agents.

We continually review and adjust to changes in our policyholders' payrolls,
economic conditions, and seasonality, as experience develops or new information
becomes known. Any such adjustments are included in our current operations and
are made periodically through mid-term endorsements and/or premium audits. We
increased our final audit premium accruals by an additional $5.5 million during
the three months ended June 30, 2022, as our payroll exposure increased with the
labor market strengthening.

We continue to experience overall declines in the on-leveled frequency and
severity of compensable indemnity claims versus those generally experienced
before the COVID-19 pandemic. However, despite the emergence of vaccinations and
businesses operating at more normalized rates, the continued impact of the
COVID-19 pandemic, including any increases in infection rates, new variants and
renewed governmental actions to combat the COVID-19 pandemic, cannot be
estimated at this time.

Recent increases in market interest rates have negatively impacted the fair
value of our fixed maturity investments through the first six months of 2022. In
addition, economic and market disruptions caused by the COVID-19 pandemic,
inflationary pressures, and geo-political conditions have negatively impacted
the fair value of our equity securities during that period. The negative impacts
to our investment portfolio experienced thus far in 2022 have consisted
primarily of unrealized investment losses.

While we have no international operations, the geo-political uncertainties with
the ongoing Russia and Ukraine conflict have indirectly impacted the value of
our investment portfolio. Contributing factors include supply chain disruptions,
inflationary pressures and interest rate and general market volatility.

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Results of Operations

Our results of operations are as follows:

                                                            Three Months Ended                      Six Months Ended
                                                                 June 30,                               June 30,
                                                          2022                2021               2022              2021
                                                                                 (in millions)
Gross premiums written                              $    179.4             $  147.1          $   351.8          $  295.4
Net premiums written                                $    178.1             $  146.0          $   348.5          $  292.9

Net premiums earned                                 $    165.2             $  137.0          $   315.4          $  270.9
Net investment income                                     20.0                 18.2               39.1              36.6
Net realized and unrealized (losses) gains on
investments                                              (50.1)                16.0              (67.4)             26.9

Other income                                               0.2                  0.2                0.2               0.6
Total revenues                                           135.3                171.4              287.3             335.0

Losses and LAE                                            93.3                 83.7              187.5             153.3
Commission expense                                        23.7                 18.0               44.6              34.8

Underwriting and general and administrative
expenses                                                  39.4                 37.0               78.6              83.6
Interest and financing expenses                            0.3                  0.2                0.4               0.3
Other expenses                                               -                  0.1                  -               3.0
Total expenses                                           156.7                139.0              311.1             275.0
Income tax (benefit) expense                              (5.8)                 6.0               (6.0)             10.5
Net (loss) income                                   $    (15.6)            $   26.4          $   (17.8)         $   49.5


Overview

Our net loss was $15.6 million and $17.8 million for the three and six months
ended June 30, 2022, respectively, compared to net income of $26.4 million and
$49.5 million for the corresponding periods of 2021. The key factors that
affected our financial performance during the three and six months ended
June 30, 2022, compared to the same periods of 2021 included:

•Net premiums earned increased 20.6% and 16.4%, respectively;
•Losses and LAE increased 11.5% and 22.3%, respectively;
•Underwriting and general and administrative expenses increased 6.5% and
decreased 6.0%, respectively;
•Underwriting income (loss) was $8.8 million and $4.7 million, compared to
$(1.7) million and $(0.8) million respectively;
•Net investment income increased 9.9% and 6.8%, respectively; and
•Net realized and unrealized (losses) gains on investments were $(50.1) million
and $(67.4) million compared to $16.0 million and $26.9 million, respectively.

Summary of Consolidated Financial Results

Gross Premiums Written

Gross premiums written were $179.4 million and $351.8 million for the three and
six months ended June 30, 2022, respectively, compared to $147.1 million and
$295.4 million for the corresponding periods of 2021. The year-over-year changes
were primarily related to our Employers segment. See "-Summary of Financial
Results by Segment -Employers".

Net Premiums Written

Net premiums written are gross premiums written less reinsurance premiums ceded.

Net Premiums Earned

Net premiums earned are primarily a function of the amount and timing of net
premiums previously written.

Net Investment Income and Net Realized and Unrealized Gains and Losses on
Investments

We invest in fixed maturity securities, equity securities, other invested
assets, short-term investments, and cash equivalents. Net investment income
includes interest and dividends earned on our invested assets and amortization
of premiums and discounts

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on our fixed maturity securities, less bank service charges and custodial and
portfolio management fees. We have established a high quality/short duration
bias in our investment portfolio.

Net investment income increased 9.9% and 6.8% for the three and six months ended
June 30, 2022, respectively, compared to the same periods of 2021. The increases
were primarily due to higher bond yields.

Realized and unrealized gains and losses on our investments are reported
separately from our net investment income. Realized gains and losses on
investments include the gain or loss on a security at the time of sale compared
to its original or adjusted cost (equity securities) or amortized cost (fixed
maturity securities). Realized losses are also recognized for changes in our
CECL allowance or when securities are written down as a result of an
other-than-temporary impairment. Changes in fair value of equity securities and
other invested assets are also included in Net realized and unrealized (losses)
gains on investments on our Consolidated Statements of Comprehensive (Loss)
Income.

Net realized and unrealized (losses) gains on investments were $(50.1) million
and $(67.4) million for three and six months ended June 30, 2022, compared to
$16.0 million and $26.9 million for the corresponding periods of 2021. The net
realized and unrealized gains on investments for the three months ended June 30,
2022 and 2021 included $(42.0) million and $14.0 million of net realized and
unrealized (losses) gains on equity securities and other investments,
respectively, and $(8.1) million and $2.0 million of net realized (losses) gains
on fixed maturity securities, respectively. The net realized and unrealized
gains on investments for the six months ended June 30, 2022 and 2021 included
$(59.0) million and $24.1 million of net realized and unrealized (losses) gains
on equity securities and other investments, respectively, and $(8.4) million and
$2.8 million of net realized (losses) gains on fixed maturity securities,
respectively.

The net unrealized investment losses we experienced on our equity and fixed
maturity securities during the three and six months ended June 30, 2022 were
primarily the result of significant volatility in financial markets resulting
from increasing inflationary concerns, rising market interest rates and recent
world events. The net investment losses on our fixed maturity securities for the
three and six months ended June 30, 2022 included $7.8 million and $9.8 million
increase in our allowance for CECL.

The net unrealized investment gains on our equity securities during the three
and six months ended June 30, 2021 were largely consistent with the performance
of U.S. equity markets. The net investment gains on our fixed maturity
securities for the three and six months ended June 30, 2021 increased by $0.1
million and $0.6 million, respectively, related to the change in CECL.

Additional information regarding our Investments is set forth under "-Liquidity
and Capital Resources-Investments."

Other Income

Other income consists of net gains and losses on fixed assets, non-investment
interest, installment fee revenue, and other miscellaneous income. Beginning in
2022, installment fee revenue was allocated to net investment income.

Losses and LAE

Losses and LAE represents our largest expense item and includes claim payments
made, amortization of the Deferred Gain, LPT Reserve Adjustments, LPT Contingent
Commission Adjustments, 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.

Our current accident year loss estimate considered overall declines in the
frequency of compensable indemnity claims versus those generally experienced
before the COVID-19 pandemic while recognizing the impacts of the COVID-19
pandemic, including the potential for further expansions or permanent extensions
of presumed compensability for COVID-19 in certain jurisdictions. Total claims
costs have also been reduced by cost savings associated with increased claims
settlement activity that has continued into the first half of 2022. We believe
that our current accident year loss estimate is adequate; however, ultimate
losses will not be known with any certainty for many years. See "-Summary of
Financial Results by Segment -Employers".

Commission Expenses

Commission expenses include direct commissions to our agents and brokers,
including our partnerships and alliances, for the premiums that they produce for
us, as well as agency incentive payments, other marketing costs, and fees. See
"-Summary of Financial Results by Segment -Employers".

Underwriting and General and Administrative Expenses

Underwriting expenses represent those costs that we incur to underwrite and
maintain the insurance policies we issue, excluding commissions. Direct
underwriting expenses, such as premium taxes, policyholder dividends, and those
expenses that vary directly with the production of new or renewal business, are
recognized as the associated premiums are earned. Indirect

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underwriting expenses, such as the operating expenses of each of the Company's
subsidiaries, do not vary directly with the production of new or renewal
business and are recognized as incurred.

General and administrative expenses of the holding company are excluded in
determining the underwriting expense ratios of our reportable segments.

Interest and Financing Expenses

Interest and financing expenses include fees and interest associated with the
Credit Agreement and the FHLB Advances, FHLB Letter of Credit Agreement fees,
finance lease interest, and other financing fees.

Other Expenses

During the three and six months ended June 30, 2021, we recorded charges of $0.1
million and $3.0 million, respectively, of employee severance costs resulting
from a 2021 reduction-in-force. This action was taken to better align our
expenses with our revenues.

Income Tax (Benefit) Expense

Income tax (benefit) expense was $(5.8) million and $(6.0) million for the three
and six months ended June 30, 2022, compared to $6.0 million and $10.5 million
for the corresponding periods of 2021. The effective tax rates were 27.1% and
25.2% for the three and six months ended June 30, 2022, compared to 18.5% and
17.5%for the corresponding periods of 2021. The effective rates during each of
the periods presented included income tax benefits and exclusions associated
with tax-advantaged investment income, LPT adjustments, and deferred gain
amortization.

Summary of Financial Results by Segment

EMPLOYERS

The components of Employers' net income before income taxes are set forth in the
following table:

                                                    Three Months Ended                   Six Months Ended
                                                         June 30,                            June 30,
                                                  2022              2021              2022              2021
                                                                    (dollars in millions)
Gross premiums written                        $   178.5          $  146.8          $  349.7          $  294.8
Net premiums written                          $   177.2          $  145.7          $  346.4          $  292.3

Net premiums earned                           $   164.6          $  136.8          $  314.2          $  270.7
Net investment income                              18.7              17.4              36.3              35.1
Net realized and unrealized (losses) gains on
investments                                       (42.8)             15.8             (58.4)             26.6

Other income                                        0.2               0.2               0.2               0.6
Total revenues                                    140.7             170.2             292.3             333.0

Losses and LAE                                     95.1              85.6             191.0             157.3
Commission expense                                 23.7              18.0              44.6              34.8
Underwriting expenses                              33.3              31.5              66.1              68.8
Interest and financing expenses                     0.2                 -               0.2                 -
Other expenses                                        -               0.1                 -               3.0
Total expenses                                    152.3             135.2             301.9             263.9

Net (loss) income before income taxes $ (11.6) $ 35.0

       $   (9.6)         $   69.1

Underwriting income                           $    12.5          $    1.7          $   12.5          $    9.8

Combined ratio                                     92.4  %           98.8  %           96.0  %           96.4  %


Underwriting Results

Gross Premiums Written

Gross premiums written were $178.5 million and $349.7 million for the three and
six months ended June 30, 2022, compared to $146.8 million and $294.8 million
for the corresponding periods of 2021. The increases in both
quarter-over-quarter and year-over-year were primarily driven by increases in
new and renewal business premiums and final audit premiums. We have

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experienced year-over-year increases in new business submissions, quotes and
binds in the majority of the states in which we operate. We also increased our
final audit premium accruals by an additional $5.5 million during the three
months ended June 30, 2022, as our payroll exposure increased with the labor
market strengthening. In addition, our retention rate has remained strong
throughout the first half of 2022.

Net premiums written were $177.2 million and $346.4 million for the three and
six months ended June 30, 2022, compared to $145.7 million and $292.3 million
for the corresponding periods of 2021. Reinsurance premiums ceded were $1.3
million and $3.3 million for the three and six months ended June 30, 2022,
compared to $1.1 million and $2.5 million for the corresponding periods of 2021.

Net Premiums Earned

Net premiums earned were $164.6 million and $314.2 million for the three and six
months ended June 30, 2022, compared to $136.8 million and $270.7 million for
the corresponding periods of 2021.

In-force premiums represent the estimated annual premium on all policies that
are active and in-force on such date. More specifically, in-force premiums
include policy endorsements but exclude estimated final audit premiums. We focus
on in-force premium because it represents premium that is available for renewal
in the future. The following table shows Employers' in-force premiums and number
of policies in-force for each of our largest states and all other states
combined for the periods presented:

                                         June 30, 2022                         December 31, 2021                          June 30, 2021                         December 31, 2020
                                In-force            Policies             In-force            Policies            In-force            Policies             In-force            Policies
         State                  Premiums            In-force             Premiums            In-force            Premiums            In-force             Premiums            In-force
                                                                                                  (dollars in millions)
California                     $  265.8              42,047            $   258.4              40,704            $  251.7              39,553            $   262.0              39,610
Florida                            42.8               8,436                 41.1               7,989                39.1               7,572                 37.9               6,898
New York                           26.0               7,367                 24.5               7,307                25.1               6,959                 26.7               6,657
Other (43 states and
D.C.)                             253.5              57,746                245.9              54,164               242.4              52,454                251.1              50,124
Total in-force                 $  588.1             115,596            $   569.9             110,164            $  558.3             106,538            $   577.7             103,289
Estimated audit premium            21.3                   -                 21.9                   -                22.4                   -                 (3.1)                  -
Total in-force,
including
estimated audit premium        $  609.4             115,596            $   591.8             110,164            $  580.7             106,538            $   574.6             103,289


We continue to actively seek new partnerships and alliances to foster organic
growth within our target classes of business. Alternative distribution channels
generated $172.8 million and $152.6 million, or 29.4% and 27.3%, of our in-force
premiums as of June 30, 2022 and 2021, respectively. We believe that the
bundling of payroll-related products and services through these distribution
channels contributes to higher retention rates than business generated by our
independent agents. These relationships also allow us to access new customers
that we may not have access to through our independent agent distribution
channel. We continue to actively seek new partnerships and alliances.

Losses and LAE, Commission Expenses, and Underwriting Expenses

The following table presents calendar year combined ratios for our Employers
segment.

                                        Three Months Ended                 Six Months Ended
                                             June 30,                          June 30,
                                         2022              2021            2022             2021
     Loss and LAE ratio                       57.8  %     62.6  %              60.8  %     58.1  %
     Commission expense ratio                 14.4        13.2                 14.2        12.9

     Underwriting expense ratio               20.2        23.0             

   21.0        25.4
     Combined Ratio                           92.4  %     98.8  %              96.0  %     96.4  %

Loss and LAE Ratio. We analyze our loss and LAE ratios on both a calendar year
and accident year basis.

The calendar year loss and LAE ratio is calculated by dividing the losses and
LAE recorded during the calendar year, regardless of when the underlying insured
event occurred, by the net premiums earned during that calendar year. The
calendar year loss and LAE ratio includes changes made during the calendar year
in reserves for losses and LAE established for insured events occurring in the
current and prior years. The calendar year loss and LAE ratio for a particular
year will not change in future periods.

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The accident year loss and LAE ratio is calculated by dividing cumulative losses
and LAE for reported events that occurred during a particular year by the net
premiums earned for that year. The accident year loss and LAE ratio for a
particular year can decrease or increase when recalculated in subsequent periods
as the reserves established for insured events occurring during that year
develop favorably or unfavorably. The accident year loss and LAE ratio is based
on our statutory financial statements and is not derived from our GAAP financial
information.

We analyze our calendar year loss and LAE ratio to measure our profitability in
a particular year and to evaluate the adequacy of our premium rates charged in a
particular year to cover expected losses and LAE from all periods, including
development (whether favorable or unfavorable) of reserves established in prior
periods. In contrast, we analyze our accident year loss and LAE ratios to
evaluate our underwriting performance and the adequacy of the premium rates we
charged in a particular year in relation to ultimate losses and LAE from insured
events occurring during that year. The loss and LAE ratios provided in this
report are on a calendar year basis, except where they are expressly identified
as accident year loss and LAE ratios.

The table below reflects prior accident year loss and LAE reserve adjustments
and the impact to loss ratio.

                                                   Three Months Ended                    Six Months Ended
                                                        June 30,                             June 30,
                                                 2022               2021              2022              2021
                                                                    (dollars in millions)

Losses and LAE                               $     95.1          $   85.6          $  191.0          $  157.3
Prior accident year favorable development,
net                                                10.0               1.6              10.0              15.5

Current accident year losses and LAE $ 105.1 $ 87.2

$ 201.0 $ 172.8

Current accident year loss and LAE ratio           63.9  %           63.7  %           64.0  %           63.8  %


The increase in our total losses and LAE during the three months ended June 30,
2022, as compared to the same period of 2021, was primarily due to higher earned
premium and a higher current accident year estimate, partially offset by an
increase in net favorable prior year loss reserve development. Favorable prior
loss reserve development totaled $10.0 million and $1.6 million during the three
months ended June 30, 2022 and 2021, respectively, which included $9.6 million
and $1.6 million of net favorable development on our voluntary business,
respectively, and $0.4 million and zero of net favorable development on our
assigned risk business, respectively.

The increase in our total losses and LAE during the six months ended June 30,
2022, as compared to the same period of 2021, was primarily due to higher earned
premium, a higher current accident year estimate and less net favorable
development recognized during the current year. Favorable prior loss reserve
development totaled $10.0 million and $15.5 million during the six months ended
June 30, 2022 and 2021, respectively, which included $9.6 million and $15.0
million of net favorable development on our voluntary business, respectively,
and $0.4 million and $0.5 million of net favorable development on our assigned
risk business, respectively.

Favorable prior year loss development on our voluntary business during the three
and six months ended June 30, 2022 was primarily related to observed favorable
paid loss cost trends related primarily to accident years 2017 and prior.
Favorable prior year loss development on our voluntary business during the three
and six months ended June 30, 2021 was the result of observed favorable paid
loss cost trends related primarily to accident years 2017 and prior, partially
offset by $8.0 million of unfavorable development relating to two catastrophic
non-COVID claims that occurred in accident year 2020.

Our current accident year loss and LAE ratio was 63.9% and 64.0% for the three
and six months ended June 30, 2022, respectively, compared to 63.7% and 63.8%
for the corresponding periods of 2021. The increase in our current accident year
ratio during the three and six months ended June 30, 2022 was primarily due to a
slight increase in our rate on voluntary business. Our current accident year
loss and LAE ratio continues to reflect the impact of our key business
initiatives: an emphasis on the accelerated settlement of open claims;
diversifying our risk exposure across geographic markets; and leveraging
data-driven strategies to target, underwrite, and price profitable classes of
business across all of our markets.

Commission Expense Ratio. The commission expense ratio was 14.4% and 14.2% for
the three and six months ended June 30, 2022, respectively, compared to 13.2%
and 12.9% for the corresponding periods of 2021. Our commission expenses were
$23.7 million and $44.6 million for the three and six months ended June 30,
2022, respectively, compared to $18.0 million and $34.8 million for the
corresponding periods of 2021. Our commission expense ratios increased 1.2 and
1.3 percentage points, or 9.1% and 10.1% for the three and six months ended
June 30, 2022, respectively, compared to the same periods of 2021. The increase
for the three months ended June 30, 2022 related primarily to an increase in
agency incentive commissions. The increase for the six months ended June 30,
2022 was primarily related to an increase in agency incentive commissions and
reversal of commissions relating to non-compliant and uncollectible premium
recorded in the first quarter of 2021 which lowered the ratio for the six months
ended June 30, 2021.

Underwriting Expenses Ratio. The underwriting expense ratio was 20.2% and 21.0%
for the three and six months ended June 30, 2022, respectively, compared to
23.0% and 25.4% for the corresponding period of 2021. The improvements in our

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underwriting expense ratio from period-to-period is largely the result of higher
earned premiums coupled with active expense management.

Our underwriting expenses were $33.3 million and $66.1 million for the three and
six months ended June 30, 2022, respectively, compared to $31.5 million and
$68.8 million for the corresponding periods of 2021.

During the three months ended June 30, 2022, our premium tax and assessment
expenses increased $1.8 million and our bad debt expenses increased $1.1
million, each compared to the same period of 2021. During the six months ended
June 30, 2022, our compensation-related expenses decreased $2.4 million and our
policyholder dividend expenses decreased $1.3 million, each compared to the same
period of 2021. These decreases in our fixed underwriting expenses resulted from
continued targeted expense reductions and employee reductions and departures
that occurred in 2021.

Underwriting Income

Underwriting income for our Employers segment was $12.5 million for each of the
three and six months ended June 30, 2022, compared to $1.7 million and $9.8
million for the corresponding periods of 2021. Underwriting income or loss is
determined by deducting losses and LAE, commission expense, and underwriting
expenses from net premiums earned.

Non-Underwriting Income and Expenses

For a further discussion of non-underwriting related income and expenses,
including Net Investment Income and Net Realized and Unrealized Gains and Losses
on Investments, Other Income, Interest and Financing Expenses and Other Expenses
see "-Results of Operations -Summary of Consolidated Financial Results".

CERITY

The components of Cerity's net loss before income taxes are set forth in the
following table:

                                                       Three Months Ended                        Six Months Ended
                                                            June 30,                                 June 30,
                                                     2022                 2021                2022                2021
                                                                             (in millions)
Gross premiums written                        $      0.9               $    0.3          $     2.1             $    0.6
Net premiums written                          $      0.9               $    0.3          $     2.1             $    0.6

Net premiums earned                           $      0.6               $    0.2          $     1.2             $    0.2
Net investment income                                0.8                    0.7                1.6                  1.4
Net realized and unrealized (losses) gains on
investments                                         (0.9)                   0.2               (1.3)                 0.3

Total revenues                                       0.5                    1.1                1.5                  1.9

Losses and LAE                                       0.3                    0.1                0.7                  0.1

Underwriting expenses                                3.3                    2.6                6.5                  6.4

Total expenses                                       3.6                    2.7                7.2                  6.5

Net loss before income taxes                  $     (3.1)              $   (1.6)         $    (5.7)            $   (4.6)

Underwriting loss                             $     (3.0)              $   (2.5)         $    (6.0)            $   (6.3)

Combined ratio                                               n/m               n/m                   n/m               n/m
n/m - not meaningful


Underwriting Results

Gross Premiums Written and Net Premiums Written

Gross premiums written and net premiums written were $0.9 million and $2.1
million for the three and six months ended June 30, 2022, compared to $0.3
million and $0.6 million for the corresponding periods of 2021.

Net Premiums Earned

Net premiums earned were $0.6 million and $1.2 million for the three and six
months ended June 30, 2022, compared to $0.2 million for each of the
corresponding periods of 2021.

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Underwriting Expenses

Underwriting expenses for our Cerity segment were $3.3 million and $6.5 million
for the three and six months ended June 30, 2022, compared to $2.6 million and
$6.4 million for the corresponding periods of 2021. During the three months
ended June 30, 2022, our compensation-related expenses increased $0.6 million,
compared to the corresponding period of 2021, due to employee departures that
occurred in the second quarter of 2021. During the six months ended June 30,
2022, our compensation-related expenses increased $0.2 million, compared to the
corresponding period of 2021.

Underwriting Loss

Underwriting losses for our Cerity segment were $3.0 million and $6.0 million
for the three and six months ended June 30, 2022, compared to $2.5 million and
$6.3 million for the corresponding periods of 2021. Underwriting income or loss
is determined by deducting losses and LAE, commission expense, and underwriting
expenses from net premiums earned.

Non-Underwriting Income

For a further discussion of non-underwriting related income, including Net
Investment Income and Net Realized and Unrealized Gains and Losses on
Investments, see "-Results of Operations -Summary of Consolidated Financial
Results Consolidated."

CORPORATE AND OTHER

The components of Corporate and Other's net loss before income taxes are set
forth in the following table:

                                                       Three Months Ended                        Six Months Ended
                                                            June 30,                                 June 30,
                                                     2022                 2021                2022                2021
                                                                             (in millions)
Net investment income                                0.5                    0.1                1.2                  0.1
Net realized and unrealized losses on
investments                                         (6.4)                     -               (7.7)                   -

Total (losses) revenues                             (5.9)                   0.1               (6.5)                 0.1

Losses and LAE - LPT                                (2.1)                  (2.0)              (4.2)                (4.1)

General and administrative expenses                  2.8                    2.9                6.0                  8.4
Interest and financing expenses                      0.1                    0.2                0.2                  0.3

Total expenses                                       0.8                    1.1                2.0                  4.6

Net loss before income taxes                  $     (6.7)              $   (1.0)         $    (8.5)            $   (4.5)


Losses and LAE - LPT

The table below reflects the impact of the LPT on Losses and LAE, which are
recorded as a reduction to Losses and LAE incurred on our Consolidated
Statements of Comprehensive (Loss) Income.

                                                   Three Months Ended                       Six Months Ended
                                                        June 30,                                June 30,
                                                 2022               2021                 2022                 2021
                                                                           (in millions)
Amortization of the Deferred Gain related to
losses                                       $      1.7          $    1.6          $     3.4               $    3.3
Amortization of the Deferred Gain related to
contingent commission                               0.4               0.4                0.8                    0.8

Total impact of the LPT                      $      2.1          $    2.0          $     4.2               $    4.1

General and Administrative Expenses

General and administrative expenses primarily consist of compensation related
expenses, professional fees, and other corporate expenses at the holding
company. General and administrative expenses were $2.8 million and $6.0 million
for the three and six months ended June 30, 2022, respectively, compared to $2.9
million and $8.4 million for the corresponding periods of 2021.

During the three and six months ended June 30, 2022, compensation-related
expenses decreased $0.2 million and $2.5 million, compared to the same periods
of 2021. The decreases are related primarily to the acceleration of share-based
awards in connection with the retirement of our prior Chief Executive Officer,
which served to increase our compensation-related expenses during the six months
ended June 30, 2021.

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Non-Underwriting Income and Expenses

For a further discussion of non-underwriting related income and expenses,
including Net Investment Income and Net Realized and Unrealized Gains and Losses
on Investments, and Interest and Financing Expenses see "-Results of Operations
-Summary of Consolidated Financial Results".

Liquidity and Capital Resources

The COVID-19 pandemic disruption to the U.S. economy, our current operations and
our investment portfolio have, at times, been significant. Nonetheless we
believe that the liquidity available to our holding company and its operating
subsidiaries remains adequate and we do not currently foresee a need to: (i)
suspend ordinary dividends or forego repurchases of our common stock; (ii) seek
a capital infusion; or (iii) seek any material non-investment asset sales.

Holding Company Liquidity

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

Our insurance subsidiaries' ability to pay dividends and distributions to their
parent is based on reported capital, surplus, and dividends paid within the
prior twelve months.

During the first quarter of 2022, ECIC made a $120.0 million return of capital
payment to its parent company, who in turn distributed that amount to the
holding company. As a result of that distribution, ECIC cannot pay dividends
through February 15, 2023, without prior regulatory approval.

During the first quarter of 2022, EICN made a $9.7 million dividend payment to
its parent company, who in turn distributed that amount to the holding company.
As a result of that payment, EICN cannot pay any dividends for the remainder of
2022 without prior regulatory approval.

Total cash and investments at the holding company were $94.5 million at June 30,
2022, consisting of $28.5 million of cash and cash equivalents, $8.7 million of
fixed maturity securities, and $57.3 million of equity securities.

On December 15, 2020, EHI entered into a Credit Agreement (the Credit Agreement)
with a syndicate of financial institutions. The Credit Agreement provides EHI
with a $75.0 million three-year revolving credit facility. Borrowings under the
Credit Agreement may be used for working capital and general corporate purposes.
Pursuant to the Credit Agreement, EHI has the option to request an increase of
the credit available under the facility, up to a maximum facility amount of
$125.0 million, subject to the consent of lenders and the satisfaction of
certain conditions. EHI had no outstanding advances under the Credit Agreement
at June 30, 2022.

The interest rates applicable to loans under the Credit Agreement are generally
based on a base rate plus a specified margin, ranging from 0.25% to 1.25%, or
the Eurodollar rate (which will convert to an alternative reference rate once
LIBOR is discontinued) plus a specified margin, ranging from 1.25% to 2.25%.
Total interest paid and fees incurred pursuant to the Credit Agreement during
the three and six months ended June 30, 2022 was $0.1 million and $0.2 million,
respectively.

The Credit Agreement contains covenants that require us to maintain: (i) a
minimum consolidated net worth of no less than 70% of our stockholders' equity
as of September 30, 2020, plus 50% of our aggregate net income thereafter; and
(ii) a debt to total capitalization ratio of no more than 35%, in each case as
determined in accordance with the Credit Agreement. At June 30, 2022, we were in
compliance with all debt covenants.

Operating Subsidiaries' Liquidity

The primary sources of cash for our operating subsidiaries, which include our
insurance and other operating subsidiaries, are premium collections, investment
income, sales and maturities of investments, proceeds from FHLB advances, and
reinsurance recoveries. The primary uses of cash for our operating subsidiaries
are payments of losses and LAE, commission expenses, underwriting and general
and administrative expenses, ceded reinsurance, repayments of FHLB advances,
investment purchases and dividends paid to their parent.

Total cash and investments held by our operating subsidiaries was $2,548.2
million at June 30, 2022, consisting of $101.8 million of cash and cash
equivalents, $2,181.6 million of fixed maturity securities, $213.8 million of
equity securities, $47.8 million of other invested assets, and $3.2 million of
short-term investments. Sources of immediate and unencumbered liquidity at our
operating subsidiaries as of June 30, 2022 consisted of $100.6 million of cash
and cash equivalents, $208.6 million of publicly traded equity securities whose
proceeds are available within three business days, $725.0 million of highly
liquid fixed maturity securities whose proceeds are available within three
business days, and $3.2 million of short-term investments whose

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proceeds are available within three business days. We believe that our
subsidiaries' liquidity needs over the next 24 months will be met with cash from
operations, investment income, and maturing investments.

EICN, ECIC, EPIC, and EAC are members of the FHLB. Membership allows our
subsidiaries access to collateralized advances, which may be used to support and
enhance liquidity management. The amount of advances that may be taken is
dependent on statutory admitted assets on a per company basis.

As of June 30, 2022, our insurance subsidiaries had received advances of $126.0
million under the FHLB Standard Credit Program. The proceeds from these advances
were used to purchase an equivalent amount of high-quality collateralized loan
obligation securities. The annual interest rate on these advances is adjusted
daily per the Secure Overnight Funding Rate (SOFR). As of June 30, 2022, the
Company's weighted average annual interest rate on these advances was 0.90%.
Interest paid during each of the three and six months ended June 30, 2022 was
$0.2 million. These advances can be repaid at any time without penalty and are
collateralized by eligible investment securities

During the second quarter of 2020, the FHLB announced its Zero Interest Recovery
Advance Program (the FHLB Advance Program). The FHLB Advance Program is a zero
percent interest, six-month or one-year credit product that members can use to
provide immediate relief to property owners, businesses, and other customers
struggling with the financial impacts of the COVID-19 pandemic. Each member was
allocated up to $10.0 million in advances under the FHLB Advance Program.

On May 11, 2020, our insurance subsidiaries received a total of $35.0 million of
advances under the FHLB Advance Program. The advances were secured by collateral
previously pledged to the FHLB by our insurance subsidiaries in support of our
existing collateralized advance facility, which has been reduced by the amount
of these outstanding advances. Our insurance subsidiaries repaid $15.0 million
of such advances on November 4, 2020, $5.0 million on March 31, 2021, and
$15.0 million on May 4, 2021. As of June 30, 2022, we have no outstanding
advances under the FHLB Advance Program.

FHLB membership also allows our insurance subsidiaries access to standby Letter
of Credit Agreements. On January 26, 2021, EPIC chose to amend its existing
Letter of Credit Agreement to decrease its credit amount to $10.0 million. On
August 13, 2021, EAC and ECIC chose to amend their existing Letter of Credit
Agreements to decrease their respective credit amounts to $25.0 million and
$35.0 million. The amended Letter of Credit Agreements will expire on March 31,
2023. The Letter of Credit Agreements may only be used to satisfy, in whole or
in part, insurance deposit requirements with the State of California and are
fully secured with eligible collateral at all times (See Note 10).

We purchase reinsurance to protect us against the costs of severe claims and
catastrophic events, including pandemics. On July 1, 2022, we entered into a new
reinsurance program that is effective through June 30, 2023. The reinsurance
program consists of one treaty covering excess of loss and catastrophic loss
events in four layers of coverage. Our reinsurance coverage is $190.0 million in
excess of our $10.0 million retention on a per occurrence basis, subject to
certain exclusions. We believe that our reinsurance program meets our needs and
that we are sufficiently capitalized.

Various state laws and regulations require us to hold investment securities or
letters of credit on deposit with certain states in which we do business.
Securities having a fair value of $798.8 million and $861.4 million were on
deposit at June 30, 2022 and December 31, 2021, respectively. These laws and
regulations govern both the amount and types of investment securities that are
eligible for deposit. Additionally, standby letters of credit from the FHLB have
been issued in lieu of $70.0 million securities on deposit at both June 30, 2022
and December 31, 2021.

Certain reinsurance contracts require company funds to be held in trust for the
benefit of the ceding reinsurer to secure the outstanding liabilities we
assumed. The fair value of fixed maturity securities held in trust for the
benefit of our ceding reinsurers was $2.8 million and $3.1 million at June 30,
2022 and December 31, 2021, respectively.

Sources of Liquidity

We monitor the cash flows of each of our subsidiaries individually, as well as
collectively as a consolidated group. We use trend and variance analyses to
project future cash needs, making adjustments to our forecasts as appropriate.

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

                                                                              June 30,
                                                                          2022        2021
                                                                            (in millions)
Cash, cash equivalents, and restricted cash provided by (used in):
Operating activities                                                    $ 37.9      $ (24.7)
Investing activities                                                     (44.3)        30.1
Financing activities                                                     

61.4 (58.2)
Increase (decrease) in cash, cash equivalents, and restricted cash $ 55.0 $ (52.8)

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

Operating Activities

Net cash provided by operating activities for the six months ended June 30, 2022
included net premiums received of $312.4 million and investment income received
of $39.4 million. These operating cash inflows were partially offset by net
claims payments of $185.5 million, underwriting and general and administrative
expenses paid of $79.5 million, commissions paid of $39.8 million, and federal
income taxes paid of $8.6 million.

Net cash used in operating activities for the six months ended June 30, 2021
included net premiums received of $267.7 million and investment income received
of $40.5 million. These operating cash inflows were more than offset by net
claims payments of $205.0 million, underwriting and general and administrative
expenses paid of $77.2 million, commissions paid of $34.5 million, and federal
income taxes paid of $16.5 million.

Investing Activities

Net cash used in investing activities for the six months ended June 30, 2022
were primarily related to the investment of premiums received and reinvestment
of funds from investment sales, maturities, redemptions, and interest income.
These investing cash outflows were partially offset by investment sales,
maturities and redemptions whose proceeds were used to fund claims payments,
underwriting and general and administrative expenses, stockholder dividend
payments, and common stock repurchases.

Net cash provided by investing activities for the six months ended June 30, 2021
were primarily related to sales, maturities, and redemptions of investments
whose proceeds were used to fund claims payments, underwriting and general and
administrative expenses, stockholder dividend payments, and common stock
repurchases, partially offset by the investment of premiums received and
reinvestment of funds from investment sales, maturities, redemptions, and
interest income.

Financing Activities

Net cash provided by financing activities for the six months ended June 30, 2022
was primarily related to FHLB advances received partially offset by common stock
repurchases and stockholder dividend payments. During the six months ended
June 30, 2022, we also borrowed and subsequently repaid $10.0 million under the
Credit Agreement.

Net cash used in financing activities for the six months ended June 30, 2021 was
primarily related to common stock repurchases, stockholder dividend payments,
and repayments of FHLB advances. During the six months ended June 30, 2021, we
also borrowed and subsequently repaid $27.0 million under the Credit Agreement.

Dividends

We paid $42.1 million and $14.9 million in dividends to our stockholders for the
six months ended June 30, 2022 and 2021, respectively. The dividends paid during
2022 included a special dividend of $1.00 per share, which totaled $27.5
million, that was paid to eligible shareholders on June 15, 2022. The
declaration and payment of future dividends to common stockholders, including
any special dividends that may be declared in the future, will be at the
discretion of our Board of Directors and will depend upon many factors including
our financial position, capital requirements of our operating subsidiaries,
legal and regulatory requirements, and any other factors our Board of Directors
deems relevant. On July 27, 2022, the Board of Directors declared a quarterly
dividend per share of $0.26, which is payable August 24, 2022 to stockholders of
record on August 10, 2022.

Share Repurchases

We repurchased 365,359 shares of our common stock for $14.6 million during the
three months ended June 30, 2022. Future repurchases of our common stock will be
at the discretion of our Board of Directors and will depend upon many factors,
including our financial position, capital requirements of our operating
subsidiaries, general business and social economic conditions, legal, tax,
regulatory, and/or contractual restrictions, and any other factors our Board of
Directors deems relevant.

Capital Resources

As of June 30, 2022, the capital resources available to us consisted of $977.5
million of stockholders' equity and the $110.2 million Deferred Gain.

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Contractual Obligations and Commitments

Other than operating expenses, current and long-term cash requirements include
the following contractual obligations and commitments as of June 30, 2022:

Leases

We have entered into lease arrangements for certain equipment and facilities. As
of June 30, 2022, we had lease payment obligations of $16.4 million, with $3.4
million payable within 12 months.

Other Purchase Obligations

We have other purchase obligations that primarily consist of non-cancellable
obligations to acquire capital assets, commitments for information technology
and related services, software acquisition and license commitments and other
legally binding agreements to purchase services that are to be used in our
operations. As of June 30, 2022, we had other purchase obligations of $15.5
million, with $8.7 million payable within 12 months.

Unfunded Investment Commitments

We have investments in private equity limited partnerships that require capital
distributions to fund the investments and can be called at any time deemed
necessary. As of June 30, 2022, we had unfunded investment commitments of $68.6
million.

FHLB Advances

We received advances of $126.0 million under the FHLB Standard Credit Program
and these advances can be repaid at any time without prepayment penalties or
additional fees.

Unpaid Losses and LAE Expenses

We have developed unpaid losses and LAE expense payment patterns that are
computed based on historical information. Our calculation of loss and LAE
expense payments by period is subject to the same uncertainties associated with
determining the level of reserves and to the additional uncertainties arising
from the difficulty of predicting when claims (including claims that have not
yet been reported to us) will be paid. Actual payments of losses and LAE by
period will vary, perhaps materially, to the extent that current estimates of
losses and LAE expense vary from actual ultimate claims amounts due to
variations between expected and actual payment patterns. As of June 30, 2022, we
had unpaid losses and LAE expense payment patterns of $1,972.8 million, with
$316.4 million payable within 12 months.

The unpaid losses and LAE expense payment patterns are gross of reinsurance
recoverables for unpaid losses. As of June 30, 2022, we had reinsurance
recoverables on unpaid losses and LAE of $462.4 million, with recoveries of
$31.4 million within 12 months.

Investments

Our investment portfolio is structured to support our need for: (i) optimizing
our risk-adjusted total returns; (ii) providing adequate liquidity; (iii)
facilitating financial strength and stability; and (iv) ensuring regulatory and
legal compliance. These investments provide a steady source of income, which may
fluctuate with changes in interest rates and our current investment strategies.

As of June 30, 2022, our investment portfolio consisted of 87% fixed maturity
securities. We strive to limit the interest rate risk associated with fixed
maturity investments by managing the duration of these securities. Our fixed
maturity securities (excluding cash and cash equivalents) had a duration of 4.1
at June 30, 2022. To minimize interest rate risk, our portfolio is weighted
toward short-term and intermediate-term bonds; however, our investment strategy
balances consideration of duration, yield, and credit risk. Our investment
guidelines require that the minimum weighted average quality of our fixed
maturity securities portfolio be "A+," using ratings assigned by Standard &
Poor's (S&P) or an equivalent rating assigned by another nationally recognized
statistical rating agency. Our fixed maturity securities portfolio had a
weighted average quality of "A+" as of June 30, 2022. Other securities within
fixed maturity securities consist of bank loans, which are classified as AFS and
are reported at fair value.

Our investment portfolio also contains equity securities. We strive to limit the
exposure to equity price risk associated with publicly traded equity securities
by diversifying our holdings across several industry sectors. These equity
securities had a fair value of $265.8 million at June 30, 2022, which
represented 11% of our investment portfolio at that time. We also have a $5.3
million investment in FHLB stock which we record at cost. We receive periodic
dividends from the FHLB for this investment, when declared, which can vary from
period to period.

Our other invested assets made up 2% of our investment portfolio as of June 30,
2022 and include private equity limited partnerships. Our investments in private
equity limited partnerships totaled $47.8 million at June 30, 2022 and are
generally not redeemable by the investees and cannot be sold without prior
approval of the general partner. These investments have a fund term of 3 to 12
years, subject to two or three one-year extensions at the general partner's
discretion. We expect to receive

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distributions of proceeds from dividends and interest from fund investments, as
well as from the disposition of a fund investment or portion thereof, from
time-to-time during the full course of the fund term. As of June 30, 2022, we
had unfunded commitments to these private equity limited partnerships totaling
$68.6 million.

We believe that our current asset allocation meets our strategy to preserve
capital for claims and policy liabilities and to provide sufficient capital
resources to support and grow our ongoing insurance operations.

The following table shows the estimated fair value, the percentage of the fair
value to total invested assets, and the average ending book yield, (each based
on the book value of each category of invested assets) as of June 30, 2022.

                                              Estimated Fair       Percentage
Category                                           Value            of Total       Book Yield
                                                     (in millions, except percentages)
U.S. Treasuries                              $          60.8            2.5  %          1.8  %
U.S. Agencies                                            2.2            0.1             2.9
States and municipalities                              353.9           14.4             3.0
Corporate securities                                   945.3           38.5             3.4
Residential mortgage-backed securities                 341.4           13.9             2.8
Commercial mortgage-backed securities                   62.7            2.5             3.2
Asset-backed securities                                 64.4            2.6             4.1
Collateralized loan obligations                        203.1            8.3             2.6
Foreign government securities                           10.5            0.4             3.0
Other securities                                         146            5.9             4.5
Equity securities                                      265.8           10.8             3.0
Short-term investments                                   3.2            0.1             0.5
Total investments at fair value              $       2,459.3          100.0  %
Weighted average yield                                                                  3.3  %


The following table shows the percentage of total estimated fair value of our
fixed maturity securities as of June 30, 2022 by credit rating category, using
the lower of the ratings assigned by Moody's Investors Service or S&P.

                               Percentage of Total
Rating                         Estimated Fair Value
"AAA"                                        11.4  %
"AA"                                         35.0
"A"                                          28.3
"BBB"                                        13.3
Below Investment Grade                       12.0
Total                                       100.0  %


Investments that we currently own could be subject to credit risk and subsequent
default by the issuer. We regularly assess individual securities as part of our
ongoing portfolio management, including the identification of credit related
losses. Our assessment includes reviewing the extent of declines in fair value
of investments below amortized cost, historical and projected financial
performance and near-term prospects of the issuer, the outlook for industry
sectors, credit rating, and macro-economic changes, including those caused by
the COVID-19 pandemic. We also make a determination as to whether it is not more
likely than not that we will be required to sell the security before its fair
value recovers to above cost, or maturity.

In addition to recognizing realized gains and losses upon the disposition of an
investment security, we also recognize realized gains or losses on AFS debt
securities for changes in CECL. As of June 30, 2022, we have a $10.0 million
allowance for CECL on AFS debt securities. During the six months ended June 30,
2022, we recognized a $9.8 million increase to our allowance for CECL on AFS
debt securities. The remaining fixed maturity securities whose total fair value
was less than amortized cost at June 30, 2022, were those in which we had no
intent, need, or requirement to sell at an amount less than their amortized
cost.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

Critical Accounting Estimates

The unaudited interim consolidated financial statements included in this
quarterly report include amounts based on the use of estimates and judgments of
management for those transactions that are not yet complete. We believe that the
estimates and judgments that were most critical to the preparation of the
consolidated financial statements involved the reserves for losses and LAE and
reinsurance recoverables. These estimates and judgments require the use of
assumptions about matters that are highly

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uncertain and therefore are subject to change as facts and circumstances
develop. Our accounting policies are discussed under "Critical Accounting
Estimates" in Management's Discussion and Analysis of Financial Condition and
Results of Operations in our Annual Report.