We operate in a single reportable segment with 13 territorial offices serving the various states in which we are currently doing business.
Net Premiums Earned. Our net premiums earned have historically been generated primarily in California and Nevada. In California, we have reduced our rates by 62.3% during the period September 2003 through December 31, 2007, including a decline of 38.1% since January 1, 2006. This compares with the California Workers Compensation Insurance Rating Bureau (WCIRB) recommendation of a 45.0% rate decline for the same period. In November, 2007, the California Commissioner of Insurance (California Commissioner) recommended that there be no overall change in pure premium rates for policies written on or after January 1, 2008. This is the first recommendation of no rate decrease by the California Commissioner since the reforms of 2003 and 2004. Our California rates continue to be based upon our actuarial analysis of current and anticipated loss cost trends. We have not filed new rates for new or renewal policies incepting on or after January 1, 2008.
• characteristics of the business we have written in the current quarter and prior quarters, including characteristics such as geographical location, type of business, size of accounts, historical claims experience, and pricing levels; and
• 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
The following table provides a reconciliation of the beginning and ending loss reserves on a GAAP basis at the date specified:
The table below shows the reconciliation of net income to net income before impact of LPT Agreement for the years ended:
There were no other bulk transactions involving the sale of securities in either 2007 or 2006. The remaining gains were primarily attributable to the sale of equity securities holdings, where the market value was influenced by the acquisitions or mergers of the companies issuing such securities, offset by an other-than-temporary impairment of $1.2 million.
factors: a) a decline of $54.1 million in realized gains in 2007; b) an increase in the ratio of tax exempt interest and dividends to pre-tax income resulting from the Company’s reallocation of its investment portfolio in the fourth quarter 2006; and c) the $5.8 million reversal of a liability for previously unrecognized tax benefits, including related interest, in third quarter 2007. Additionally, in 2006 there were non-deductible expenses related to the conversion.
On February 21, 2008, the EHI Board of Directors authorized a stock repurchase program of up to $100 million of the Company’s shares of common stock through June 30, 2009. EHI expects the shares to be purchased from time to time at prevailing market prices in the open market. The repurchases may be commenced or suspended from time to time without prior notice. There can be no assurance that EHI will complete any repurchases of its common stock pursuant to the program. To date, the Company has not repurchased any shares of common stock, see ‘‘-Stock Repurchases.’’
As required by Nevada law, we established a closed block as of February 5, 2007 for the preservation of the reasonable dividend expectations of eligible members and other policyholders holding policies entitling the holder to distributions from the surplus of EICN in accordance with the terms of a dividend plan or program with respect to such policy. The closed block was created for the benefit of: (a) all policies issued by EICN that were in force as of February 5, 2007, and that were participating pursuant to a dividend plan or program of EICN; and (b) all policies that were no longer in force as of February 5, 2007, but that were participating pursuant to a dividend plan or program of EICN, that had an inception date that was not earlier than 24 months prior to and not later than February 5, 2007, and for which a participating policy dividend has not been calculated, declared and paid by EICN as of February 5, 2007. The requirements for the closed block will end on February 5, 2009 and any remaining funds will revert to the Company.
We employ an investment strategy that emphasizes asset quality and matching the durations of fixed maturity securities against anticipated claim payments and expenditures or other liabilities. The amounts and types of our investments are governed by statutes and regulations in which our insurance subsidiaries are domiciled. 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 invest excess cash in securities with appropriate duration targets to balance against anticipated future claim payments.
We regularly assess individual securities as part of our ongoing portfolio management, including the identification of other-than-temporary declines in fair values. This process includes reviewing the amount and length of time of unrealized losses on investments, historical and projected company financial performance, company-specific news and other developments, the outlook for industry sectors, credit ratings and macro-economic changes, including government policy initiatives. For the 12 months ended December 31, 2007, we recognized an impairment of $1.2 million in the fair values of 13 of the equity holdings in our investment portfolio as a result of the severity and duration of the decline in market value of these securities. We believe that we have appropriately identified other-than-temporary declines in the fair values of our remaining unrealized losses at December 31, 2007. We have the ability and intent to hold fixed maturity securities with unrealized losses for a sufficient amount of time for them to recover their values or reach maturity.
EHI is engaged through its subsidiaries, primarily EICN and its wholly owned subsidiary, Employers Compensation Insurance Company (ECIC), in the commercial property and casualty insurance industry, specializing in workers’ compensation products and services. EICN, domiciled in Nevada, and ECIC, domiciled in California, provide insurance to employers against liability for workers’ compensation claims in the states of Arizona, California, Colorado, Florida, Idaho, Illinois, Montana, Nevada, Oregon, Texas and Utah. As of December 31, 2007, approximately 71.7% and 17.4% of the Company’s direct premium is written in California and Nevada, respectively. Employers Occupational Health, Inc. (EOH) provides managed care services to the insurance companies in certain jurisdictions, and Elite Insurance Services, Inc. (Elite), a managing general agent, provides limited administrative services to its affiliates. Both EOH and Elite are wholly owned subsidiaries of EGI. Unless otherwise indicated, all references to the ‘‘Company’’ refer to EHI, together with its subsidiaries.
A premium deficiency is recognized if the sum of expected claims costs, claims adjustment expenses, expected dividends to policyholders, unamortized acquisition costs and policy maintenance costs exceed the related unearned premiums and future investment income from related in force policies. A premium deficiency would first be recognized by charging any unamortized acquisition costs to expense to the extent required to eliminate the deficiency. If the premium deficiency was greater than unamortized acquisition costs, a liability would be accrued for the excess deficiency. There was no premium deficiency at December 31, 2007 or 2006.
The Company maintains reinsurance for losses from a single occurrence or event in excess of $5.0 million and up to $200.0 million, subject to certain exclusions. The reinsurance coverage includes coverage for acts of terrorism, excluding nuclear, biological, chemical and radiological events. Any liability outside the coverage limits of the reinsurance program is retained by the Company.
Net rent expense was $4.7 million, $4.3 million, and $4.5 million for the years ended December 31, 2007, 2006 and 2005, respectively. Certain rental commitments have renewal options extending through 2018. Some of these renewals are subject to adjustments in future periods.
The fair market value of the stock options granted during the year ended December 31, 2007, was calculated using the following weighted average assumptions:
Quarterly results for the years ended December 31, 2007 and 2006 were as follows:
The increases during the third and fourth quarters of 2006 are a result of increases in taxable income for the related periods, primarily due to the reduction in losses and LAE reserves.