The workers’ compensation insurance segment’s combined ratio increased from 80.2% in 2008 to 87.7% in 2009. The increased combined ratio primarily reflects the impact of the current economic environment on the Company’s workers’ compensation loss and LAE ratio and an increase in the expense ratio. The increase in the loss and LAE ratio is due primarily to an increase in the 2009 accident year loss ratio reflecting management’s view of the current economic conditions. The increase in the expense ratio primarily reflects an increase in corporate expense allocations and the impact of premium rate decreases and audits of prior year policies that resulted in return premium to customers in 2009.
reserves in that quarter. This information is used as a tool in the judgmental process by which management assesses the overall adequacy of the reserves for unpaid losses and LAE at the Company. The evaluation of the reserves for unpaid losses and LAE related to the Company’s run-off specialty reinsurance segment requires that loss development be estimated over an extended period of time. Because the primary insurer under the reinsurance program changed in 1999 and the claims management philosophy of the two primary insurers differed, historical loss data for years prior to 1999 has limited relevance. Therefore, reliance has been placed on a blend of historical loss development data, industry loss development patterns and estimated loss ratios, adjusted to reflect considerations particular to the exposure. The reliance on external benchmarks and estimated loss ratios, while necessary, creates an additional element of uncertainty.
As of December 31, 2009, the Company’s best estimate of its ultimate liability for unpaid losses and LAE, before purchase accounting adjustments, for its run-off specialty reinsurance segment was $32.6 million.
In addition to the discounted cash flow analysis, management assessed the Company’s stock price relative to the book value of the workers’ compensation insurance segment. As of September 30, 2009, the Company’s stock price was trading below book value, primarily reflecting the impact of market conditions over the past year; therefore, management also considered an estimate of the Company’s value in a potential transaction and allocated that value to the Company’s reporting units, including the workers’ compensation insurance segment.
The increase in the dental loss ratio for year ended December 31, 2009, compared to the same period in 2008, primarily reflects an increase in the accident period loss ratio from 75.6% in 2008 to 79.5% in 2009. Favorable development on prior accident year reserves reduced the loss ratio by 0.8 percentage points, or $161,000, for the year ended December 31, 2009, compared to 1.5 percentage points, or $325,000, for the same period in 2008. The increase in the accident period loss ratio primarily reflects the impact of the competitive rate environment.
Acquisition and other underwriting expenses as a percent of direct premiums written totaled 13.9% and 14.3% for the years ended December 31, 2009 and 2008, respectively. The decrease primarily reflects lower commissions paid to general agents, primarily IBSi, the Company’s former general agent in the Southeast.
The segregated portfolio cell reinsurance ratios were as follows for the years ended December 31, 2008 and 2007:
The increase in direct premiums written primarily reflects the impact of new business sales and a slight increase in renewal rates, partially offset by a decline in the renewal retention rate from 80.8% in 2007 to 78.6% in 2008.
The average yield on the fixed income portfolio was 3.97% as of December 31, 2008, compared to 4.64% as of December 31, 2007.
ESHC was merged into Global Alliance with Global Alliance being the surviving entity; and
In September 2009, the Financial Accounting Standards Board (“FASB”) issued new accounting and disclosure guidance related to the determination of fair value of investments in entities (investees) that permit the investor to redeem its investments directly with the investee or receive distributions from the investee at times specified under the terms of the investee’s governing documents. Many of these investees do not have readily determinable fair values and provide their investors with a net asset value per share (or its equivalent, such as member units or an ownership interest in partners’ capital). Under the new guidance, investments in entities that calculate net asset value per share (or its equivalent) may be measured at fair value using the investee’s net asset value per share (or its equivalent) if the net asset value of the investment is calculated in a manner consistent with the measurement principles of investment companies as of the reporting entity’s measurement date, including measurement of all or substantially all of the underlying investments of the investee in accordance with the fair value measurement principles. The new guidance also requires enhanced disclosure related to the reporting entity’s investment is such investees including, but not limited to, the nature of any restrictions on the reporting entity’s ability to redeem its investments at the measurement date, any unfunded commitments, and the investment strategies of the investee. The Company’s limited partnership interests are currently reported in the consolidated balance sheets using the net asset value per share (or its equivalent) of the investee. The Company adopted the new accounting guidance effective December 31, 2009. The adoption had no impact on the estimated fair value of our limited partnership interests. The Company’s enhanced disclosures related to its limited partnership interests is included in Note 10.
For the year ended December 31, 2008, the Company recognized net favorable development on prior accident year group benefits insurance reserves of $993,000. The favorable development primarily reflects a decrease in prior accident year dental and short-term disability reserves of $613,000 as a result of better than expected claim experience. The Company also decreased its term life reserves by $264,000 as a result of lower than expected reported death claims.
For the years ended December 31, 2009, 2008 and 2007, the Company increased (decreased) its specialty reinsurance reserves for unpaid losses and LAE by the following amounts by accident year (in thousands):
Based on the funded status of the pension plan as of December 31, 2009, the Company does not anticipate making a contribution in 2010.
On June 17, 2008, the Company announced its 2008 Agency Stock Purchase Plan (the “Stock Purchase Plan”). The purpose of the Stock Purchase Plan is to provide eligible insurance agencies of the Company with the opportunity to purchase the Company’s common stock at a discount from fair market value and is designed to foster the common interests of the Company and agencies in achieving long-term profitable growth for the Company. The Company has reserved 125,000 shares of its common stock for purchase under the Stock Purchase Plan for the five-year period ending June 30, 2013. Common stock issued under the Stock Purchase Plan may be issued from treasury stock.