On a quarterly basis, the Company prepares actuarial analyses to assess the reasonableness of the recorded reserves for unpaid losses and LAE in its workers’ compensation insurance segment. These actuarial analyses incorporate various methodologies, including paid loss development, incurred loss development and a combination of other actuarial methodologies that incorporate characteristics of paid and incurred methodologies combined with a review of the Company’s exposure base. The recorded amount in each accident year is then compared to the results of these methodologies, with consideration being given to the age of the accident year. As accident years mature, the various methodologies generally produce consistent loss estimates. For more recent accident years, the methodologies produce results that are not as consistent. Accordingly, more emphasis is placed on supplementing the methodologies in more recent accident years with trends in exposure base, medical expense inflation, general inflation, severity, and claim counts, among other things.
The Company’s reserves for unpaid losses and LAE in its workers’ compensation insurance segment as of December 31, 2011 and 2010 are summarized below (in thousands):
In its workers’ compensation insurance segment, the Company records reserves for estimated losses under insurance policies and for LAE related to the investigation and settlement of policy claims. The Company’s reserves for unpaid losses and LAE represent the estimated cost of reported and unreported losses and LAE incurred and unpaid at a given point in time. In establishing its workers’ compensation insurance reserves, the Company uses loss discounting, which involves recognizing the time value of money and offsetting estimates of future payments by future expected investment income.
For the years ended December 31, 2011, 2010 and 2009, the Company recorded other-than-temporary impairments of $0, $0, and $1.7 million, respectively, related to its equity security portfolio. The securities impaired in 2009 were a result of the securities being in an unrealized loss position for more than 12 months.
Goodwill is assigned to one or more reporting units at the date of acquisition. The Company has allocated 100% of the goodwill recorded on its consolidated balance sheet as of December 31, 2011 to its workers’ compensation insurance segment.
In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income (“ASU 2011-05”). ASU 2011-05 requires entities to present net income and comprehensive income in either a single continuous statement or in two separate, but consecutive, statements of net income and other comprehensive income. The option to present items of other comprehensive income in the statement of changes in equity is eliminated. ASU 2011-05 is effective for public entities as of the beginning of a fiscal year that begins after December 15, 2011 (including interim periods) and for nonpublic entities for fiscal years ending after December 15, 2012 and interim and annual periods thereafter. Early adoption is permitted and retrospective application is required. The Company currently presents comprehensive income in the consolidated statement of operations and comprehensive income. Management does not expect the adoption of ASU 2011-05 to have a significant impact on the Company’s current presentation of comprehensive income.
The increase in the policyholder dividend expense primarily reflects the loss experience of underlying policies related to policies with a 2011 policy effective date. As of December 31, 2011, approximately 12.5% of the Company’s policies were written on a participating basis, compared to approximately 12.3% as of December 31, 2010.
Acquisition and other underwriting expenses as a percent of net premiums earned was 6.3% for the year ended December 31, 2010, compared to 8.5% for the same period in 2009. The decrease in acquisition and other underwriting expenses as a percent of net premiums earned primarily reflects the release of the 2009 and 2010 accruals related to the Pennsylvania Workers’ Compensation Security Fund assessment.
The increase in cash used in investing activities from 2009 to 2010 primarily reflects the purchase of securities by EIHI in 2010 from the proceeds of the sale of Eastern Life.
The Company considers all investments with original maturity dates of three months or less to be cash equivalents for purposes of the consolidated statements of cash flows. The carrying amount of cash equivalents approximates their fair value.
EIHI’s insurance subsidiaries are not generally subject to state income taxes; rather, they are subject to state premium tax in the jurisdictions in which they write business. Employers Alliance and Eastern Services are subject to state income tax in the states in which they operate.
For the years ended December 31, 2011, 2010 and 2009, the Company repurchased 1,030,398, 728,413 and 1,400 shares, respectively, at a cost of $13,274, $8,169 and $11, respectively, representing a weighted average cost of $12.88, $11.21 and $8.03 per share, respectively.
As of December 31, 2011, the Company held 6 fixed income securities with gross unrealized losses totaling $15. Management has evaluated the unrealized losses related to those fixed income securities and determined that they are primarily due to a fluctuation in interest rates and not to credit issues of the issuer or the underlying assets in the case of asset-backed securities. The Company does not intend to sell the fixed income securities and it is not more likely than not that the Company will be required to sell the fixed income securities before recovery of their amortized cost bases, which may be maturity; therefore, management does not consider the fixed income securities to be other-than-temporarily impaired as of December 31, 2011.
Suspense shares, allocated shares, shares committed to be released, average price per share and stock compensation expense as of and for the years ended December 31, 2011 and 2010 were as follows (in thousands, except share and per share data):
The corporate/other segment primarily includes the expenses of the holding company, the third party administration activities of the Company, and the results of operations of Eastern Re, as well as certain eliminations necessary to reconcile the segment information to the consolidated statements of operations and comprehensive income (loss). The Company cancelled the remaining reinsurance contracts at Eastern Re in 1999 on a run-off basis and continues to have exposure for outstanding claims as of December 31, 2011. The corporate/other segment also includes the Company’s 10% interest in a segregated portfolio cell with an unaffiliated primary carrier that writes insurance coverage for sprinkler contractors, known as “SprinklerPro”. The Company non-renewed the contract for its 10% interest in SprinklerPro on a run-off basis effective April 1, 2009.
The Company’s corporate headquarters are located at 25 Race Avenue in Lancaster, Pennsylvania. The Company leases its home office building under a 15-year, non-cancelable operating lease through February 2017. The annual base rent is subject to an annual increase based upon the consumer price index at the end of each preceding calendar year. In addition to the base rent, the Company is responsible for its proportionate share of expenses related to the building including, but not limited to, utilities, maintenance, real estate taxes, and insurance. The Company has a 5% interest in the limited partnership that owns the building.