Net realized investment gains amounted to $1.8 million in 2010, as compared to $0.6 million in 2009. The Group had gains on the sales of securities of $2.0 million and $0.9 million, and write-downs of other than temporary impairments of $0.1 million and $0.8 million, in 2010 and 2009, respectively. The Group also recorded a loss on the mark-to-market of interest rate swaps in 2010 of $0.1 million, and a gain in 2009 of $0.5 million. These interest rate swaps were entered into to convert the floating interest rate to a fixed rate on the Group’s trust preferred securities obligations, and the mark-to-market gains or losses are recorded as realized gains or losses. See also the discussion of other than temporary impairments on investment securities in the “Critical Accounting Policies” section.
In 2010 net investment income decreased $0.3 million, or 2.3%, to $13.9 million, as compared to $14.2 million in 2009. This decrease was driven by a low interest rate environment in the first three quarters of the year, as maturing and sold fixed income securities were reinvested at lower rates combined with an increase in the allocation of expense to the investment function of the Company.
In 2010 investment income on fixed income securities decreased $0.1 million, or (0.9%), to $15.8 million, as compared to $15.9 million in 2009. This was driven by the low interest rate environment for reinvestment of securities noted above. Our tax equivalent yield (yield adjusted for tax-benefit received on tax-exempt securities) on fixed income securities decreased slightly to 4.63% in 2010, as compared to 5.14% in 2009.
During 2009 we introduced a new on-line system for Homeowners policies. It enables agents to quote, bind and service Homeowners policies in New Jersey and Pennsylvania.
We have audited the accompanying consolidated balance sheets of Mercer Insurance Group, Inc. and subsidiaries as of December 31, 2010 and 2009, and the related consolidated statements of earnings, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2010. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
In December 2009, the FASB issued Accounting Standards Update (“ASU”) 2009-16, Transfers and Servicing (Topic 860) - Accounting for Transfers of Financial Assets. This guidance: (i) eliminates the concept of a qualifying “special-purpose entity”; (ii) alters the requirements for transferring assets off of the reporting company’s balance sheet; (iii) requires additional disclosure about a transferor’s involvement in transferred assets; and (iv) eliminates special treatment of guaranteed mortgage securitizations. The adoption of this guidance, which was effective for fiscal years beginning after November 15, 2009, did not impact the Group’s financial condition or results of operations.
In July 2010, the FASB issued ASU 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. This guidance expands the disclosure requirements related to the credit quality of financing receivables and their allowance for credit losses. The majority of these requirements do not apply to the Group’s operations as we generally issue insurance policies that are effective for one year, and this guidance excludes accounts receivable that arise from the sale of goods or services with a contractual maturity of one year or less or receivables reported at fair value or the lower of cost or fair value. This guidance is effective for interim and annual periods ending on or after December 15, 2010.
In December 2010, the FASB issued ASU 2010-29, Business Combinations (Topic 805:) Disclosure of Supplementary Pro Forma Information for Business Combinations. This guidance relates to disclosure of pro forma information for business combinations that have occurred in the current reporting period. It requires that an entity presenting comparative financial statements include revenue and earnings of the combined entity as though the combination had occurred as of the beginning of the comparable prior annual period only. This guidance is effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010, and therefore, the adoption of this guidance and its corresponding impact will only need to be assessed to the extent that we engage in any future business combinations.
With $8.5 million, $8.3 million, and $7.6 million of recorded reserves, net of reinsurance, at December 31, 2010, 2009, and 2008, respectively, workers’ compensation represents 4 %, 4%, and 3%, respectively, of the Group’s total carried net loss and loss adjustment expense reserves at December 31, 2010, 2009 and 2008. A portion of this business is assumed from the National Involuntary Pool managed by the National Council on Compensation Insurance (NCCI).
Goodwill was reduced by $209 as a result of the adoption of FIN 48 as of January 1, 2007.
The denominator for diluted earnings per share does not include the effect of outstanding stock options that have an anti-dilutive effect. For the years ended December 31, 2009 and 2008, 40,000 and 115,000 stock options, respectively, were considered to be anti-dilutive and were excluded from the earnings per share calculation.
Financial Pacific Statutory Trust II (Trust II) is a Connecticut statutory business trust. The Trust issued 3,000 shares of the Trust preferred securities at a price of $1 per share for $3,000. The Trust purchased $3,093 in Junior Subordinated Debentures from the Group that mature on May 15, 2033. The annual effective rate of interest at December 31, 2010 is 8.9%.