The following table sets forth selected historical financial information for the Company for the years ended and as of the dates indicated. This information comes from the Company’s consolidated financial statements. The information presented for the year ended December 31, 2006 includes the results of ELH for the entire year and the results of EIHI and EHC and its subsidiaries for the period from June 17, 2006 to December 31, 2006. The information presented as of December 31, 2005, 2004, 2003 and 2002 and for the years then ended represents the financial condition and results of operations of ELH for the respective periods. You should read the following selected financial information along with the information contained in this annual report, including Part II,
The Company is an insurance holding company offering workers’ compensation and group benefits insurance products and reinsurance products through its wholly-owned subsidiaries. As a result of the acquisition of EHC on June 16, 2006, the Company’s consolidated results of operations for the year ended December 31, 2006 include the results of operations of the Company’s workers’ compensation insurance, segregated portfolio cell reinsurance, and specialty reinsurance segments from June 17, 2006 to December 31, 2006 and the results of operations of the Company’s group benefits insurance segment for the year ended December 31, 2006. The Company’s results of operations for the year ended December 31, 2005 represent the results of operations of the Company’s group benefits insurance segment and ELH’s former general agency operations segment, which is included in corporate/other. The corporate/other segment for the year ended December 31, 2006 includes the results of operations of Employers Alliance, EIHI, Eastern Holding Company, Ltd., Eastern Services, and Global Alliance from June 17, 2006 to December 31, 2006 and the results of operations of ELH’s corporate activity and group medical run-off operations for the year ended December 31, 2006.
Workers’ Compensation Insurance. The property and casualty insurance industry is affected by recurring industry cycles known as “hard” and “soft” markets. Since EAIG began operations in 1997 and continuing into 2001, EAIG operated in a soft market cycle, which is generally considered an adverse industry cycle in the property and casualty insurance industry. A soft cycle is characterized by intense competition resulting in lower pricing and increased commissions paid to distribution sources in order to compete for business. Management believes that a hard market began in 2001. A hard market, generally considered a beneficial industry trend, is characterized by reduced competition that results in higher pricing and lower commissions paid to acquire business. The hard market conditions significantly intensified after the September 11, 2001 terrorist attacks. Management believes that a soft market commenced in 2005, as evidenced by increased competition. During 2006, the workers’ compensation insurance segment experienced renewal rate decreases of 6.1%.
Direct and net premiums written. Direct premiums written is the sum of both direct premiums and assumed premiums before the effect of ceded reinsurance. Net premiums written is the difference between direct premiums written and premiums ceded or paid to reinsurers (ceded premiums written). In the specialty reinsurance segment, assumed premiums are premiums that are received from another company under a reinsurance agreement, which are reported to the Company directly from the broker on a quarterly basis. In the segregated portfolio cell reinsurance segment, assumed premiums are derived from insurance contracts written by EAIG and ceded to the segregated portfolio cells at Eastern Re.
Net premiums earned. Net premiums earned are the earned portion of the Company’s net premiums written. Direct premiums written include all premiums billed during a specified policy period.
Premiums are earned over the term of the related policies. At the end of each accounting period, the portion of the premiums that are not yet earned are included in unearned premiums and are realized as revenue in subsequent periods over the remaining term of the policy. The Company’s workers’ compensation policies typically have a term of twelve months. Thus, for example, for a policy that is written on July 1, 2006, one-half of the premiums would be earned in 2006 and the other half would be earned in 2007. Workers’ compensation premiums are determined based upon the payroll of the insured, the applicable premium rates and, where applicable, an experience based modification factor. An audit of the policyholders’ records is conducted after policy expiration, to make a final determination of applicable premiums. Included with net premiums earned is an estimate for earned but unbilled final audit premiums. The Company can estimate earned but unbilled premiums because it keeps track, by policy, of how much additional premium is billed in final audit invoices as a percentage to estimate the probable additional amount that it has earned but not yet billed as of the balance sheet date. The majority of the Company’s group benefits insurance policies are billed on a monthly basis with premiums being earned in the month in which coverage is provided. As a result, there is minimal unearned premium related to the group benefits insurance policies as of the balance sheet date.
Losses and loss adjustment expenses. Losses and loss adjustment expenses represent the largest expense item and include: (1) claim payments made, (2) estimates for future claim payments and changes in those estimates for prior periods, and (3) costs associated with investigating, defending and adjusting claims.
Income tax expense. EIHI and certain of its subsidiaries pay federal, state and local income taxes. Income tax expense includes an amount for both current and deferred income taxes. Current income tax expense includes an amount for the Company’s current year federal income tax liability and any adjustments related to differences between the prior year federal income tax estimate and the actual income tax expense reported in the tax return. Deferred tax expense represents the change in the Company’s net deferred tax asset, exclusive of the tax effect related to changes in unrealized gains and losses in the Company’s investment portfolio and changes in the unrecognized amounts related to the Company’s benefit plan liabilities.
Loss ratio. The loss ratio is the ratio (expressed as a percentage) of losses and loss adjustment expenses incurred to net premiums earned and measures the underwriting profitability of a company’s insurance business. The Company measures the loss ratio on an accident year and calendar year loss basis to measure underwriting profitability. An accident year loss ratio measures losses and loss adjustment expenses for insured events occurring in a particular year, regardless of when they are reported, as a percentage of net premiums earned during that year. A calendar year loss ratio measures losses and loss adjustment expenses for insured events occurring during a particular year and the change in loss reserves from prior accident years as a percentage of net premiums earned during that year.
Combined ratio. The combined ratio is the sum of the loss ratio and the expense ratio and measures the Company’s overall underwriting profit. If the combined ratio is below 100%, the Company is making an underwriting profit. If the Company’s combined ratio is at or above 100%, the Company is not profitable without investment income and may not be profitable if investment income is insufficient.
The preparation of financial statements in accordance with U.S. GAAP requires both the use of estimates and judgment relative to the application of appropriate accounting policies. The Company is required to make estimates and assumptions in certain circumstances that affect amounts reported in the consolidated financial statements and related footnotes. The Company evaluates these estimates and assumptions on an
In addition to case reserves, the Company establishes loss and ALAE reserves on an aggregate basis for case incurred development and IBNR claims. Case incurred development and IBNR reserves are primarily intended to provide for aggregate changes in preexisting case incurred amounts and, secondarily, as the unpaid cost of IBNR claims for which an initial case reserve has not been established.
Paid Loss Development Method. The paid loss development method is mechanically identical to the incurred loss development method described above. The paid method does not rely on case reserves or claim reporting patterns in making projections. The validity of the results from using a paid loss development approach can be affected by many conditions, such as internal claim department processing changes, legal changes or variations in a company’s mix of business from one year to the next. Also, since the percentage of losses paid for immature years is often low, development factors are more volatile. A small variation in the number of claims paid can have a leveraging effect that can lead to significant changes in estimated ultimate liability for losses and loss adjustment expenses. Therefore, ultimate values for immature accident years are often based on alternative estimation techniques.
produce expected unreported losses. The unreported percentage is calculated as one minus the reciprocal of the selected cumulative incurred LDFs. Finally, the unreported losses are added to the current reported losses to produce ultimate losses. The Bornhuetter-Ferguson method is most useful as an alternative to other models for immature accident years. For these immature accident years, the amounts reported or paid may be small and unstable and therefore not predictive of future development. Therefore, future development is assumed to follow an expected pattern that is supported by more stable historical data or by emerging trends. This method is also useful when changing reporting patterns distort historical development of losses.
In determining management’s best estimate, the Company considers the various accident year loss indications produced by the actuarial methods. Considering the results of the methods, the inherent strengths and weaknesses of each method as described above, as well as other statistical information such as ultimate loss ratios, ultimate loss to exposure ratios and average ultimate claim values, the Company determines and records its best estimate of unpaid losses and ALAE. Management believes its best estimate of recorded reserves for unpaid losses and LAE is representative of the inherent uncertainty surrounding reserving for a long-tail line of business such as workers’ compensation as well as the relative immature accident year historical experience of its workers’ compensation insurance segment, which completed its first full year of operations in 1998.
As of December 31, 2006, the Company’s best estimate of its ultimate liability for losses and LAE, net of amounts recoverable from reinsurers and before purchase accounting adjustments, for its workers’ compensation insurance segment was $41.8 million. This amount was determined based on methods which were viewed to be better predictors than other methods.
The Company’s reserves for unpaid losses and LAE in its segregated portfolio cell reinsurance segment as of December 31, 2006 are summarized below (in thousands):
The reporting and paid loss development patterns in the segregated portfolio cell reinsurance segment are also consistent with that of the workers’ compensation insurance segment. Accordingly, the tail factors used to project actual current losses to ultimate losses for claims covered in the Company’s segregated portfolio cell reinsurance segment require considerable judgment. The difference between total revenue for the segregated portfolio cell reinsurance segment for each period and the sum of losses and loss adjustment expenses, underwriting expenses, policyholder dividend expenses and other expenses is accrued as a segregated portfolio dividend expense. Accordingly, any change in the reserve for unpaid losses and LAE is recorded to the segregated portfolio dividend payable / receivable account and would only impact the Company’s net income or shareholders’ equity if it were a segregated portfolio cell dividend participant.
Tabular Reserve Method. The tabular reserve method is used to estimate the reserve for insurance products that are longer tail by nature and for which the claim payment patterns are relatively predictable. Under the tabular reserve method, the reserve for reported but unpaid claims is estimated using industry-standard valuation tables (for long-term disability claims, the Company uses the 1987 Commissioners Group Disability Table; for life premium waiver claims, the Company uses the 1970 Intercompany Group Life Disability Table). These tables incorporate expected death and recovery rate assumptions (based on an insured’s age and length of disability) that impact the reserve for unpaid claims.
The Company’s reserves for unpaid losses and LAE in its group benefits insurance segment, by line business, as of December 31, 2006 and 2005, were as follows (in thousands):
The dental reserves represent the Company’s estimate of future amounts due on in-process and IBNR dental claims. The Company estimates its dental reserves using a combination of the lag factor development method and the loss ratio method, which results in the development of a point estimate. The loss ratio method is applied to the last three months (or most recent quarter), based on recent loss ratio trends. The Company’s reserving methodology takes into consideration the immaturity of the most recent quarter’s paid claim runout. Therefore, the recorded dental reserve represents a point estimate plus an amount for adverse development, equal to 10% of the point estimate. The most significant assumptions used in estimating the dental reserves include the selection of claim completion factors and ultimate loss ratios. Completion factors are selected based on the average for the past twelve months and are applied to all periods prior to the most recent three months. An ultimate loss ratio is applied to the most recent three months based on recent trends. Due to the small size of the Company’s dental block of business, the ultimate loss ratios on a monthly basis can be quite volatile. The Company evaluated the impact to its recorded dental reserves by adjusting the loss ratios for the most recent three months by 100, 200 and 300 basis points above and below the selected loss ratios. The results of this analysis are shown in the table below (dollars in thousands):
The term life reported claim reserve represents the Company’s liability for reported but unpaid death benefits and AD & D claims. The reserve is based on the death benefit of the underlying term life insurance contract.
The term life IBNR claim reserve represents the Company’s estimate of future amounts to be paid under existing term life insurance contracts for insured deaths and dismemberments that have occurred but not yet been reported. The Company estimates the term life IBNR claim reserve by applying a reserve factor to the current in-force volume of life insurance and AD & D benefits, resulting in the development of a point estimate. The reserve factor is based on past experience and is evaluated against actual results on an annual basis for reasonableness. The reserve factor selected as of December 31, 2006 was based on the average actual reserve factor for the past three years, which management believes produces the best indication of the Company’s expected term life IBNR claims.
With respect to the specialty reinsurance segment, numerous internal and external factors will affect the ultimate settlements of future claims including, but not necessarily limited to, changes in the cost of environmental remediation, impacts of relevant federal or state legislation, changes in technology and the resulting impact on costs, and reliance on ceding companies to handle claims and remit proper loss information in a timely manner. Reserving for assumed reinsurance requires evaluating loss information received from the ceding company. On a quarterly basis, Eastern Re receives a statement from the ceding company which includes premium and loss settlement activity for the period with corresponding reserves as established by the ceding company. Claims reported to the ceding company by insureds are entered into its claim system and ceded to Eastern Re on a quarterly basis. The claim information received from the ceding company is compiled into loss development triangles. Generally accepted actuarial methodologies, supplemented by judgment where appropriate, are used to develop the appropriate IBNR reserves for Eastern Re. Each quarter the Company compares its actual reported losses for the quarter, and cumulative reported losses since the most recently completed reserve study, to expected reported losses for the respective period, which may result in the Company increasing its losses and loss adjustment expenses, and its corresponding loss 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 loss adjustment expenses at Eastern Re. The evaluation of the reserves for unpaid losses and LAE related to the Company’s specialty reinsurance programs requires that loss development be estimated over an extended period of time. Because the primary insurer under this program changed in 1999 and the claims management philosophy of the two primary insurers differed, historical loss data for years prior to 1999 is not very useful. Therefore, reliance has been placed on industry loss development patterns, adjusted to reflect considerations particular to the exposure. The reliance on external benchmarks, while necessary, creates an additional element of uncertainty.
The Company’s reserves for unpaid losses and LAE in its specialty reinsurance segment as of December 31, 2006 are summarized below (in thousands):
In its specialty reinsurance segment, the Company categorizes unpaid losses and loss adjustment expenses into case reserves and IBNR reserves. Case reserves represent unpaid losses reported by the ceding company. The Company updates its reserve estimates on a quarterly basis using information received from its cedants.
A significant amount of time can lapse between the assumption of risk, occurrence of a loss event, the reporting of the event to an insurance company, often referred to as the primary company or cedant, the subsequent reporting to the reinsurance company, referred to as the reinsurer, and the ultimate payment of the claim on the loss event by the reinsurer.
The evaluation of the reserves for unpaid losses and LAE in the specialty reinsurance segment requires that loss development be estimated over an extended period of time without the benefit of credible historical loss development patterns. As the historical loss development data lacks credibility, reliance has been placed on loss development patterns based on industry loss development patterns judgmentally adjusted to reflect considerations particular to the exposure. The reliance on external benchmarks, while necessary, creates an additional element of uncertainty. Following is a sensitivity analysis of the reserves for unpaid losses and LAE to reasonably likely changes in industry loss development factors used to project current losses to ultimate losses (in thousands):
Unrealized investment gains or losses on investments carried at fair value, net of applicable income taxes, are reflected directly in shareholders’ equity as a component of comprehensive income (loss) and, accordingly, have no effect on net income. When, in the opinion of management, a decline in the fair value of an investment below its cost or amortized cost is considered to be “other-than-temporary,” such investment is written-down to its fair value. The amount written-down is recorded in earnings as a realized loss on investments. Generally, the determination of other-than-temporary impairment includes, in addition to other relevant factors, a presumption that if the market value is below cost by a significant amount for a period of time, a write-down is necessary. Notwithstanding this presumption, the determination of other-than-temporary impairment requires judgment about future prospects for an investment and is therefore a matter of inherent uncertainty. For the year ended December 31, 2006, the Company did not experience any declines in investment securities that were determined to be other-than-temporary. Adverse investment market conditions, or poor operating results of underlying investments, could result in impairment charges in the future. The Company generally applies the following standards in determining whether the decline in fair value of an investment is other-than-temporary:
The temporary differences between the tax and book bases of assets and liabilities are recorded as deferred income taxes. Management evaluates the recoverability of the net deferred tax asset based on historical trends of generating taxable income or losses, as well as expectations of future taxable income or loss. As of December 31, 2006, the Company recorded a net deferred tax asset of $2.7 million. Management expects that the net deferred tax asset is fully recoverable. If this assumption were to change, any amount of the net deferred tax asset that the Company could not expect to recover would be provided for as an allowance and would be reflected as an increase in income tax expense in the period in which it was established.
Amounts recoverable from Company’s reinsurers are estimated in a manner consistent with the reserves for unpaid losses and LAE associated with the reinsured policy. Amounts paid for reinsurance contracts are expensed over the contract period during which insured events are covered by the reinsurance contracts. Reinsurance balances recoverable on paid and unpaid loss and loss adjustment expenses are reported separately as assets, instead of being netted with the appropriate liabilities, because reinsurance does not relieve the Company of its legal liability to its policyholders. Reinsurance balances recoverable are subject to credit risk associated with the particular reinsurer. Additionally, the same uncertainties associated with estimating unpaid losses and loss adjustment expenses affect the estimates for the ceded portion of these liabilities. The Company continually monitors the financial condition of its reinsurers.
In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment to FASB Statements No. 87, 88, 106, and 132(R)”. SFAS 158 requires employers to recognize the funded status of a benefit plan in its statement of financial position, with changes in the funded status occurring during the year reported as a component of other comprehensive income or loss. The funded status of a benefit plan represents the difference between plan assets at fair value and the benefit obligation. For defined benefit pension plans and postretirement benefit plans, the benefit obligation is the projected benefit obligation and accumulated postretirement benefit obligation, respectively. In addition to the above changes, SFAS 158 requires that plan assets and benefit obligations be measured as of the date of an employer’s fiscal year-end. The recognition and disclosure provisions of SFAS 158 are effective for fiscal years ending December 31, 2006. The requirement to measure plan assets and benefit obligations as of the end of an employer’s fiscal year-end is effective for fiscal years ending after December 31, 2008. As a result of adopting SFAS 158 effective December 31, 2006, the prepaid asset related to our defined benefit pension plan increased $287,000 and our liability related to our defined benefit postretirement plan decreased $364,000, resulting in an increase to accumulated other comprehensive income of $423,000, net of tax.
In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109” (“FIN 48”), which provides criteria for the recognition, measurement, presentation and disclosure of uncertain tax positions. A tax benefit from an uncertain position may be recognized only if it is “more likely than not” that the position is sustainable based on its technical merits. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006. The Company expects that the adoption of FIN 48 will not have a material effect on its consolidated financial condition or results of operations.
YEAR ENDED DECEMBER 31, 2006 COMPARED TO YEAR ENDED DECEMBER 31, 2005
The components of consolidated revenue were as follows for the year ended December 31, 2006 and 2005 (in thousands):
The workers’ compensation insurance segment consists of the operating results of EAIG. Summarized financial results of the workers’ compensation insurance segment are as follows for the period from June 17, 2006 to December 31, 2006 (in thousands):
Direct premiums written for the period from June 17, 2006 to December 31, 2006 were $34.0 million. Direct premiums written for traditional business and alternative markets were $27.1 million and $6.9 million for the period from June 17, 2006 to December 31, 2006, respectively. Direct written premiums include the impact of 2006 renewal rate decreases of 6.1%, a premium renewal retention rate of 85.4% and a reduction for purchase accounting adjustments of $5.1 million. Audit premiums of $1.6 million were also included in direct premiums written for the period from June 17, 2006 to December 31, 2006.
The workers’ compensation ratios were as follows for the period from June 17, 2006 to December 31, 2006:
Loss and loss adjustment expenses were reduced by the amortization of purchase accounting adjustments of $484,000. The accident period loss and loss adjustment expense ratio was 62.1% for the period from June 17, 2006 to December 31, 2006. The calendar period loss and loss adjustment expense
ratio was 62.8% for the period from June 17, 2006 to December 31, 2006, including 9.2 points related to purchase accounting adjustments. Favorable loss reserve development on prior accident years of $2.1 million was recorded for the period from June 17, 2006 to December 31, 2006. The favorable loss and loss adjustment expense reserve development relates primarily to a decrease in the prior accident period loss development factors used to estimate loss and loss adjustment expenses. The decrease in prior accident period loss development factors relates primarily to significant prior year claim settlements during 2006 for amounts at, or less than, previously established case and IBNR reserves. This decrease had the effect of lowering loss development factors as of December 31, 2006. For the period from July 1, 2006 to December 31, 2006, the Company closed 95, or 22.5%, of the 423 open lost time claims as of December 31, 2005. In the aggregate, the claims were closed at amounts lower than the provision established for claims incurred but not reported. Management believes that the realization of the benefits of its return-to-work controls implemented in 2003 coupled with strong economies in its underwriting territories during 2006 enabled it to record loss and loss adjustment expenses that were lower than the amount reserved for claim settlements. For the period from June 17, 2006 to December 31, 2006, there were no claims that exceeded the Company’s $500,000 reinsurance retention.
Acquisition and other underwriting expenses for the period from June 17, 2006 to December 31, 2006 were $(40,000) and include a reduction for purchase accounting adjustments of $968,000 and a decrease of $872,000 related to management’s estimate that the Security Fund will not be making an assessment in 2007 based on 2006 direct written premium. Acquisition and other underwriting expenses consist primarily of agent commissions and premium taxes. Offsetting acquisition and other underwriting expenses are fee-based revenue from Alternative Market writings. Other expenses were $3.7 million for the period from June 17, 2006 to December 31, 2006. The expense ratio was 15.3% for the period from June 17, 2006 to December 31, 2006.
Policyholder dividends were $239,000 for the period from June 17, 2006 to December 31, 2006. Dividends represent payments to customers who purchased participating policies that produced favorable loss ratios. In 2006, 9.1% of all policies were written on a dividend policy basis.
For the period from June 17, 2006 to December 31, 2006, net realized gains were $586,000 and related primarily to sales activity on equity securities.
The decrease in losses and loss adjustment expenses reflects the improved loss experience and favorable development in the dental, long-term disability and term life lines of business, and the decrease in net premiums earned. The calendar period loss ratios, by line of business, for the years ended December 31, 2006 and 2005 were as follows:
The increase in the calendar period short-term disability reflects an increase in the accident period loss ratio, offset by offset by favorable development on prior year reserves. The accident period loss ratio was 80.3% and 77.4% in 2006 and 2005, respectively. The increase in the accident period loss ratio reflects increased claim frequency and severity, offset by renewal rate increases. Favorable development on prior year reserves reduced the calendar year loss ratio by 5.2 percentage points in 2006, compared to 3.2 percentage points in 2005.
The increase in income tax expense reflects the improvement in pre-tax income and the increase in the effective tax rate from 32.6% in 2005 to 35.2% in 2006. The 2005 effective tax rate reflects the release of a valuation allowance related to tax credits totaling $227,000. The tax credits were fully utilized in 2006. In addition, ELH’s statutory tax rate increased from 34% in 2005 to 35% in 2006 as a result of the Company’s acquisition of EHC.
Reinsurance premiums assumed by line of business were as follows for the period from June 17, 2006 to December 31, 2006 (in thousands):
Reinsurance premiums assumed include a reduction for purchase accounting adjustments of $2.6 million.
Acquisition and other underwriting expenses for the period from June 17, 2006 to December 31, 2006 were $789,000 and include a reduction for purchase accounting adjustments of $1.7 million. As part of its quota share reinsurance agreement with the primary insurer, Eastern Re pays the primary insurer a ceding commission based on assumed premiums. For the period from June 17, 2006 to December 31, 2006, the ceding commission paid to the primary insurer was 30.0%. Other expenses of $411,000 were incurred for the period from June 17, 2006 to December 31, 2006. Other expenses consist primarily of accounting, banking, management services and legal fees.
For the period from June 17, 2006 to December 31, 2006, net realized investment gains were $15,000.
Income tax benefit was $265,000 for the period from June 17, 2006 to December 31, 2006. The effective tax rate for the period from June 17, 2006 to December 31, 2006 was 35.1%. Specialty reinsurance is underwritten by Eastern Re, a Cayman domiciled reinsurer. Eastern Re has received an undertaking from the Cayman Islands government exempting them from all local income, profits and capital gains taxes until February 14, 2026. Eastern Re has remained a Cayman Islands corporation after the acquisition of EHC, however, it is now controlled indirectly by the Company, which is a Pennsylvania corporation. As a result, under applicable federal income tax laws and regulations, Eastern Re is deemed a controlled foreign corporation and its income after June 16, 2006 is subject to United States federal income taxes.
The following discussion of the Company’s results of operations for the years ended December 31, 2005 and 2004 reflects the results of operations of ELH, including ELH’s former general agency operations, IBSi. IBSi’s results of operations are included in the corporate/other segment.
The decrease in consolidated net income reflects the impact of certain unusual items, including conversion/merger expenses totaling $877,000, a charge for one-time termination benefits totaling $580,000, and a charge related to ELH’s defined benefit pension plan totaling $294,000. These items were offset by a net after-tax reduction in the Company’s benefit plan liabilities totaling $773,000 and the release of loss reserves in the dental and short-term disability lines of business totaling $692,000. The decrease in consolidated net income from 2004 to 2005 was also impacted by the release of loss reserves totaling $1.6 million related to the run-off of ELH’s group medical insurance business in 2004.
Net premiums earned, by line of business, for the years ended December 31, 2005 and 2004 were as follows (in thousands):
The decrease in losses and loss adjustment expenses primarily reflects reserve releases in the dental and short-term disability lines totaling $637,000 and $55,000, respectively. Losses and loss adjustment expenses in the disability lines increased $969,000, from $6.0 million in 2004 to $6.9 million in 2005, while term life losses and loss adjustment expenses increased $364,000, from $4.0 million in 2004 to $4.3 million in 2005. Claim frequency increased 6.7% and 6.9% in the short-term disability and long-term disability lines, respectively, while long-term disability claim severity increased 11.4%. The increase in term life losses and loss adjustment expenses primarily reflects increasing claim frequency and severity related to premium waiver claims, offset by a decrease in frequency and severity related to death claims. The increase in losses and loss adjustment expenses in the disability and term life lines was offset by a decrease in losses and loss adjustment expenses in the dental line totaling $1.7 million, from $17.6 million in 2004 to $15.9 million in 2005. In addition to the reserve releases, the decrease in dental losses and loss adjustment expenses reflects a decrease in dental premiums and claim frequency, offset by an increase in claim severity. Dental claim frequency decreased 4.4%, while claim severity increased 5.5%.
The group benefits loss ratio decreased 1.0%, from 71.1% in 2004 to 70.1% in 2005. Excluding the impact of the dental and short-term disability reserve releases, the loss ratio increased 0.8%, to 71.9%, from 2004 to 2005. Excluding the effect of the reserve release, the dental loss ratio decreased 2.5% from 2004 to 2005, which primarily reflects an increase in premium per certificate of 6.1%, offset by an increase in claims per certificate of 2.4%. The short-term disability loss ratio continued to increase in 2005, primarily as a result of the aforementioned increase in claim frequency. Claims per certificate in the short-term disability line increased 6.1%, while premiums per certificate increased only 1.8%. The increase in the long-term disability primarily reflects the impact of claim reserve releases totaling $370,000 in 2004, while the increase in the term life loss ratio primarily reflects the increased claim frequency and severity related to premium waiver claims.
December 31, 2006 compared to December 31, 2005. Total assets were $368.2 million as of December 31, 2006, compared to $111.2 million as of December 31, 2005. The increase reflects the proceeds from the initial public offering and the acquisition of EHC.
Total liabilities were $194.5 million as of December 31, 2006, compared to $49.1 million as of December 31, 2005. The increase primarily reflects the acquisition of EHC.
Total shareholders’ equity was $173.7 million as of December 31, 2006, compared to $62.1 million as of December 31, 2005. The increase primarily reflects the proceeds from the initial public offering and the acquisition of EHC.
Liquidity is a measure of an entity’s ability to secure sufficient cash to meet its contractual obligations and operating needs. The Company’s principal sources of funds are underwriting operations, investment income and proceeds from sales and maturities of investments. The Company’s primary use of funds is to pay claims and operating expenses and to purchase investments.
The Company’s investment portfolio is structured so that investments mature periodically over time in reasonable relation to current expectations of future claim payments. The Company’s investment portfolio as of December 31, 2006 had an effective duration of 2.40 years. Currently, claim payments are made from positive cash flow from operations, but the Company also invests excess cash in securities with appropriate maturity dates matched against anticipated future claim payments. As these securities mature, the Company intends to invest any excess funds with appropriate durations to match expected future claim payments.
The net cash from financing activities reflects the net proceeds received from the initial public offering, net of related expenses.
The decrease in net cash from investing activities primarily reflects a decrease in investment purchases of $8.1 million, offset by a decrease in investment sales and maturities of $6.7 million. The Company’s 2004 investment purchases included the investment of excess cash totaling $9.0 million in fixed income securities, as well as the investment of $2 million in a hedge fund. The decrease in investment sales and maturities from 2004 to 2005 primarily reflects the repositioning of the fixed income portfolio during 2004, as well as higher volume of maturities in 2004.
(1) Amounts include interest payments associated with the debt issued to related party trust using applicable interest rates as of December 31, 2006. In connection with the adoption of FIN 46R, the Company does not consolidate the trust established in connection with the issuance of its trust preferred securities. As a result, the Company reports as a component of long-term debt the junior subordinated debenture that its subsidiary, Global Alliance, pays to the trust. For a discussion of the circumstances in which the Company’s subordinated debt may be subject to acceleration, please see “Liquidity and Capital Resources.”
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Eastern Insurance Holdings, Inc. and its subsidiaries at December 31, 2006, and the results of their operations and their cash flows for the year ended December 31, 2006 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the index appearing under Item 15 present fairly, in all material respects, the information set forth therein as of and for the year ended December 31, 2006 when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audit. We conducted our audit of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation.
We have audited the accompanying consolidated balance sheet of Eastern Insurance Holdings, Inc. and subsidiaries (formerly Educators Mutual Life Insurance Company) (the Company) as of December 31, 2005 and the related consolidated statements of operations and comprehensive income (loss) changes in shareholders’ equity, and cash flows for each of the two years in the period ended December 31, 2005. 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 our opinion, the 2005 and 2004 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Eastern Insurance Holdings, Inc. and subsidiaries as of December 31, 2005 and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2005 in conformity with accounting principles generally accepted in the United States of America.
EIHI is an insurance holding company offering workers’ compensation and group benefits insurance products through its wholly-owned subsidiaries. The accompanying consolidated financial statements include the accounts of EIHI and its wholly-owned subsidiaries (collectively, the “Company”), EHC and ELH, and EHC’s wholly-owned subsidiaries, Eastern Services Corporation (“Eastern Services”), Global Alliance Holdings, Ltd. (“Global Alliance”), Global Alliance Statutory Trust I (“Trust I”), Eastern Alliance Insurance Company (“Eastern Alliance”), Allied Eastern Indemnity Company (“Allied Eastern”), Eastern Re Ltd., S.P.C. (“Eastern Re”), and Employers Alliance, Inc. (“Employers Alliance”).
Effective June 16, 2006, EHC was redomesticated from the Cayman Islands to the United States of America. As a result of the redomestication, EHC and Eastern Re are subject to federal income tax on a prospective basis.
The Company operates in five segments: workers’ compensation insurance, group benefits insurance, specialty reinsurance, segregated portfolio cell reinsurance, and corporate/other.
All inter-company transactions and related account balances have been eliminated in consolidation.
The Company’s investments in fixed income securities are classified as available-for-sale and are carried at estimated fair value, with unrealized gains and losses reported in accumulated other comprehensive income (loss), net of tax. Fixed income securities include publicly traded and private placement bonds, including convertible bonds. The estimated fair value of publicly traded bonds is determined based on quoted market prices obtained through an independent pricing service or independent broker. The estimated fair value of private placement bonds is determined using valuation models, taking into consideration the securities’ coupon rate, maturity date, and other pertinent features.
The Company’s investments in equity securities are classified as available-for-sale and are carried at estimated fair value, with unrealized gains and losses reported in accumulated other comprehensive income (loss), net of tax. The estimated fair value of equity securities is determined based on quoted market prices obtained through an independent pricing service or independent broker.
Equity call options represent the estimated fair value of the stock options embedded in the Company’s convertible bond portfolio. The estimated fair value of the fixed income component of the convertible bond is included in fixed income securities. The estimated fair value of equity call options is determined by deducting the theoretical bond value (which is determined using spread information on non-convertible issues from the same issuer) from the estimated fair value of the convertible bond (which is determined based on quoted market prices obtained through an independent pricing service). The equity call option is considered an embedded derivative and changes in the estimated fair value of the equity call options are reported as realized gains or losses in the consolidated statements of operations and comprehensive income (loss).
Mortgage loans on real estate are carried at their unpaid principal balance.
Premiums generated by the Company’s workers’ compensation insurance segment, including estimates of additional premiums resulting from audits of insureds’ records, are generally recognized as written upon inception of the policy. Premiums written are primarily earned on a daily pro rata basis over the terms of the policies to which they relate. Accordingly, unearned premiums represent the portion of premiums written which is applicable to the unexpired portion of the policies in force. Workers’ compensation premiums are determined based upon the payroll of the insured, the applicable premium rates and, where applicable, an experience based modification factor. An audit of the policyholders’ records is conducted after policy expiration to make a final determination of applicable premiums. Included in net premiums earned is an estimate for earned but unbilled final audit premiums. The Company estimates earned but unbilled premiums by tracking, by policy, how much additional premium is billed in final audit invoices as a percentage of payroll exposure to estimate the probable additional amount that it has earned, but not yet billed, as of the balance sheet date. Earned but unbilled premiums accrued as of December 31, 2006, and included in net premiums earned, totaled $1.5 million.
Other revenue for the year ended December 31, 2006 primarily consists of service revenues related to claims adjusting and risk management services provided by Employers Alliance. Claims adjusting and risk management service revenue is earned over the term of the related contracts in proportion to the actual services rendered.
The Company discounts its reserves for unpaid losses and LAE for workers’ compensation claims on a non-tabular basis, using a discount rate of 3%, based upon regulatory guidelines. The reserves for unpaid losses and LAE have been reduced for the effects of discounting by approximately $3.3 million as of December 31, 2006.
The liability for reported but unpaid long-term disability claims is calculated using the 1987 Commissioners Group Disability Table. The long-term disability reserves are discounted based on the expected rate of return of ELH’s fixed income portfolio in the year that the claim was incurred. The discount rate for claims incurred in 2006 and 2005 was 4.75% and 4.25%, respectively. The liability for incurred but not reported claims is estimated on a policy-by-policy basis, taking into consideration average monthly premium, policy elimination periods, and an expected loss ratio.
The liability for life premium waiver reserves represents the present value of future life insurance benefits under those term life insurance policies for which premium has been waived due to the
The methods used to estimate the reserves for unpaid losses and loss adjustment expenses are reviewed periodically and any adjustments resulting therefrom are reflected in current operations.
Management believes that its reserves for unpaid losses and loss adjustment expenses is adequate as of December 31, 2006. However, estimating the ultimate liability is necessarily a complex and judgmental process inasmuch as the amounts are based on management’s informed estimates and judgments using data currently available. If the Company’s ultimate losses, net of reinsurance, prove to differ substantially from the amounts recorded as of December 31, 2006, the related adjustments could have a material adverse effect on the Company’s financial condition, results of operations or liquidity.
Policy acquisition costs consist primarily of commissions and premium taxes that vary with and are primarily related to the production of premium. Policy acquisition costs are deferred and amortized over the period in which the related premiums are earned. Deferred acquisition costs are limited to the estimated amounts recoverable after providing for losses and loss adjustment expenses that are expected to be incurred based upon historical and current experience. Anticipated investment income is considered in determining recoverability.
Goodwill represents the excess of cost over the fair value of net assets of businesses acquired. Goodwill and other intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but are instead tested for impairment at least annually. Intangible
assets with estimable useful lives are amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with Statement of Financial Accounting Standards No. 144 (“SFAS 144”), “Accounting for Impairment or Disposal of Long-Lived Assets.”
Comprehensive income (loss) includes all changes in shareholders’ equity during the reporting period. Other comprehensive income (loss) includes those revenues, expenses, gains and losses that are included in comprehensive income (loss), but not net income.
In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment to FASB Statements No. 87, 88, 106, and 132(R)”. SFAS 158 requires employers to recognize the funded status of a benefit plan in its statement of financial position, with changes in the funded status occurring during the year reported as a component of other comprehensive income or loss. The funded status of a benefit plan represents the difference between plan assets at fair value and the benefit obligation. For defined benefit pension plans and postretirement benefit plans, the benefit obligation is the projected benefit obligation and accumulated postretirement benefit obligation, respectively. In addition to the above changes, SFAS 158 requires that plan assets and benefit obligations be measured as of the date of an employer’s fiscal year-end. The recognition and disclosure provisions of SFAS 158 are effective for fiscal years ending December 31, 2006. The requirement to measure plan assets and benefit obligations as of the end of an employer’s fiscal year-end is effective for fiscal years ending after December 31, 2008. As a result of adopting SFAS 158 effective December 31, 2006, the prepaid asset related to our defined benefit pension plan increased $287 and our liability related to our defined benefit postretirement plan decreased $364, resulting in an increase to accumulated other comprehensive income of $423, net of tax.
The incremental effect of adopting SFAS 158 on the Company’s consolidated balance sheet as of December 31, 2006 is shown in the table below (in thousands). The adoption of SFAS 158 had no effect on the Company’s consolidated statement of operations and comprehensive income (loss) for the year ended December 31, 2006.
In September 2006, the FASB issued SFAS 157, “Fair Value Measurements”. SFAS 157 clarifies the definition of fair value for purposes of financial reporting, specifies the methods to be used to measure fair value, and requires expanded disclosures related to fair value and financial instruments measured at fair value. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. Early application is encouraged, provided an entity has not yet issued financial statements for the fiscal year, including interim financial statements. Management is currently evaluating the impact of SFAS 157 on its current fair value disclosures. The Company expects that the adoption of SFAS 157 will not have a material effect on its consolidated financial condition or results of operations.
a substantial change has occurred, the related unamortized deferred policy acquisition costs, unearned premiums and other related balances must be written off. The Company will adopt SOP 05-1 on January 1, 2007. The Company expects that the adoption of SOP 05-1 will not have a material effect on its consolidated financial condition or results of operations.
The transaction was accounted for using the purchase method of accounting in accordance with SFAS 141, “Business Combinations”.
The fair value of the reserve for unpaid losses and loss adjustment expenses was estimated by discounting the gross reserves and applying a risk margin to the gross reserves. EIHI discounted the reserve for unpaid losses and loss adjustment expenses based on the present value of the expected underlying cash flows using a risk-free interest rate, which approximated the U.S. Treasury rate on the acquisition date. The discounting pattern was developed by EIHI based on historical loss data. A risk margin was applied to the
As of the acquisition date, EIHI adjusted EHC’s net unearned premium reserves to fair value by (1) discounting the unearned premium reserves and (2) applying a risk margin to the unearned premium reserves. EIHI discounted the unearned premium reserves based on the present value of the expected underlying cash flows using a risk-free interest rate, which approximated the U.S. Treasury rate on the acquisition date. The discounting pattern was developed by EIHI based on historical loss data. As a result of these adjustments, unearned premium reserves were reduced by $12.9 million as of June 16, 2006.
Acquisition and other underwriting expenses were decreased by $6.8 million as of June 16, 2006 to exclude deferred acquisition costs. Deferred acquisition costs consisting primarily of commissions and premium taxes, which vary with and are primarily related to the production of new business, are deferred and amortized to achieve a matching of revenue and expenses.
The acquisition of EHC resulted in the identification of certain intangible assets. The allocation of the purchase price in excess of the fair value of the Company’s net assets acquired to intangible assets totaled $9.2 million. As of December 31, 2006, intangible assets consisted of the following (in thousands):
Amortization expense totaled $1.1 million for the year ended December 31, 2006. The estimated aggregated amortization expense for each of the next five years is as follows (in thousands):
The conversion, stock offering and the acquisition of EHC resulted in the issuance of common shares of the Company on June 16, 2006. Basic earnings per share are computed by dividing the net income for the period from June 17, 2006 to December 31, 2006 by the weighted average number of shares outstanding. Diluted earnings per share are computed by dividing net income for the period from June 17, 2006 to December 31, 2006 by the weighted average number of shares outstanding for the period, including dilutive potential common shares outstanding for the period. Stock warrants of 306,099 have been included as dilutive potential common shares outstanding. There were no anti-dilutive stock warrants or options as of December 31, 2006. Consolidated net income, basic shares outstanding, diluted shares outstanding, basic earnings per share and diluted earnings per share for the period from June 17, 2006 to December 31, 2006 were as follows (in thousands, except share and per share data):
The Company’s domestic insurance subsidiaries, Eastern Alliance, Allied Eastern and ELH, prepare statutory-basis financial statements in accordance with accounting practices prescribed or permitted by the Insurance Department of the Commonwealth of Pennsylvania (the “Insurance Department”). The Insurance Department requires that insurance companies domiciled in the Commonwealth prepare their statutory-basis financial statements in accordance with the National Association of Insurance Commissioners’ (“NAIC”) Accounting Practices and Procedures manual, subject to any deviations prescribed or permitted by the Commonwealth’s insurance commissioner (“SAP”).
Permitted statutory accounting practices encompass all accounting practices that are not prescribed; such practices differ from state to state, may differ from company to company within a state, and may change in the future. The reserves for unpaid losses and loss adjustment expenses of Eastern Alliance and Allied Eastern are discounted on both a tabular and non-tabular basis. The discounting of workers’ compensation indemnity reserves on a tabular basis is a prescribed practice by the NAIC. The discounting of other workers’ compensation reserves on a non-tabular basis is a permitted practice by the Insurance Department. The non-tabular discounting of other workers’ compensation reserves increased Eastern Alliance’s and Allied Eastern’s statutory surplus by $1,239 and $180, respectively, as of December 31, 2006 and by $1,079 and $148, respectively, as of December 31, 2005. The non-tabular discounting of other workers’ compensation reserves increased (decreased) Eastern Alliance’s statutory net income by $176, $(32), and $(126) and increased (decreased) Allied Eastern’s statutory net income by $34, $(11), and $75 for the years ended December 31, 2006, 2005, and 2004, respectively. ELH did not have any permitted practices for the years ended December 31, 2006, 2005, or 2004.
The statutory surplus and statutory net income (loss) of Eastern Alliance, Allied Eastern, and ELH as of December 31, 2006 and 2005 and for the years ended December 31, 2006, 2005, and 2004 was as follows (in thousands):
The ability of Eastern Alliance, Allied Eastern and ELH to pay dividends to EIHI is limited by the laws and regulations of Pennsylvania. The maximum annual dividends that EIHI’s insurance subsidiaries may pay without the prior approval from the Insurance Department is limited to the greater of 10% of statutory surplus or 100% of statutory net income for the most recently filed annual statement. For the three years subsequent to June 16, 2006, the effective date of the common stock offering, conversion of ELH, and acquisition of EHC, Eastern Alliance, Allied Eastern and ELH are prohibited from declaring or paying any dividends or other forms of distribution without the prior approval of the Pennsylvania Insurance Commissioner.
For the years ended December 31, 2006, 2005, and 2004, the change in the estimated fair value of equity call options included in net realized investment gains in the consolidated statements of operations and comprehensive income (loss) totaled $837, $(367), and $217, respectively.
The amortized cost and estimated fair value of fixed income securities, including the equity call option component of the Company’s convertible bond portfolio, as of December 31, 2006, by contractual maturity, are shown below (in thousands). Expected maturities could differ from contractual maturities because borrowers may have the right to call or prepay obligations, with or without call or prepayment penalties.
The change in the Company’s net unrealized gains and losses for the years ended December 31, 2006, 2005, and 2004 was as follows (in thousands):
Net investment income for the years ended December 31, 2006, 2005, and 2004 was as follows (in thousands):
The following table provides a summary of the activity in the Company’s reserves for unpaid losses and loss adjustment expenses, excluding term life premium waiver reserves, for the years ended December 31, 2006, 2005, and 2004 (in thousands):
Group Benefits Insurance. The Company’s results of operations for the year ended December 31, 2006 include favorable development on prior year reserves in the group benefits insurance segment. Favorable development in the dental and short-term disability lines totaled $533 and $337, respectively, which reflects better claim experience than anticipated at the time the liability was established. The Company’s results of operations also reflect the termination of prior year long-term disability claims totaling $2.2 million, which resulted from claimants returning to work, claimant death, or the termination of benefits in accordance with policy provisions.
ELH entered into a coinsurance agreement in 1999, under which it ceded an existing block of outstanding claims related to a program that provided long-term disability coverage to certain professional associations. The Company recorded a reinsurance recoverable totaling $11,549 and $15,366 at December 31, 2006 and 2005, related to this block of ceded claims.
The components of the income tax provision for the years ended December 31, 2006, 2005, and 2004 are as follows (in thousands):
As of December 31, 2006, the estimated fair value of unearned ESOP shares were $10.3 million.
A reconciliation of changes in the benefit obligation, fair value of plan assets and funded status of the pension plan and the postretirement plan at December 31, 2006 and 2005 is as follows (in thousands):
As of December 31, 2006, the following amounts related to the pension plan and postretirement plan have been included in accumulated other comprehensive income (AOCI) (in thousands):
The accumulated benefit obligation of the pension plan at December 31, 2006 and 2005 was $9,335 and $9,502, respectively, and the accumulated benefit obligation of the postretirement plan was $324 and $469, respectively.
Benefits paid totaled $522, $561, and $518 for the pension plan and $152, $194, and $203 for the postretirement plan for the years ended December 31, 2006, 2005, and 2004, respectively. The estimated future benefits to be paid over the next ten years are as follows (in thousands):
The primary investment objective of the pension plan is to achieve maximum rates of return commensurate with safety of principal. The pension plan asset allocation is reviewed annually to determine whether the portfolio mix is within an acceptable range of the target allocation. Target asset allocations are based on asset and liability studies with the goal to enhance the expected return of the pension plan portfolio while maintaining acceptable levels of risk. The target asset allocation for the portfolio is 35% equity securities and 65% fixed income securities.
At December 31, 2006, the assumed healthcare cost trend rate used in the estimate of the postretirement benefit plan obligation was 9.00% for those participants under age 65, with the rate decreasing to 5.00% in 2011 and thereafter. The assumed healthcare cost trend rate used for those participants over age 65 was 8.00%, with the rate decreasing to 4.00% in 2011 and thereafter.
Assumed healthcare cost trend rates are a significant assumption in the development of postretirement medical plan liabilities. As a result of the amendment to the Company’s postretirement plan that transfers 100% of the healthcare premium contribution to the retirees on January 1, 2008, the assumed healthcare cost trend does not have a material impact on the Company’s benefit obligation or net periodic benefit cost at December 31, 2006.
The Company’s current operations are organized into the five following business segments. As a result of the acquisition of EHC, the Company has three new business segments: worker’s compensation insurance, segregated portfolio cell reinsurance and specialty reinsurance. In addition, the Company’s prior year segment information has been restated to reflect the sale of IBSi and the completion of the group medical run-off operations, both of which are included in the corporate/other segment for the years ended December 31, 2005 and 2004.
The Company provides a variety of services to self-insured workers’ compensation plans including program design, fronting, claims adjusting, investment management, and cell rental services at Eastern Re. The primary insurance coverage for the segregated portfolio cell program is underwritten by Eastern Alliance and Allied Eastern and ceded 100% to Eastern Re. The cell rental structure provides the segregated portfolio dividend participants the opportunity to retain control of both underwriting profit and investment income derived from the insurance programs. Eastern Re currently provides cell rental facilities and Eastern Alliance and Allied Eastern provide fronting services to 11 customers. Upon termination of the respective agreements with the customers and after settlement of the ultimate liabilities due under the various programs, the segregated portfolio dividend participants are entitled to receive a profit participation dividend payment from Eastern Re for the remaining underwriting profit, if any, under the cell rental programs. Fronting fees earned by Eastern Alliance and Allied Eastern on the segregated portfolio cell reinsurance business are reported in the workers’ compensation insurance segment. Outstanding loss reserves and unearned premiums under the segregated portfolio cell programs are collateralized by letters of credit provided by the segregated portfolio dividend participants.
Group benefits insurance, which includes dental, short and long-term disability, and term life insurance products are underwritten through ELH. The group benefits insurance products are primarily marketed to small and medium sized businesses. ELH is licensed to write business in 41 jurisdictions in the United States. ELH is currently actively writing business in 16 jurisdictions, primarily in the Mid-Atlantic, Southeast, and Midwest regions of the United States. ELH distributes its products through a network of independent producers.
Specialty reinsurance is underwritten through Eastern Re. Eastern Re assumes business through its participation in reinsurance treaties with an unaffiliated insurance company related to an underground storage tank insurance program, referred to as “EnviroGuard,” and a non-hazardous waste transportation product, referred to as “EIA liability” (“EIA”). The EnviroGuard program provides coverage to underground tank owners for third party off-site bodily injury and property damage claims as well as clean-up coverage and first party on-site claims. The EIA program provides commercial automobile liability coverage for non-hazardous waste haulers.
The following table represents the segment results for the year ended December 31, 2004, which reflects the results of operations of ELH (in thousands):
On May 15, 2003, Trust I, a business trust subsidiary formed by Global Alliance, issued $8.0 million of fixed/floating rate trust preferred securities. These securities have a thirty-year maturity, with a provision that allows the Company to call these securities at par after five years from the date of issuance. Cash distributions will be paid quarterly in arrears at a rate of 7.35% for a period of five years and will float thereafter at 410 basis points over three-month London Interbank Offered Rates. The Company guarantees all obligations of the Trust I with respect to distributions and payments of these securities.
18. Quarterly Financial Data (Unaudited, in thousands, except per share data)
The basic and diluted earnings per share for the quarter ended June 30, 2006 was computed based on the Company’s net income for the period from June 17, 2006 to June 30, 2006.