The home office building is used by the workers’ compensation insurance and corporate/other segments. The regional office space in North Carolina, Indiana, Tennessee and Western Pennyslvania is primarily used by the workers’ compensation insurance segment.
(2) Includes the results of operations of Eastern Holding Company, Ltd. and its subsidiaries for the period from June 17, 2006 to December 31, 2006.
(5) Total liabilities as of December 31, 2009, 2008, 2007 and 2006 include liabilities reclassified to discontinued operations totaling $65,054, $77,048, $72,428 and $69,013, respectively.
(7) Calculated by dividing the sum of acquisition and other underwriting expenses, other expenses and amortization of intangibles by net premiums earned.
(8) Calculated by dividing the policyholder dividend expense by net premiums earned.
(9) The sum of the loss and LAE ratio, expense ratio and the policyholder dividend expense ratio.
During 2010, the Company sold its group benefits insurance business and the majority of its run-off specialty reinsurance business. As a result of these transactions, the Company has reported the results of operations of its group benefits insurance and run-off specialty reinsurance business as discontinued operations. The Company reported a net loss of $9.2 million for the year ended December 31, 2010, of which $12.1 million was attributed to discontinued operations.
The Company reported net income from continuing operations of $2.9 million for the year ended December 31, 2010, compared to net income of $5.9 million for the year ended December 31, 2009. The decrease in net income primarily reflects an increase in the loss ratio from 60.0% in 2009 to 71.1% in 2010, premiums returned to customers as a result of premium audits, and a decrease in net investment income. These items, which contributed to the decrease in the Company’s operating results, were partially offset by an increase in net premiums earned, an increase in realized gains from the sale of investments, a decrease in other-than-temporary investment impairments, and a decrease in the expense ratio from 35.1% in 2009 to 31.7% in 2010.
The decrease in the expense ratio primarily reflects the impact of the premium revenue increase. The Company experienced growth in each of its geographical markets during 2010, and particularly in its Southeast market. The expense ratio was also positively impacted by the release of the 2009 and 2010 accruals related to the Pennsylvania Workers’ Compensation Security Fund assessment.
Other expenses. Other expenses consist of general administrative expenses such as salaries, rent, office supplies, depreciation and all other operating expenses not otherwise classified separately.
Policyholder dividend expense ratio. The policyholder dividend expense ratio is the ratio (expressed as a percentage) of policyholder dividend expense to net premiums earned and measures the impact of the Company’s policyholder dividend policies on its workers’ compensation insurance segment.
To estimate reserves, the Company stratifies its data using variations of the following different categorizations of claims:
As of December 31, 2010, 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 $64.1 million.
The Company has utilized the following tail factors for the years ended December 31, 2010, 2009, and 2008:
The Company’s reserves for unpaid losses and LAE in its segregated portfolio cell reinsurance segment as of December 31, 2010 and 2009 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 LAE, acquisition and other underwriting expenses, policyholder dividend expense 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 the Company were a segregated portfolio cell dividend participant.
For the years ended December 31, 2010, 2009 and 2008, the Company recorded other-than-temporary impairments of $0, $1.7 million, and $3.0 million, respectively, related to its equity security portfolio. The securities were impaired because they had been in an unrealized loss position for more than 12 months.
There were no impairments related to the Company’s limited partnership investments in 2010 or 2009. For the year ended December 31, 2008, the Company recorded a permanent impairment of $1.4 million related to one of its limited partnership investments.
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, 2010 to its workers’ compensation insurance segment. The goodwill impairment test, performed as of September 30 of each year, is a two-step test. The first step identifies whether there is potential impairment by comparing the fair value of a reporting unit to the carrying amount, including goodwill. If the fair value of a reporting unit is less than its carrying amount, the second step of the impairment test is required to measure the amount of any impairment loss.
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, 2010, the Company recorded a net deferred tax asset of $721,000. 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.
The components of consolidated net income, by segment, for the years ended December 31, 2010 and 2009 were as follows (in thousands):
The following table represents the operations of the workers’ compensation insurance segment for the years ended December 31, 2010 and 2009 (in thousands).
The increase in direct premiums written primarily reflects new business of $32.7 million and an increase in the renewal retention rate, partially offset by the impact of audit premium returned and renewal rate decreases of 1.9%. Traditional and alternative market direct premiums written totaled $98.0 million and $28.8 million, respectively, for the year ended December 31, 2010. The renewal retention rate increased from 84.1% in 2009 to 87.0% in 2010. The Company returned $1.4 million in premium to customers as a result of premium audits in 2010, compared to $6,000 of additional premium from customers in 2009. In addition, the Company reduced its estimate of earned but unbilled (“EBUB”) premium in 2010 by $750,000. The decrease in audit premium and the related reduction in the EBUB estimate reflects the impact of lower payrolls in the Company’s geographic markets.
The expense ratios are consistent with the contractual ceding commissions for the years ended December 31, 2010 and 2009.
The increase in consolidated revenue from 2008 to 2009 primarily reflects an improvement in the Company’s investment portfolio and an increase in net premiums earned in the workers’ compensation insurance segment, partially offset by lower investment income. The Company’s limited partnership investments experienced an increase in value during 2009, compared to significant losses in 2008. Other-than-temporary impairments in the Company’s investment portfolio decreased from 2008 to 2009, which contributed to the improvement in net realized investment gains during 2009. The decrease in net investment income is reflective of a decrease in the Company’s fixed income security holdings, and lower interest rates on new fixed income security purchases and cash and short-term investment holdings. The increase in net premiums earned in the workers’ compensation insurance segment primarily reflects new business written and a full year of premium related to the acquisition of Employers Security.
The improvement in the Company’s net income from 2008 to 2009 primarily reflects the aforementioned improvement in the Company’s investment portfolio and a reduction in expenses in the corporate/other segment, partially offset by an increase in the workers’ compensation insurance combined ratio.
The increase in the calendar period loss and LAE ratio primarily reflects an increase in the accident period loss ratio, partially offset by an increase in favorable loss reserve development related to prior accident periods. The accident period loss ratio was 65.6% and 60.2% for the years ended December 31, 2009 and 2008, respectively. The increase in the accident period loss ratio primarily reflects management’s estimate of the impact of the then current economic environment on the Company’s workers’ compensation book of business, including the impact of rising unemployment on management’s return to work controls. Favorable loss reserve development totaled $3.7 million for the year ended December 31, 2009, compared to favorable loss reserve development of $2.7 million for the same period in 2008. The favorable development primarily reflects continued improvements in loss mitigation and underwriting, including greater availability and use of employers’ return to work programs. Furthermore, the Company was able to settle a large amount of Pennsylvania claims via compromise and release, which is a lump sum cash payment in exchange for a full and final claim settlement. Management attributes the large amount of compromise and release claim closures to the difficult economic conditions and the claimants’ choosing a lump sum cash settlement over the continuation of a workers’ compensation annuity payment.
The increase in other expenses as a percent of net premiums earned from 2008 to 2009 primarily reflects the impact of the lower net premiums earned and the increase in corporate expense allocations.
The decrease in policyholder dividend expense primarily reflects an increase in the aforementioned accident period loss ratio from 2008 to 2009. As of December 31, 2009 and 2008, approximately 10.0% of the Company’s workers’ compensation insurance policies were written on a participating basis.
(1) The workers’ compensation insurance and corporate/other segments provide services to the segregated portfolio cell reinsurance segment. The fees paid by the segregated portfolio cell reinsurance segment for these services are included in the revenue of the segment providing the service. The segregated portfolio cell reinsurance segment records the fees associated with these services as ceding expense, which is included in its underwriting expenses. 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. As a result, the segregated portfolio cell reinsurance segment has no net income for the period presented in this table.
December 31, 2010 compared to December 31, 2009. Total assets were $322.7 million as of December 31, 2010, compared to $397.3 million as of December 31, 2009. The decrease in assets reflects the sale of the group benefits insurance and run-off specialty reinsurance segments. Cash and investments increased $29.2 million, primarily reflecting the purchase of investments during 2010. Premiums receivable increased $8.2 million, primarily reflecting the increase in direct premiums written. Net deferred income taxes decreased $622,000, primarily reflecting an increase in the estimated fair value of the Company’s convertible bond portfolio, and federal income taxes recoverable decreased $631,000, primarily reflecting the receipt of a carryback refund in 2010 related to capital losses carried back to prior tax years.
Total liabilities were $188.0 million as of December 31, 2010, compared to $243.4 million as of December 31, 2009. The decrease in liabilities reflects the sale of the group benefits insurance and run-off specialty reinsurance segments. Reserves for unpaid losses and LAE increased $6.5 million primarily reflecting the increase in the accident period loss ratio. Unearned premiums increased $7.5 million, primarily reflecting higher direct premiums written. The segregated portfolio cell dividend payable decreased $3.3 million, primarily reflecting a decrease in unrealized gains on investments and dividends paid to preferred segregated portfolio cell dividend participants.
The Company has a $2.6 million line of credit available to provide additional liquidity if needed.
The Company’s ability to manage liquidity results, in part, from the purchase of reinsurance to protect the Company against severe claims and catastrophic events. See “Item 1 - Business, Reinsurance.”
Our domestic insurance subsidiaries’ ability to pay dividends to EIHI is limited by the insurance laws and regulations of Pennsylvania and Indiana. The maximum annual dividends that the domestic insurance entities may pay without prior approval from the Pennsylvania Insurance Department and the Indiana 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.
Cash flows used in investing activities for the year ended December 31, 2010 primarily reflects the investment of cash received from the sale of Eastern Life.
Cash flows from financing activities for the year ended December 31, 2010 reflect the Company’s stock buyback activity, shareholder dividends and the repayment of the outstanding loan.
Cash Flows From Continuing Operations for the Years Ended December 31, 2009 and 2008. The decrease in cash flows from operating activities from 2008 to 2009 primarily reflects the run-off of the specialty reinsurance segment and a reduction in net investment income.
(1) The payments related to the loss reserves are shown before purchase accounting adjustments of $330.
Eastern Insurance Holdings, Inc. (“EIHI”) is an insurance holding company offering workers’ compensation and reinsurance products through its direct and indirect wholly-owned subsidiaries, Global Alliance Holdings, Ltd. (“Global Alliance”), Eastern Alliance Insurance Company (“Eastern Alliance”), Allied Eastern Indemnity Company (“Allied Eastern”), Eastern Advantage Assurance Company (“Eastern Advantage”), Employers Alliance, Inc. (“Employers Alliance”), Eastern Re Ltd., S.P.C. (“Eastern Re”), and Eastern Services Corporation (“Eastern Services”), collectively referred to as the “Company.”
The Company currently operates in three segments: workers’ compensation insurance, segregated portfolio cell reinsurance, and corporate/other. Prior to the sale of Atlantic RE and Eastern Life, the Company’s operations included a run-off specialty reinsurance segment and a group benefits insurance segment. The components of the run-off specialty reinsurance segment that were not transferred to Atlantic RE have been included in the corporate/other segment for the years ended December 31, 2010, 2009 and 2008.
Certain amounts in the prior year consolidated financial statements have been reclassified to conform to the current year presentation.
The Company’s investments in equity securities, which consist primarily of index and exchange-traded mutual funds, 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 or independent broker quotes.
Other long-term investments consist of investments in limited partnerships. Investments in limited partnerships are reported in the consolidated financial statements using the equity method. The carrying value of the Company’s limited partnership investments are based on the Company’s allocable share of the limited partnerships’ net asset value. Changes in
the value of the Company’s proportionate share of its limited partnership investments are included in the change in equity interest in limited partnerships in the consolidated statements of operations and comprehensive income (loss). The Company reports changes in the value of its limited partnership investments on a month lag as a result of the timing of statements being received from the limited partnership.
Amortization of policy acquisition costs totaled $6,487, $5,908, and $4,676 for the years ended December 31, 2010, 2009 and 2008, respectively.
The Company includes income tax-related interest and penalties as a component of income tax expense. The Company did not incur any income tax-related interest or penalties during 2010, 2009 or 2008.
The Company’s federal income tax returns for tax years subsequent to December 31, 2006 are subject to examination by the Internal Revenue Service.
Property and equipment, including expenditures for significant improvements and purchased software, is carried at cost less accumulated depreciation and amortization. Maintenance, repairs and minor improvements are expensed as incurred. When property and equipment is retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is included in operations. Depreciation is computed under the straight-line method. The estimated useful lives of property and equipment range from 3-7 years. Accumulated depreciation and amortization expense totaled $2,754 and $2,263 as of December 31, 2010 and 2009, respectively. Depreciation and amortization expense totaled $691, $658, and $471 for the years ended December 31, 2010, 2009 and 2008, respectively.
The Company is subject to state guaranty fund assessments in the states in which it is licensed, which provide for the payment of covered claims or to meet other insurance obligations from insurance company insolvencies. The Company’s assessments consist primarily of charges from the Workers’ Compensation Security Fund of Pennsylvania (“Security Fund”). The Security Fund serves as a guaranty fund to provide claim payments for those workers entitled to workers’ compensation benefits when the insurance company originally providing the benefits was placed into liquidation by a court. Security Fund
assessments are established on an actuarial basis to provide an amount sufficient to pay the outstanding and anticipated claims in a timely manner, to meet the costs of the Pennsylvania Insurance Department to administer the fund and to maintain a minimum balance in the fund of $500 million. If the Security Fund determines that the balance in the Security Fund is less than $500 million based on the actuarial study, then an assessment up to one percent of direct written premium is made to all companies licensed to write workers’ compensation in Pennsylvania. Eastern Alliance, Allied Eastern and Eastern Advantage recognize a liability and the related expense for the assessments when premiums covered under the Security Fund are written; when an assessment from the Security Fund has been imposed or it is probable that an assessment will be imposed; and the amount of the assessment is reasonably estimable. The Company accrued an assessment related to the Security Fund of $0 and $2,108 as of December 31, 2010 and 2009, respectively. The 2009 accrual included an amount related to the 2008 Security Fund assessment, which was paid in January 2010.
Management tests goodwill for impairment annually as of September 30 and more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The Company’s goodwill is allocated 100% to the workers’ compensation insurance segment.
The Company recognizes compensation expense related to its employee stock ownership plan (“ESOP”) equal to the product of the number of shares earned, or committed to be released, during the period, and the average price of the
Company’s common stock during the period. The estimated fair value of unearned ESOP shares is calculated based on the average price of the Company’s common stock for the period. For purposes of calculating earnings per share, the Company includes the weighted average of ESOP shares committed to be released for the period.
Comprehensive income includes all changes in shareholders’ equity during the reporting period, net of tax. The components of accumulated other comprehensive income, net of tax, as of December 31, 2010 and 2009 were as follows (in thousands):
The issuance of the $1,750 promissory note related to the sale of Eastern Life and the recognition of the contingent profit commission of $3,018 related to the sale of Atlantic RE is considered a non-cash investing activity and has been excluded from the consolidated statement of cash flows for the year ended December 31, 2010.
The Company paid income taxes of $455, $3,175, and $4,875 for the years ended December 31, 2010, 2009 and 2008, respectively. Taxes paid for the year ended December 31, 2010 are net of refunds related to capital loss carrybacks to prior tax years totaling $1,795.
The Company paid interest of $33, $65, and $468 for the years ended December 31, 2010, 2009 and 2008, respectively.
On September 29, 2008, EIHI acquired all of the outstanding stock of ESHC in a transaction valued at $14,820, including the assumption of $2,650 in debt. The acquisition of ESHC resulted in the recognition of certain intangible assets and goodwill totaling $4,180 and $2,760, respectively. The intangible assets included renewal rights, agency relationships, and state insurance licenses of $1,841, $1,814, and $525, respectively. ESHC reported total assets and total liabilities of $25,856 and $19,203, respectively, on the date of the transaction. ESHC’s shareholders’ equity of $6,653 on the date of the transaction was reduced by $10 as a result of purchase accounting adjustments to reflect the fair value of certain acquired assets and liabilities. The most significant purchase accounting adjustments related to the elimination of deferred acquisition costs, an increase to reserves for losses and LAE, and a decrease to unearned premiums. Direct costs related to the acquisition totaling $107 were capitalized and included in goodwill.
During the year ended December 31, 2010, the Company disposed of its group benefits insurance operations and the majority of its run-off specialty reinsurance operations. As a result of the disposals, the group benefits insurance and the run-off specialty reinsurance segments have been reflected in the consolidated financial statements as discontinued operations.
On June 21, 2010, EIHI completed the sale of its wholly-owned group benefits insurance subsidiary, Eastern Life, to Security Life Insurance Company of America (“Security”). The agreement effected a statutory merger of Eastern Life into Security, with Security continuing as the surviving corporation. Total transaction consideration to EIHI was $34,102, which represented Eastern Life’s GAAP shareholder’s equity as of May 31, 2010 plus $250. The consideration consisted of cash and a $1,750 promissory note from Security’s parent. The note bears interest at 4.0%, payable quarterly, and is due in full on July 1, 2013.
The sale of Atlantic RE resulted in the recognition of a loss totaling $14,029, which is included in discontinued operations. The loss includes the recognition of an estimated contingent profit commission of $3,018, which is based on the adequacy of the run-off specialty reinsurance segment’s reserves for losses and LAE as of September 30, 2010, compared to a predetermined targeted reserve for losses and LAE. Transaction expenses related to the sale of Atlantic RE totaled $510 for the year ended December 31, 2010, and have been included in discontinued operations.
For the years ended December 31, 2010, 2009, and 2008, the run-off specialty reinsurance segment reported net premiums earned of $1, $1,133, and $9,682, respectively, and total revenue of $4,180, $957, and $10,585, respectively. Total revenue for the year ended December 31, 2010 excludes the loss on the sale of Atlantic RE of $14,029. The loss before income taxes in the run-off specialty reinsurance segment totaled $(12,924), $(663), and $(18,609) for the years ended December 31, 2010, 2009, and 2008, respectively.
The Company’s acquisition of EHC and ESHC resulted in the identification of certain intangible assets. The renewal rights and agency relationships will be amortized over their estimated useful lives of 15 years. The state insurance licenses are considered to have an infinite life and will not be amortized.
The estimated aggregated amortization expense for each of the next five years is as follows (in thousands):
For the years ended December 31, 2010, 2009 and 2008, the Company repurchased 728,413, 1,400 and 1,073,492 shares, respectively, at a cost of $8,169, $11 and $17,066, respectively, representing a weighted average cost of $11.21, $8.03 and $15.90 per share, respectively.
options may be granted to 500,000. The total number of shares initially authorized in the Stock Incentive Plan was 1,046,500 shares, with an annual increase equal to 1% of the shares outstanding at the end of each year. The Stock Incentive Plan provides that stock options and restricted stock awards may include vesting restrictions and performance criteria at the discretion of the Compensation Committee of the Board of Directors. The stock options and restricted stock awards vest over a five year period and are not subject to performance criteria. The term of options may not exceed ten years for incentive stock options, and ten years and one month for nonqualified stock options, and the option price may not be less than fair market value on the date of grant. During 2010, the Company granted 208,000 stock options and 1,500 restricted stock awards to employees. There were no stock options or restricted stock awards granted in 2009. During 2008, the Company granted 15,000 stock options and 5,000 restricted stock awards to employees. During 2001, 2009, and 2008, stock options totaling 8,522, 12,780, and 32,741, respectively, were forfeited. No stock options or restricted stock awards were exercised in 2010, 2009, or 2008.
The aggregate intrinsic value of the stock options in the above table is $0 because the Company’s closing stock price of $11.90 on December 31, 2010 was below the weighted average exercise price of the stock options.
The following table summarizes restricted stock activity for the year ended December 31, 2010.
Risk-based capital is designed to measure the acceptable amount of capital an insurer should have based on the inherent risks of the insurer’s business. Insurers failing to meet adequate capital levels may be subject to insurance department scrutiny and ultimately rehabilitation or liquidation. Based on established standards, Eastern Alliance, Allied Eastern, Eastern Advantage, and Employers Security maintained statutory-basis surplus in excess of minimum prescribed risk-based capital requirements as of December 31, 2010.
The estimated fair values of the Company’s investments in fixed income securities, convertible bonds, and equity securities are based on prices provided by an independent, nationally recognized pricing service. Approximately 99.0% of the Company’s fixed income and equity security prices are obtained from the independent pricing service. The prices provided by the independent pricing service are based on quoted market prices, when available, non-binding broker quotes, or matrix pricing. The independent pricing service provides a single price or quote per security and the Company does not adjust security prices. The Company obtains an understanding of the methods, models and inputs, used by the independent pricing service, and has controls in place to validate that amounts provided represent current exit values. The Company’s controls
The Company’s equity securities consist primarily of mutual fund instruments for which there is an active market and quoted market prices; therefore, the Company has classified its mutual fund investments as Level 1 securities. The Company holds an investment in an international equity fund, which is included in equity securities on the consolidated balance sheets, that is considered a Level 2 security. The estimated fair value of the fund is based on the fund’s net asset value and the Company has the ability to redeem its investment at net asset value. Approximately 94.7% of the fund’s underlying investments were considered Level 1 securities as of December 31, 2009, the most recent date for which the Company has audited financial statements of the fund.
Natural resources-The Company invests in two separate natural resource funds. The investment objective of one of the funds is to achieve long-term capital appreciation primarily through investments in hard asset securities and hard asset commodities. The investment objective of the other fund is to provide an enhancement to an investor’s portfolio of investments and to provide a partial inflation hedge with an attractive risk/return profile as compared to other products using a commodity index or pool of commodities.
The following tables provide the amortized cost and estimated fair value of the Company’s fixed income and equity securities as of December 31, 2010 and 2009 (in thousands):
Proceeds from the sale of fixed income securities totaled $42,218, $36,511, and $16,130 for the years ended December 31, 2010, 2009 and 2008, respectively. Proceeds from the sale of equity securities totaled $8,293, $6,346, and
The gross realized gains and gross realized losses recognized by the Company as a result of the sale of investments were as follows for the years ended December 31, 2010, 2009, and 2008 (in thousands):
For the years ended December 31, 2010, 2009 and 2008, the Company recognized an increase (decrease) of $1,052 and $1,066, and (3,540) respectively, related to its equity interest in limited partnerships. The Company’s limited partnership investments include a multi-strategy fund of funds, natural resource funds, a structured finance opportunity fund and open-ended investment fund and a real estate partnership. The Company obtains audited financial statements of its limited partnership investments on an annual basis. The total assets, total liabilities and results of operations of the limited partnerships in which the Company invests as of and for the year ended December 31, 2009, based on the limited partnerships’ audited financial statements, were as follows (in thousands):
For the year ended December 31, 2010, the Company did not recognize any development on prior accident period workers’ compensation reserves.
The Company estimates and records reserves for its segregated portfolio cell reinsurance segment in the same manner as for its workers’ compensation insurance segment. Furthermore, the Company’s underwriting, claim administration and risk management services are consistent between its workers’ compensation insurance and segregated portfolio cell reinsurance segments. This is because the workers’ compensation and segregated portfolio cell reinsurance segments derive their books of business from the same general business demographics and geography. Prior period reserve development in the segregated portfolio cell reinsurance segment results in an increase or decrease in the segment’s losses and LAE incurred and a corresponding decrease or increase in the segregated portfolio cell dividend expense.
For the year ended December 31, 2010, the Company recognized net favorable development on prior accident year segregated portfolio cell reinsurance reserves of $1.4 million, representing 5.6% of the Company’s estimated segregated portfolio cell reinsurance reserves as of December 31, 2009 and 5.8% of the Company’s segregated portfolio cell reinsurance net premiums earned for the year ended December 31, 2009. The favorable development arose primarily from accident years 2008 and 2009, but was generally prevalent in most prior accident years, and resulted from actual loss development being somewhat lower than the Company had expected based on its historical loss development experience, reflecting continued improvements in loss mitigation and underwriting. The improvements in loss mitigation and underwriting include greater availability and use of employers’ return to work programs.
The following table provides a summary of the Company’s premiums on a direct, assumed, ceded, and net basis for the years ended December 31, 2010, 2009, and 2008 (in thousands):
The following table provides a summary of the Company’s losses and loss adjustment expenses incurred on a direct, assumed, ceded and net basis for the years ended December 31, 2010, 2009, and 2008 (in thousands):
The components of the net deferred tax asset as of December 31, 2010 and 2009 are as follows (in thousands):
As of December 31, 2010, the Company has not recognized any future tax benefit related to its foreign operations at Eastern Re. The unrecognized tax benefit, which represents the excess of the tax basis over the amount for financial reporting (i.e., outside basis difference) of Eastern Re, was $11,545 as of December 31, 2010. The outside basis difference primarily arises from losses at Eastern Re recognized for financial statement purposes, which have not yet been recognized for tax purposes. Management presently believes that the Company will not be able to recognize these tax benefits in the foreseeable future and, therefore, has not recognized the future tax benefits as of December 31, 2010.
As of December 31, 2010, the Company has no tax positions for which management believes a provision for uncertainty is necessary. The Company’s federal income tax returns for tax years subsequent to December 31, 2006 are subject to examination by the Internal Revenue Service.
For the years ended December 31, 2010, 2009, and 2008 the Company made a cash contribution of $958, $937, and $858 to the ESOP, respectively. The ESOP used these contributions, along with dividends received on the unallocated shares of the Company’s stock held by the ESOP, to make the semi-annual principal and interest payments to the Company related to the outstanding balance of the promissory note. Dividends used by the ESOP to fund the semi-annual principal and interest payments totaled $142, $163, and $242 in 2010, 2009, and 2008, respectively. The transactions between the Company and the ESOP are considered non-cash transactions for purposes of the consolidated statements of cash flows.
As of December 31, 2010 and 2009, the projected benefit obligation, fair value of plan assets and funded status of the pension plan and the postretirement plan were as follows (in thousands):
Based on the funded status of the pension plan as of December 31, 2010, the Company does not anticipate making a contribution in 2011.
Benefits paid totaled $117, $39, and $234 for the pension plan and $2, $1, and $21 for the postretirement plan for the years ended December 31, 2010, 2009, and 2008, respectively. The estimated future benefits to be paid over the next ten years related to the pension plan are as follows (in thousands):
The pension plan’s assets were comprised of the following at December 31, 2010 and 2009 (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. As of December 31, 2010 the target asset allocation for the portfolio is 10% equity securities and 90% fixed income securities.
The Company currently operates in three business segments. Prior to the sale of Atlantic RE and Eastern Life, the Company’s operations included a run-off specialty reinsurance segment and a group benefits insurance segment. The components of the run-off specialty reinsurance segment that were not transferred to Atlantic RE have been included in the corporate/other segment for the years ended December 31, 2010, 2009 and 2008.
The Company offers traditional workers’ compensation insurance coverage to employers, primarily in the Mid-Atlantic, Southeast and Midwest regions of the continental United States. The Company’s workers’ compensation products include guaranteed cost policies, policyholder dividend policies, retrospectively-rated policies and deductible policies.
portfolio cell with an unaffiliated primary carrier that writes insurance coverage for sprinkler contractors. The Company cancelled the non-segregated portfolio cell reinsurance contracts in 1999 and the Company non-renewed the contract for its 10% interest in the segregated portfolio cell on a run-off basis effective April 1, 2009.
The Company maintains regional offices in North Carolina, Indiana, Tennessee and Pittsburgh, Pennsylvania and leases office space in each of these locations under multi-year operating leases.
Minimum monthly lease commitments for the remainder of the office lease terms are as follows (in thousands):
Rent expense totaled $918, $1,084, and $953 for the years ended December 31, 2010, 2009 and 2008, respectively.
For the year ended December 31, 2008, the Company incurred interest expense of $468 related to the junior subordinated debentures.
The Company repaid the loan during 2010. The Company incurred interest expense of $33 and $46 related to the loan for the years ended December 31, 2010, 2009 and 2008, respectively.
The Company has an agreement with Alliance Impairment Management, Inc. (“AIM”), which provides case management services to certain of the Company’s insurance subsidiaries. For the years ended December 31, 2010, 2009, and 2008, the Company paid fees to AIM totaling approximately $3,200, $2,600 and $2,200, respectively. Bruce Eckert, the Company’s Vice Chairman (Chief Executive Officer as of December 31, 2010), is an investor in AIM.