The Company’s results of operations for the year ended December 31, 2009 reflect the improvement in the fixed income and equity security markets during 2009, partially offset by an increase in the combined ratios in the workers’ compensation insurance, segregated portfolio cell reinsurance and group benefits insurance segments. The 2009 results also reflect the run-off of the specialty reinsurance segment.
The dental, short-term disability and vision reserves represent the Company’s estimate of future amounts due on in-process and IBNR. The Company estimates its dental, short-term disability, and vision 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 generally applied to the last three months (or most recent quarter), based on recent loss ratio trends.
While management believes that the assumptions underlying the amounts recorded for the reserves for unpaid losses and LAE as of December 31, 2009 are reasonable, the ultimate net liability may differ materially from the amount recorded.
The following table represents the operations of the workers’ compensation insurance segment for the years ended December 31, 2009 and 2008 (in thousands). The results of operations for the year ended December 31, 2008 include the operating results of ESIC for the period from October 1, 2008 to December 31, 2008:
The decrease in direct premiums written primarily reflects a decline in the renewal retention rate, partially offset by new business sales.
The decrease in net investment income primarily reflects a lower invested asset base. The average yield on the fixed income portfolio was 2.76% as of December 31, 2009, compared to 4.88% as of December 31, 2008.
The net realized investment losses for the year ended December 31, 2008 primarily reflect other-than-temporary impairments of $3.4 million. There were no impairments recorded in 2007. In addition, the change in the fair value of convertible bond securities increased the net realized investment losses by $623,000 in 2008, compared to a decrease in net realized investment gains of $35,000 in 2007.
Total shareholders’ equity was $153.9 million as of December 31, 2009, compared to $138.1 million as of December 31, 2008. The increase in shareholders’ equity primarily reflects 2009 consolidated net income and the increase in the estimated fair value of the Company’s fixed income and equity security portfolios.
The Company’s domestic insurance subsidiaries prepare statutory-basis financial statements in accordance with accounting practices prescribed or permitted by the insurance department in the subsidiaries’ domiciliary state. The Pennsylvania Insurance Department and the Indiana Insurance Department requires that insurance companies domiciled in their respective states 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 domiciliary insurance commissioner (“SAP”).
Other long-term investments include the Company’s interest in various limited partnerships, including a low volatility multi-strategy fund of funds, two natural resource limited partnerships, a structured finance opportunity fund, an open-ended investment fund and a real estate limited partnership. The Company records its investment in the limited partnerships using the equity method. The carrying value of the Company’s limited partnership investments are based on the Company’s
Employees may invest the contributions to their account in a variety of mutual funds. The estimated fair values of the mutual fund investments are based on quoted net asset values; therefore, the estimated fair values are considered Level 1 fair value measurements.
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, 2009 the target asset allocation for the portfolio is 10% equity securities and 90% fixed income securities.