The Company also has regional offices in Charlotte, North Carolina, Indianapolis, Indiana, Franklin, Tennessee, Wexford, Pennsylvania and Richmond, Virginia and leases office space in each of these locations under multi-year operating leases.
The consolidated combined ratio was 94.3% for the year ended December 31, 2011, compared to a combined ratio of 103.8% for the same period in 2010. The decrease in the combined ratio primarily reflects an increase in net premiums earned, the impact of audit premium and the release of state assessment accruals totaling $1.0 million. The Company recognized additional audit premium from customers of $3.5 million in 2011, compared to audit premium returned to customers of $2.2 million in 2010. The additional audit premium in 2011 includes an adjustment to the estimate for earned but unbilled (“EBUB”) premiums of $950,000 that increased net premiums earned, compared to an adjustment to the EBUB estimate of $750,000 that decreased net premiums earned in 2010. The increase in the EBUB estimate is primarily attributable to the increase in audit premium collected in 2011 as a result of audits of insured’s payrolls.
(1) Ceded premiums written include premiums ceded to the segregated portfolio cell reinsurance segment of $33,994 and $28,798 for the years ended December 31, 2011 and 2010, respectively.
The expense ratios are consistent with the contractual ceding commissions for the years ended December 31, 2011 and 2010.
The decrease in expenses primarily reflects an increase in the Company’s equity interest in the segregated portfolio cells and a decrease in intangible asset amortization, partially offset by an increase in other expenses. The increase in other expenses primarily reflects an increase in stock compensation expense and other corporate-related expenses.
The effective tax rate was 31.0% and 29.3% for the years ended December 31, 2010 and 2009, respectively. The primary difference between the statutory tax rate of 35.0% and the effective tax rate reflects tax exempt income on municipal bond securities.
Total shareholders’ equity was $128.3 million as of December 31, 2011, compared to $134.7 million as of December 31, 2010. The decrease in shareholders’ equity primarily reflects common stock repurchases, a decrease in the net unrealized gains in the Company’s equity security portfolio, and an increase in the Company’s benefit plan liabilities, partially offset by 2011 net income.
Premiums or discounts are amortized using the effective interest method. Realized gains or losses are based on amortized cost and are computed using the specific identification method. The Company monitors its fixed income securities for unrealized losses that appear to be other-than-temporary. A fixed income security is considered to be other-than-temporarily impaired when the security’s fair value is less than its amortized cost basis and 1) the Company intends to sell the security, 2) it is more likely than not that the Company will be required to sell the security before recovery of the security’s amortized cost basis, or 3) the Company believes it will be unable to recover the entire amortized cost basis of the security (i.e., a credit loss has occurred). When the Company determines a credit loss has been incurred, but the Company does not intend to sell the security and it is not more likely than not that the Company will be required to sell the security before recovery of the security’s amortized cost basis, the portion of the other-than-temporary impairment that is credit related is recorded as a realized loss in the consolidated statements of operations and comprehensive income (loss), and the portion of the other-than-temporary impairment that is not credit related is included in other comprehensive income (loss). Any subsequent increase in the fixed income security’s estimated fair value would be reported as an unrealized gain.
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
Financial instruments, which potentially expose the Company to concentrations of credit risk, consist primarily of cash and cash equivalents, investments, premiums receivable, and amounts recoverable from reinsurers.
For the years ended December 31, 2010 and 2009, the group benefits insurance segment reported net premiums earned of $18,262 and $35,937, respectively, and total revenue of $20,563 and $40,745, respectively. Income before income taxes in the group benefits insurance segment totaled $952 and $4,157 for the years ended December 31, 2010 and 2009, respectively.
The ability of Eastern Alliance, Allied Eastern, Eastern Advantage, and Employers Security to pay dividends to EIHI is limited by the laws and regulations of Pennsylvania and Indiana. The maximum annual dividends that EIHI’s insurance subsidiaries may pay without the prior approval from the Pennsylvania Insurance Department and 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. The maximum dividend that may be paid by Eastern Alliance, Allied Eastern and Eastern Advantage in 2012, without prior approval from the Pennsylvania Insurance Department, is $8,805, $910 and $997, respectively. The maximum dividend that may be paid by Employers Security in 2012, without prior approval from the Indiana Insurance Department, is $1,287.
The activity in the Company’s limited partnership investments for the years ended December 31, 2011, 2010 and 2009 was as follows (in thousands):
During the fourth quarter of 2011, the Company liquidated its interest in one of the natural resource funds.
Net investment income for the years ended December 31, 2011, 2010, and 2009 was as follows (in thousands):
For the years ended December 31, 2011, 2010 and 2009, the Company recognized an increase of $5, $1,052, and $1,066 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, 2010, based on the limited partnerships’ audited financial statements, were as follows (in thousands):
For the years ended December 31, 2011, 2010 and 2009, the Company (decreased) increased its segregated portfolio cell reinsurance reserves for unpaid losses and LAE by the following amounts by accident year (in thousands):
A reconciliation of the beginning and ending amount of unrecognized tax benefits for the year ended December 31, 2011 is as follows: