Condensed Notes to Consolidated Financial Statements
(Unaudited, dollars in thousands except share and per share data)
1. Background and Nature of Operations
Eastern Insurance
Holdings, Inc. (EIHI) is an insurance holding company offering workers compensation insurance 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 Security Insurance
Company (Employers Security) Employers Alliance, Inc. (Employers Alliance), Eastern Re Ltd., SPC (Eastern Re), and Eastern Services Corporation (Eastern Services), collectively referred to as the
Company.
In September 2013, Employers Security Insurance Company was merged into and with Eastern Alliance Insurance Company.
The Company currently operates in three segments: workers compensation insurance, segregated portfolio cell reinsurance, and corporate/other.
2. Significant Accounting Policies
Basis of
Presentation
The accompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America (GAAP) for interim financial information and with the instructions to
Form 10-Q
and Article 10 of Regulation S-X of the U.S. Securities and
Exchange Commission. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments, being normal, recurring adjustments, necessary for a fair
statement of the financial position and results of operations of the Company for the periods presented have been included. The results of operations for an interim period are not necessarily indicative of the results for an entire year. These
financial statements should be read in conjunction with the Companys audited financial statements and notes thereto as of and for the year ended December 31, 2012 included in the Companys Annual Report on Form 10-K, which was filed
with the U.S. Securities and Exchange Commission on March 8, 2013.
All inter-company transactions and related account balances have been eliminated
in consolidation.
Certain amounts in the prior year consolidated financial statements have been reclassified to conform to the current year presentation.
During the second quarter of 2013, management changed its accounting policy related to the classification of premium amortization and discount accretion
recognized in its convertible bond portfolio. The Company previously reported amortization/accretion related to its convertible bond portfolio as a component of net investment income. The Companys convertible bond portfolio is reported at
estimated fair value with changes in fair value reported as a realized gain or loss. Due to the nature of convertible securities, certain securities may be purchased at a significant premium (commonly referred to as conversion premium)
as a result of the underlying value of the issuers common stock, and the conversion premium can have a significant impact on net investment income as it is amortized. Management believes the conversion premium is reflective of the fair value
of the convertible security at acquisition and should be reflected as a component of the change in fair value reported as a realized gain or loss. As a result, the Company has changed its policy for recognizing amortization/accretion related to its
convertible bond portfolio and will report amortization/accretion as a component of the change in estimated fair value in net realized investment gains (losses) on the consolidated statements of operations and comprehensive income (loss). This
change in accounting policy had no impact of the Companys consolidated financial position or results of operations. Prior period amounts have not been reclassified as the amounts were immaterial.
Use of Estimates
The preparation of the unaudited
interim consolidated financial statements requires management to make estimates and assumptions that affect the amount of reported assets and liabilities and disclosures of contingent assets and liabilities as of the date of the unaudited interim
consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. The most significant estimates in the unaudited interim consolidated financial statements include reserves for unpaid losses and loss
adjustment expenses (LAE), earned but unbilled premium, deferred acquisition costs, return premiums under reinsurance contracts, and current and deferred income taxes. Actual results could differ from these estimates.
8
3. Agreement and Plan of Merger with ProAssurance Corporation
On September 23, 2013, EIHI entered into an Agreement and Plan of Merger (the Merger Agreement) with ProAssurance Corporation
(ProAssurance) and PA Merger Company, a wholly owned subsidiary of ProAssurance (Acquisition Sub), pursuant to which, upon the terms and subject to the conditions set forth in the Merger Agreement, Acquisition Sub will merge
with and into EIHI, with EIHI surviving the merger as a wholly owned subsidiary of ProAssurance.
The merger is expected to be finalized in January
2014. On the effective date of the merger, each share of EIHI common stock issued and outstanding immediately prior to the effective date, including any allocated and unallocated shares held by EIHIs employee stock ownership plan and any
shares of restricted stock, will be automatically cancelled and converted into the right to receive $24.50 in cash (the Cash Consideration). Each option to purchase shares of EIHI common stock issued and outstanding immediately prior to
the closing date, whether or not vested and exercisable, will be cancelled and converted into the right to receive the product of (i) the number of shares of EIHI common stock that would have been acquired upon the exercise of such stock
option, multiplied by (ii) the excess, if any, of the Cash Consideration over the exercise price to acquire a share of EIHI common stock under such stock option.
Consummation of the merger is subject to customary conditions, including (i) the approval of EIHIs shareholders, (ii) receipt of antitrust and
insurance regulatory approvals, (iii) the absence of any law, order or injunction prohibiting the merger, (iv) the accuracy of each partys representations and warranties (subject to customary materiality qualifiers), and
(v) each partys compliance with its covenants and agreements contained in the Merger Agreement. In addition, ProAssurances obligation to consummate the merger is subject to no occurrence, circumstance, or combination thereof,
shall have occurred that, individually or in the aggregate, has, or is reasonably likely to have, a material adverse effect on EIHI. The merger is not subject to any financing condition.
4. Earnings Per Share
Basic earnings per share are
computed by dividing net income (loss) by the weighted average number of shares outstanding for the respective period. Diluted earnings per share are computed by dividing net income (loss) by the weighted average number of shares outstanding for the
period, including dilutive potential common shares outstanding for the period.
Consolidated net income, basic shares outstanding, diluted shares
outstanding, basic earnings per share, diluted earnings per share and cash dividends per share for the three and nine months ended September 30, 2013 and 2012 were as follows (in thousands, except share and per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
Net income for basic and diluted earnings per share
|
|
$
|
3,692
|
|
|
$
|
2,786
|
|
|
$
|
9,928
|
|
|
$
|
7,056
|
|
Less: Dividends declaredcommon and unvested restricted share units
|
|
|
(794
|
)
|
|
|
(552
|
)
|
|
|
(2,376
|
)
|
|
|
(1,620
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Undistributed earnings
|
|
|
2,898
|
|
|
|
2,234
|
|
|
|
7,552
|
|
|
|
5,436
|
|
Percent allocated to common shareholders
|
|
|
98.5
|
%
|
|
|
98.1
|
%
|
|
|
98.5
|
%
|
|
|
98.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,855
|
|
|
|
2,192
|
|
|
|
7,439
|
|
|
|
5,333
|
|
Add: Dividends declaredcommon shares
|
|
|
782
|
|
|
|
543
|
|
|
|
2,340
|
|
|
|
1,589
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,637
|
|
|
$
|
2,735
|
|
|
$
|
9,779
|
|
|
$
|
6,922
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share
|
|
|
7,586,843
|
|
|
|
7,480,526
|
|
|
|
7,558,707
|
|
|
|
7,539,870
|
|
Effect of dilutive securities
|
|
|
54,228
|
|
|
|
146,340
|
|
|
|
38,907
|
|
|
|
139,633
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings per common share
|
|
|
7,641,071
|
|
|
|
7,626,866
|
|
|
|
7,597,614
|
|
|
|
7,679,503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.48
|
|
|
$
|
0.37
|
|
|
$
|
1.29
|
|
|
$
|
0.92
|
|
Diluted earnings per share
|
|
$
|
0.48
|
|
|
$
|
0.36
|
|
|
$
|
1.29
|
|
|
$
|
0.90
|
|
Cash dividends per share
|
|
$
|
0.11
|
|
|
$
|
0.07
|
|
|
$
|
0.31
|
|
|
$
|
0.21
|
|
The following table provides a summary of the equity awards that were not included in the Companys earnings per share
calculation because to do so would have been anti-dilutive:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
Total outstanding equity awards
|
|
|
1,427,585
|
|
|
|
1,387,000
|
|
|
|
1,427,585
|
|
|
|
1,387,000
|
|
Dilutive equity awards
|
|
|
(54,228
|
)
|
|
|
(146,340
|
)
|
|
|
(38,907
|
)
|
|
|
(139,633
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity awards excluded from earnings per share calculation
|
|
|
1,373,357
|
|
|
|
1,240,660
|
|
|
|
1,388,678
|
|
|
|
1,247,367
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
5. Fair Value Measurements
The Companys assets and liabilities that are measured at fair value on a recurring basis are segregated between those assets and liabilities that are
valued based on quoted prices (unadjusted) in active markets for identical assets or liabilities, which the reporting entity can access at the measurement date (Level 1), direct or indirect observable inputs other than Level 1 quoted prices (Level
2), or unobservable inputs to the extent that observable inputs are not available (Level 3).
The following is a description of the Companys
categorization of the inputs used in the recurring fair value measurements of its financial assets included in its consolidated balance sheets as of September 30, 2013 and December 31, 2012:
Level 1Represents financial assets whose fair value is determined based upon observable unadjusted quoted market prices for identical financial assets
in active markets that the Company can access. An example of a Level 1 input utilized to measure fair value includes the closing price of one share of common stock on an active exchange market. The Company considers U.S. Treasuries and equity
securities as Level 1 assets.
Level 2Represents financial assets whose fair value is determined based upon: quoted market prices for similar
assets in active markets; quoted market prices for identical assets in inactive markets; inputs other than quoted market prices that are observable for the asset such as interest rates or yield curves; or other inputs derived principally from or
corroborated from other observable market information. An example of a Level 2 input utilized to measure fair value, specifically for the Companys fixed income portfolio, is matrix pricing. Matrix pricing relies on
observable inputs from active markets other than quoted market prices including, but not limited to, benchmark securities and yields, latest reported trades, quotes from brokers or dealers, issuer spreads, bids, offers, and other relevant reference
data to determine fair value. Matrix pricing is used to measure the fair value of fixed income securities where obtaining individual quoted market prices is impractical. The Company considers U.S. Government agencies, municipal bonds,
corporate bonds, mortgage-backed securities, collateralized mortgage obligations, asset-backed securities, and convertible bonds as Level 2 assets.
Level 3Represents financial assets whose fair value is determined based upon inputs that are unobservable, including the Companys own
determinations of the assumptions that a market participant would use in pricing the asset.
The following table provides a summary of the fair value
measurements of the Companys fixed income securities, convertible bonds, and equity securities, as of September 30, 2013 and December 31, 2012, excluding the segregated portfolio cell reinsurance segment (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting
Date Using
|
|
|
|
9/30/2013
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Fixed income securitiesavailable for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasuries and government agencies
|
|
$
|
19,996
|
|
|
$
|
12,779
|
|
|
$
|
7,217
|
|
|
$
|
|
|
States, municipalities, and political subdivisions
|
|
|
43,926
|
|
|
|
|
|
|
|
43,926
|
|
|
|
|
|
Corporate securities
|
|
|
17,655
|
|
|
|
|
|
|
|
17,655
|
|
|
|
|
|
Residential mortgage-backed securities
|
|
|
23,529
|
|
|
|
|
|
|
|
23,529
|
|
|
|
|
|
Commercial mortgage-backed securities
|
|
|
161
|
|
|
|
|
|
|
|
161
|
|
|
|
|
|
Collateralized mortgage obligations
|
|
|
14,326
|
|
|
|
|
|
|
|
14,326
|
|
|
|
|
|
Other structured securities
|
|
|
1,023
|
|
|
|
|
|
|
|
1,023
|
|
|
|
|
|
Convertible bonds
|
|
|
29,616
|
|
|
|
|
|
|
|
29,616
|
|
|
|
|
|
Equity securitiesavailable for sale
|
|
|
14,178
|
|
|
|
14,178
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
164,410
|
|
|
$
|
26,957
|
|
|
$
|
137,453
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting
Date Using
|
|
|
|
12/31/2012
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Fixed income securitiesavailable for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasuries and government agencies
|
|
$
|
15,865
|
|
|
$
|
10,743
|
|
|
$
|
5,122
|
|
|
$
|
|
|
States, municipalities, and political subdivisions
|
|
|
45,150
|
|
|
|
|
|
|
|
45,150
|
|
|
|
|
|
Corporate securities
|
|
|
10,285
|
|
|
|
|
|
|
|
10,285
|
|
|
|
|
|
Residential mortgage-backed securities
|
|
|
28,434
|
|
|
|
|
|
|
|
28,434
|
|
|
|
|
|
Commercial mortgage-backed securities
|
|
|
167
|
|
|
|
|
|
|
|
167
|
|
|
|
|
|
Collateralized mortgage obligations
|
|
|
17,122
|
|
|
|
|
|
|
|
17,122
|
|
|
|
|
|
Other structured securities
|
|
|
1,023
|
|
|
|
|
|
|
|
1,023
|
|
|
|
|
|
Convertible bonds
|
|
|
19,747
|
|
|
|
|
|
|
|
19,747
|
|
|
|
|
|
Equity securitiesavailable for sale
|
|
|
15,588
|
|
|
|
15,588
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
153,381
|
|
|
$
|
26,331
|
|
|
$
|
127,050
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no transfers between Level 1 and Level 2 securities for the three and nine months ended September 30, 2013.
The estimated fair values of the Companys investments in fixed income securities, convertible bonds, and equity securities are based on prices
provided by an independent, nationally recognized 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 did not adjust security prices during the three and nine months ended September 30, 2013 and 2012. Management has controls in place to validate the reasonableness of fair
values provided by the independent pricing service, including testing the fair value of a sample of securities on a quarterly basis by comparing fair values from different pricing sources. Fixed income securities include U.S. Treasuries, agencies
backed by the U.S. Government, municipal bonds, corporate bonds, mortgage-backed securities, collateralized mortgage obligations, and asset-backed securities.
The Companys fixed income securities and convertible bonds consist primarily of publicly traded securities for which there are observable inputs and/or
broker quotes. Most fixed income security prices provided by the independent pricing service are based on observable inputs and, therefore, are classified as Level 2 securities. The Company does not hold any fixed income securities, for which
pricing was based on significant unobservable inputs; therefore, the Company has not classified any of its fixed income securities as Level 3 securities.
The Companys equity securities consist primarily of exchange traded funds and equity securities of natural gas companies for which there is an active
market and quoted market prices; therefore, the Company has classified its equity securities as Level 1 securities. The estimated fair values of the Companys exchange traded funds are based on published net asset value (NAV) per
share.
The estimated fair value of the Companys equity securities, excluding equity securities in the segregated portfolio cell reinsurance
segment, as of September 30, 2013 and December 31, 2012, by investment strategy and/or industry, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
Large growth fund
|
|
$
|
3,768
|
|
|
$
|
3,156
|
|
Foreign large blend fund
|
|
|
621
|
|
|
|
554
|
|
Diversified emerging markets fund
|
|
|
823
|
|
|
|
911
|
|
Large value fund
|
|
|
4,299
|
|
|
|
7,062
|
|
Foreign large value fund
|
|
|
424
|
|
|
|
378
|
|
Foreign large growth fund
|
|
|
2,135
|
|
|
|
1,881
|
|
Natural gas industry
|
|
|
1,672
|
|
|
|
1,263
|
|
Financial institutions
|
|
|
434
|
|
|
|
383
|
|
Other
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
14,178
|
|
|
$
|
15,588
|
|
|
|
|
|
|
|
|
|
|
Other long-term investments include the Companys interest in various limited partnerships, including a low volatility
multi-strategy fund of funds, a structured finance opportunity fund, and an open-ended investment fund. The Company records its investment in the limited partnerships using the equity method. The carrying value of the Companys limited
partnership investments are based on the Companys allocable share of the limited partnerships NAV. Changes in the Companys investments are based on statements received directly from the limited partnership and/or the limited
partnerships administrator. The estimated fair values of the underlying investments in the limited partnerships may be based on Level 1, Level 2, or Level 3 inputs, or a combination thereof. The Company considers its limited partnership
investments as Level 3 investments.
11
As of September 30, 2013 and December 31, 2012, the estimated fair values of the Companys limited
partnership investments, by investment strategy, were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
Multi-strategy fund of funds
|
|
$
|
7,578
|
|
|
$
|
6,063
|
|
Structured finance opportunity fund
|
|
|
3,451
|
|
|
|
3,278
|
|
Open-ended investment fund
|
|
|
693
|
|
|
|
633
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
11,722
|
|
|
$
|
9,974
|
|
|
|
|
|
|
|
|
|
|
The activity in the Companys limited partnership investments for the three and nine months ended September 30, 2013
and 2012 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
Balance, beginning of period
|
|
$
|
11,732
|
|
|
$
|
10,657
|
|
|
$
|
9,974
|
|
|
$
|
10,209
|
|
Contributions
|
|
|
|
|
|
|
|
|
|
|
1,000
|
|
|
|
|
|
Withdrawals
|
|
|
|
|
|
|
(1,243
|
)
|
|
|
|
|
|
|
(1,243
|
)
|
Unrealized change in interest
|
|
|
(10
|
)
|
|
|
290
|
|
|
|
748
|
|
|
|
738
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$
|
11,722
|
|
|
$
|
9,704
|
|
|
$
|
11,722
|
|
|
$
|
9,704
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The change in interest in the Companys limited partnership investments is included in the change in equity interest in
limited partnerships in the consolidated statements of operations and comprehensive income.
6. Investments
The following tables provide the amortized cost and estimated fair value of the Companys fixed income and equity securities as of September 30, 2013
and December 31, 2012 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2013
|
|
Cost or
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Estimated
Fair Value
|
|
U.S. Treasuries and government agencies
|
|
$
|
23,575
|
|
|
$
|
253
|
|
|
$
|
(82
|
)
|
|
$
|
23,746
|
|
States, municipalities, and political subdivisions
|
|
|
43,030
|
|
|
|
1,196
|
|
|
|
(300
|
)
|
|
|
43,926
|
|
Corporate securities
|
|
|
46,725
|
|
|
|
138
|
|
|
|
(315
|
)
|
|
|
46,548
|
|
Residential mortgage-backed securities
|
|
|
24,054
|
|
|
|
236
|
|
|
|
(761
|
)
|
|
|
23,529
|
|
Commercial mortgage-backed securities
|
|
|
149
|
|
|
|
12
|
|
|
|
|
|
|
|
161
|
|
Collateralized mortgage obligations
|
|
|
14,485
|
|
|
|
88
|
|
|
|
(247
|
)
|
|
|
14,326
|
|
Other structured securities
|
|
|
1,018
|
|
|
|
13
|
|
|
|
(8
|
)
|
|
|
1,023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income securities
|
|
|
153,036
|
|
|
|
1,936
|
|
|
|
(1,713
|
)
|
|
|
153,259
|
|
Equity securities
|
|
|
17,684
|
|
|
|
5,558
|
|
|
|
(139
|
)
|
|
|
23,103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income and equity securities
|
|
$
|
170,720
|
|
|
$
|
7,494
|
|
|
$
|
(1,852
|
)
|
|
$
|
176,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
Cost or
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Estimated
Fair Value
|
|
U.S. Treasuries and government agencies
|
|
$
|
19,780
|
|
|
$
|
364
|
|
|
$
|
(5
|
)
|
|
$
|
20,139
|
|
States, municipalities, and political subdivisions
|
|
|
42,942
|
|
|
|
2,239
|
|
|
|
(31
|
)
|
|
|
45,150
|
|
Corporate securities
|
|
|
36,624
|
|
|
|
321
|
|
|
|
(4
|
)
|
|
|
36,941
|
|
Residential mortgage-backed securities
|
|
|
27,983
|
|
|
|
481
|
|
|
|
(30
|
)
|
|
|
28,434
|
|
Commercial mortgage-backed securities
|
|
|
148
|
|
|
|
19
|
|
|
|
|
|
|
|
167
|
|
Collateralized mortgage obligations
|
|
|
17,009
|
|
|
|
172
|
|
|
|
(59
|
)
|
|
|
17,122
|
|
Other structured securities
|
|
|
1,000
|
|
|
|
23
|
|
|
|
|
|
|
|
1,023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income securities
|
|
|
145,486
|
|
|
|
3,619
|
|
|
|
(129
|
)
|
|
|
148,976
|
|
Equity securities
|
|
|
20,462
|
|
|
|
2,877
|
|
|
|
(139
|
)
|
|
|
23,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income and equity securities
|
|
$
|
165,948
|
|
|
$
|
6,496
|
|
|
$
|
(268
|
)
|
|
$
|
172,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
Corporate securities include an investment in a fixed income mutual fund with a cost and estimated fair value of
$38,767 and $38,491, respectively, as of September 30, 2013 and a cost and estimated fair value of $26,600 and $26,656 as of December 31, 2012. The fixed income mutual funds investment objective is to provide a total return that is
consistent with the preservation of capital through investing in high grade U.S. Dollar fixed income securities with a maximum maturity not exceeding five years.
Other structured securities held as of September 30, 2013 and December 31, 2012 include two asset-backed securities collateralized by auto loan
receivables and one security in an equipment trust made up of fixed retail installment contracts and retail installment loans.
The amortized cost and
estimated fair value of fixed income securities and convertible bonds, excluding the Companys investment in the fixed income mutual fund, as of September 30, 2013, 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.
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
|
Estimated
Fair Value
|
|
Less than one year
|
|
$
|
12,863
|
|
|
$
|
13,524
|
|
One through five years
|
|
|
46,436
|
|
|
|
48,244
|
|
Five through ten years
|
|
|
22,535
|
|
|
|
23,201
|
|
Greater than ten years
|
|
|
17,393
|
|
|
|
18,473
|
|
Mortgage/asset-backed securities
|
|
|
39,727
|
|
|
|
39,039
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
138,954
|
|
|
$
|
142,481
|
|
|
|
|
|
|
|
|
|
|
The gross unrealized losses and estimated fair value of fixed income and equity securities, excluding those securities in the
segregated portfolio cell reinsurance segment, classified as available-for-sale by category and length of time an individual security has been in a continuous unrealized position as of September 30, 2013 and December 31, 2012 are as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 12 Months
|
|
|
12 Months or More
|
|
|
Total
|
|
September 30, 2013
|
|
Estimated
Fair
Value
|
|
|
Gross
Unrealized
Losses
|
|
|
# of
Securities
|
|
|
Estimated
Fair
Value
|
|
|
Gross
Unrealized
Losses
|
|
|
# of
Securities
|
|
|
Estimated
Fair
Value
|
|
|
Gross
Unrealized
Losses
|
|
|
# of
Securities
|
|
U.S. Treasuries and government agencies
|
|
$
|
2,952
|
|
|
$
|
(82
|
)
|
|
|
9
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
2,952
|
|
|
$
|
(82
|
)
|
|
|
9
|
|
States, municipalities, and political subdivisions
|
|
|
13,249
|
|
|
|
(300
|
)
|
|
|
62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,249
|
|
|
|
(300
|
)
|
|
|
62
|
|
|
|
|
|
|
|
|
|
|
|
Corporate securities
|
|
|
11,451
|
|
|
|
(95
|
)
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,451
|
|
|
|
(95
|
)
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage-backed securities
|
|
|
16,064
|
|
|
|
(761
|
)
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,064
|
|
|
|
(761
|
)
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized mortgage obligations
|
|
|
9,173
|
|
|
|
(233
|
)
|
|
|
17
|
|
|
|
799
|
|
|
|
(14
|
)
|
|
|
4
|
|
|
|
9,972
|
|
|
|
(247
|
)
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
Other structured securities
|
|
|
10
|
|
|
|
(8
|
)
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
|
|
(8
|
)
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income securities
|
|
|
52,899
|
|
|
|
(1,479
|
)
|
|
|
120
|
|
|
|
799
|
|
|
|
(14
|
)
|
|
|
4
|
|
|
|
53,698
|
|
|
|
(1,493
|
)
|
|
|
124
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
|
1,142
|
|
|
|
(139
|
)
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,142
|
|
|
|
(139
|
)
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income and equity securities
|
|
$
|
54,041
|
|
|
$
|
(1,618
|
)
|
|
|
126
|
|
|
$
|
799
|
|
|
$
|
(14
|
)
|
|
|
4
|
|
|
$
|
54,840
|
|
|
$
|
(1,632
|
)
|
|
|
130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 12 Months
|
|
|
12 Months or More
|
|
|
Total
|
|
December 31, 2012
|
|
Estimated
Fair
Value
|
|
|
Gross
Unrealized
Losses
|
|
|
# of
Securities
|
|
|
Estimated
Fair
Value
|
|
|
Gross
Unrealized
Losses
|
|
|
# of
Securities
|
|
|
Estimated
Fair
Value
|
|
|
Gross
Unrealized
Losses
|
|
|
# of
Securities
|
|
U.S. Treasuries and government agencies
|
|
$
|
594
|
|
|
$
|
(5
|
)
|
|
|
1
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
594
|
|
|
$
|
(5
|
)
|
|
|
1
|
|
States, municipalities, and political subdivisions
|
|
|
3,922
|
|
|
|
(31
|
)
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,922
|
|
|
|
(31
|
)
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage-backed securities
|
|
|
11,922
|
|
|
|
(30
|
)
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,922
|
|
|
|
(30
|
)
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized mortgage obligations
|
|
|
4,943
|
|
|
|
(56
|
)
|
|
|
9
|
|
|
|
122
|
|
|
|
(3
|
)
|
|
|
2
|
|
|
|
5,065
|
|
|
|
(59
|
)
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income securities
|
|
|
21,381
|
|
|
|
(122
|
)
|
|
|
37
|
|
|
|
122
|
|
|
|
(3
|
)
|
|
|
2
|
|
|
|
21,503
|
|
|
|
(125
|
)
|
|
|
39
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
|
1,034
|
|
|
|
(135
|
)
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,034
|
|
|
|
(135
|
)
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income and equity securities
|
|
$
|
22,415
|
|
|
$
|
(257
|
)
|
|
|
48
|
|
|
$
|
122
|
|
|
$
|
(3
|
)
|
|
|
2
|
|
|
$
|
22,537
|
|
|
$
|
(260
|
)
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note: The Company has excluded the segregated portfolio cell reinsurance segments gross unrealized losses from the above
table because changes in the estimated fair value of the segregated portfolio cell reinsurance segments fixed income and equity securities inures to the segregated portfolio cell dividend participant and, accordingly, is included in the
segregated portfolio cell dividend payable and the related segregated portfolio dividend expense in the Companys consolidated balance sheets and consolidated statement of operations and comprehensive income (loss),
respectively. Management believes the exclusion of the segregated portfolio cell reinsurance segment from this disclosure provides a more transparent understanding of gross unrealized losses in the Companys fixed income and equity
security portfolios that could impact its consolidated financial position or results of operations.
Management has evaluated the unrealized losses
related to its fixed income securities and determined that they are primarily due to a fluctuation in interest rates and not to credit issues of the issuer or the underlying assets in the case of asset-backed securities. The Company does not intend
to sell the fixed income securities and it is not more likely than not that the Company will be required to sell the fixed income securities before recovery of their amortized cost bases, which may be maturity; therefore, management does not
consider the fixed income securities to be otherthan-temporarily impaired as of September 30, 2013.
Management has evaluated the unrealized
losses related to its equity securities and determined that they are primarily related to the current market conditions and not due to underlying issues related to the issuer or the industry in which the issuer operates. The equity securities have
been in an unrealized loss position for less than twelve months and none of the securities had an estimated fair value less than 80% of its cost basis. The Company does not intend to sell the equity securities and it is not more likely than not that
the Company will be required to sell the equity securities before recovery of their cost bases; therefore, management does not consider the equity securities to be other-than-temporarily impaired as of September 30, 2013.
The following table provides information related to net realized investment gains for the three and nine months ended September 30, 2013 and 2012 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
Gross realized investment gains:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities
|
|
$
|
3
|
|
|
$
|
2
|
|
|
$
|
10
|
|
|
$
|
190
|
|
Convertible bonds
|
|
|
256
|
|
|
|
492
|
|
|
|
1,102
|
|
|
|
921
|
|
Equity securities
|
|
|
1,253
|
|
|
|
38
|
|
|
|
1,576
|
|
|
|
498
|
|
Other
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross realized investment gains
|
|
|
1,512
|
|
|
|
537
|
|
|
|
2,688
|
|
|
|
1,614
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross realized investment losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities
|
|
|
(41
|
)
|
|
|
|
|
|
|
(42
|
)
|
|
|
|
|
Convertible bonds
|
|
|
(8
|
)
|
|
|
(63
|
)
|
|
|
(35
|
)
|
|
|
(86
|
)
|
Equity securities
|
|
|
|
|
|
|
|
|
|
|
(10
|
)
|
|
|
(52
|
)
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(641
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross realized investment losses
|
|
|
(49
|
)
|
|
|
(63
|
)
|
|
|
(87
|
)
|
|
|
(779
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other-than-temporary investment impairments
|
|
|
|
|
|
|
(40
|
)
|
|
|
|
|
|
|
(127
|
)
|
Change in fair value of convertible bonds
|
|
|
792
|
|
|
|
589
|
|
|
|
561
|
|
|
|
803
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized investment gains
|
|
$
|
2,255
|
|
|
$
|
1,023
|
|
|
$
|
3,162
|
|
|
$
|
1,511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
Other-than-temporary impairments recognized for the three months ended September 30, 2012 reflect one mutual
fund that had been in and unrealized loss position for more than twelve months. Other-than-temporary impairments recognized for the nine months ended September 30, 2012 reflect two mutual funds that had been in and unrealized loss position for
more than twelve months.
Net investment income for the three and nine months ended September 30, 2013 and 2012 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
Fixed income and convertible bond securities
|
|
$
|
1,048
|
|
|
$
|
964
|
|
|
$
|
3,023
|
|
|
$
|
3,025
|
|
Equity securities
|
|
|
116
|
|
|
|
90
|
|
|
|
251
|
|
|
|
260
|
|
Cash and cash equivalents
|
|
|
2
|
|
|
|
3
|
|
|
|
8
|
|
|
|
22
|
|
Other
|
|
|
|
|
|
|
28
|
|
|
|
62
|
|
|
|
126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross investment income
|
|
|
1,166
|
|
|
|
1,085
|
|
|
|
3,344
|
|
|
|
3,433
|
|
Investment expenses
|
|
|
(211
|
)
|
|
|
(193
|
)
|
|
|
(566
|
)
|
|
|
(527
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
955
|
|
|
$
|
892
|
|
|
$
|
2,778
|
|
|
$
|
2,906
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7. Reserves for Unpaid Losses and Loss Adjustment Expenses
The following table provides a summary of the activity in the Companys reserves for unpaid losses and LAE for the three and nine months ended
September 30, 2013 and 2012 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
Balance, beginning of period
|
|
$
|
123,365
|
|
|
$
|
111,521
|
|
|
$
|
117,728
|
|
|
$
|
106,077
|
|
Reinsurance recoverables on unpaid losses and LAE
|
|
|
14,073
|
|
|
|
14,539
|
|
|
|
15,084
|
|
|
|
11,805
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net balance, beginning of period
|
|
|
109,292
|
|
|
|
96,982
|
|
|
|
102,644
|
|
|
|
94,272
|
|
Incurred related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
|
28,990
|
|
|
|
28,549
|
|
|
|
84,268
|
|
|
|
76,877
|
|
Prior year
|
|
|
(42
|
)
|
|
|
(700
|
)
|
|
|
404
|
|
|
|
(542
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total incurred
|
|
|
28,948
|
|
|
|
27,849
|
|
|
|
84,672
|
|
|
|
76,335
|
|
Paid related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
|
15,183
|
|
|
|
13,181
|
|
|
|
28,157
|
|
|
|
25,246
|
|
Prior year
|
|
|
11,257
|
|
|
|
10,952
|
|
|
|
47,359
|
|
|
|
44,663
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total paid
|
|
|
26,440
|
|
|
|
24,133
|
|
|
|
75,516
|
|
|
|
69,909
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net balance, end of period
|
|
|
111,800
|
|
|
|
100,698
|
|
|
|
111,800
|
|
|
|
100,698
|
|
Reinsurance recoverables on unpaid losses and LAE
|
|
|
14,666
|
|
|
|
14,987
|
|
|
|
14,666
|
|
|
|
14,987
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$
|
126,466
|
|
|
$
|
115,685
|
|
|
$
|
126,466
|
|
|
$
|
115,685
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incurred losses by segment were as follows for the three and nine months ended September 30, 2013 and 2012, respectively
(in thousands):
Three Months Ended September 30, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Workers
Compensation
Insurance
Segment
|
|
|
Segregated
Portfolio Cell
Reinsurance
Segment
|
|
|
Total
|
|
Incurred related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year, gross of discount
|
|
$
|
23,406
|
|
|
$
|
5,789
|
|
|
$
|
29,195
|
|
Current period discount
|
|
|
(50
|
)
|
|
|
(155
|
)
|
|
|
(205
|
)
|
Prior year, gross of discount
|
|
|
|
|
|
|
(188
|
)
|
|
|
(188
|
)
|
Accretion of prior period discount
|
|
|
|
|
|
|
146
|
|
|
|
146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total incurred
|
|
$
|
23,356
|
|
|
$
|
5,592
|
|
|
$
|
28,948
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
Three Months Ended September 30, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Workers
Compensation
Insurance
Segment
|
|
|
Segregated
Portfolio Cell
Reinsurance
Segment
|
|
|
Total
|
|
Incurred related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year, gross of discount
|
|
$
|
22,544
|
|
|
$
|
6,327
|
|
|
$
|
28,871
|
|
Current period discount
|
|
|
(179
|
)
|
|
|
(143
|
)
|
|
|
(322
|
)
|
Prior year, gross of discount
|
|
|
|
|
|
|
(781
|
)
|
|
|
(781
|
)
|
Accretion of prior period discount
|
|
|
|
|
|
|
81
|
|
|
|
81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total incurred
|
|
$
|
22,365
|
|
|
$
|
5,484
|
|
|
$
|
27,849
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
Nine Months Ended September 30, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Workers
Compensation
Insurance
Segment
|
|
|
Segregated
Portfolio Cell
Reinsurance
Segment
|
|
|
Total
|
|
Incurred related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year, gross of discount
|
|
$
|
69,387
|
|
|
$
|
17,376
|
|
|
$
|
86,763
|
|
Current period discount
|
|
|
(1,927
|
)
|
|
|
(568
|
)
|
|
|
(2,495
|
)
|
Prior year, gross of discount
|
|
|
|
|
|
|
(1,726
|
)
|
|
|
(1,726
|
)
|
Accretion of prior period discount
|
|
|
1,546
|
|
|
|
584
|
|
|
|
2,130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total incurred
|
|
$
|
69,006
|
|
|
$
|
15,666
|
|
|
$
|
84,672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Workers
Compensation
Insurance
Segment
|
|
|
Segregated
Portfolio Cell
Reinsurance
Segment
|
|
|
Total
|
|
Incurred related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year, gross of discount
|
|
$
|
61,979
|
|
|
$
|
17,384
|
|
|
$
|
79,363
|
|
Current period discount
|
|
|
(1,929
|
)
|
|
|
(557
|
)
|
|
|
(2,486
|
)
|
Prior year, gross of discount
|
|
|
|
|
|
|
(2,361
|
)
|
|
|
(2,361
|
)
|
Accretion of prior period discount
|
|
|
1,430
|
|
|
|
389
|
|
|
|
1,819
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total incurred
|
|
$
|
61,480
|
|
|
$
|
14,855
|
|
|
$
|
76,335
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three and nine months ended September 30, 2013 and 2012, the estimates of ultimate losses and LAE for prior
accident periods produced from our actuarial methods were reasonably consistent, in the aggregate, with the estimates we prepared as of December 31, 2012. During the second quarter of 2013, however, there were some deviations, by accident year,
between the actuarial indications and recorded reserves. Based on consideration of the credibility of the higher than expected loss experience on older accident periods and the robustness of the recent accident period loss ratio, management adjusted
the spread of the recorded reserves by accident period to align the reserves with the actuarial indications during the second quarter of 2013. In the aggregate, the Company did not recognize any development on prior accident period workers
compensation insurance reserves for the three and nine months ended September 30, 2013.
The Company recognized favorable development in its
segregated portfolio cell reinsurance segment of $188 and $1,726 for the three and nine months ended September 30, 2013, respectively, compared to favorable development of $781 and $2,361 for the same periods in 2012. The favorable development
primarily reflects the impact of claim settlements for amounts at, or less than, previously established case and IBNR reserves. Prior period reserve development in the segregated portfolio cell reinsurance segment results in an increase or decrease
in the segments losses and LAE incurred, and a corresponding decrease or increase in the segregated portfolio cell dividend expense.
8. Segment
Information
The Company currently operates in three business segments.
Workers Compensation Insurance
The Company offers
traditional workers compensation insurance coverage to employers, primarily in the Mid-Atlantic, Southeast, Midwest and Gulf South regions of the United States. The Companys workers compensation products include guaranteed cost
policies, policyholder dividend policies, retrospectively-rated policies, deductible policies and alternative market programs.
17
Net premiums earned in the workers compensation insurance segment for the three and nine months ended
September 30, 2013 and 2012 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
Guaranteed cost policies
|
|
$
|
27,601
|
|
|
$
|
24,629
|
|
|
$
|
81,310
|
|
|
$
|
69,813
|
|
Dividend policies
|
|
|
4,711
|
|
|
|
5,144
|
|
|
|
13,982
|
|
|
|
13,893
|
|
Deductible policies
|
|
|
1,905
|
|
|
|
1,523
|
|
|
|
5,750
|
|
|
|
4,717
|
|
Retrospectively-rated policies
|
|
|
1,661
|
|
|
|
1,885
|
|
|
|
4,913
|
|
|
|
4,395
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
35,878
|
|
|
$
|
33,181
|
|
|
$
|
105,955
|
|
|
$
|
92,818
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segregated Portfolio Cell Reinsurance
The Company offers alternative market workers compensation solutions to individual companies, groups and associations (referred to as segregated
portfolio cell dividend participants) through the creation of segregated portfolio cells. The segregated portfolio cells are segregated pools of assets that function as insurance companies within an insurance company. The pool of assets and
associated liabilities of each segregated portfolio cell are solely for the benefit of the segregated portfolio cell dividend participants, and the pool of assets of one segregated portfolio cell are statutorily protected from the creditors of the
others. This permits the Company to provide customers with a turn-key alternative markets solution that includes program design, fronting, claims administration, risk management, segregated portfolio cell rental, asset management and segregated
portfolio management services. The Company outsources the asset management and segregated portfolio cell management services to a third party. The segregated portfolio cell structure provides dividend participants the opportunity to share in both
underwriting profit and investment income derived from their respective segregated portfolio cells financial results.
The following table provides
the fee revenue generated by the segregated portfolio cell reinsurance segment that is included in the Companys workers compensation insurance and corporate/other segments for the three and nine months ended September 30, 2013 and
2012, respectively (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
Workers compensation insurance segment
|
|
$
|
1,610
|
|
|
$
|
1,231
|
|
|
$
|
5,119
|
|
|
$
|
4,095
|
|
Corporate/other segment
|
|
|
33
|
|
|
|
194
|
|
|
|
300
|
|
|
|
629
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,643
|
|
|
$
|
1,425
|
|
|
$
|
5,419
|
|
|
$
|
4,724
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fee revenue earned by the workers compensation insurance and corporate/other segments is included in acquisition and
other underwriting expenses in the consolidated statements of operations and comprehensive income (loss).
The Company is a preferred shareholder in
certain of the segregated portfolio cells. For those segregated portfolio cells in which the Company participates, the Company shares in the operating and investment results of those cells and recognizes its share of the segregated portfolio
dividend in the consolidated statements of operations and comprehensive income (loss).
The Companys share of the segregated portfolio dividend,
which is included in the corporate/other segment, was as follows for the three and nine months ended September 30, 2013 and 2012, respectively (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
Segregated portfolio dividend income
|
|
$
|
401
|
|
|
$
|
256
|
|
|
$
|
1,158
|
|
|
$
|
778
|
|
Corporate/Other
The
corporate/other segment primarily includes the expenses of EIHI, the third party administration activities of the Company, and the results of operations of Eastern Re, as well as certain eliminations necessary to reconcile the segment information to
the consolidated statements of operations and comprehensive income (loss). The Company cancelled the remaining reinsurance contracts at Eastern Re in 1999 on a run-off basis and continues to have exposure for outstanding claims as of
September 30, 2013. The corporate/other segment also included the Companys interest in a segregated portfolio cell with an unaffiliated primary carrier that wrote insurance coverage for sprinkler contractors, known as
SprinklerPro. The Company non-renewed the SprinklerPro contract on a run-off basis effective April 1, 2009. The Company commuted the SprinklerPro contract during the second quarter of 2012 and recognized a realized loss of $641,000,
which is included in net realized investment gains (losses) for the nine months ended September 30, 2012.
18
The following table represents the segment results for the three months ended September 30, 2013 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Workers
Compensation
Insurance
|
|
|
Segregated
Portfolio Cell
Reinsurance
|
|
|
Corporate/
Other
|
|
|
Total
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned
|
|
$
|
35,878
|
|
|
$
|
9,251
|
|
|
$
|
|
|
|
$
|
45,129
|
|
Net investment income
|
|
|
863
|
|
|
|
70
|
|
|
|
22
|
|
|
|
955
|
|
Change in equity interest in limited partnerships
|
|
|
(48
|
)
|
|
|
|
|
|
|
38
|
|
|
|
(10
|
)
|
Net realized investment (losses) gains
|
|
|
1,651
|
|
|
|
8
|
|
|
|
596
|
|
|
|
2,255
|
|
Other revenue
|
|
|
|
|
|
|
|
|
|
|
29
|
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
38,344
|
|
|
|
9,329
|
|
|
|
685
|
|
|
|
48,358
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and LAE incurred
|
|
|
23,356
|
|
|
|
5,592
|
|
|
|
|
|
|
|
28,948
|
|
Acquisition and other underwriting expenses
|
|
|
2,672
|
|
|
|
2,787
|
|
|
|
(33
|
)
|
|
|
5,426
|
|
Other expenses
|
|
|
5,740
|
|
|
|
96
|
|
|
|
2,032
|
|
|
|
7,868
|
|
Amortization of intangibles
|
|
|
|
|
|
|
|
|
|
|
160
|
|
|
|
160
|
|
Policyholder dividend expense
|
|
|
297
|
|
|
|
12
|
|
|
|
|
|
|
|
309
|
|
Segregated portfolio dividend expense
|
|
|
|
|
|
|
842
|
|
|
|
(401
|
)
|
|
|
441
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
32,065
|
|
|
|
9,329
|
|
|
|
1,758
|
|
|
|
43,152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
6,279
|
|
|
|
|
|
|
|
(1,073
|
)
|
|
|
5,206
|
|
Income tax expense (benefit)
|
|
|
1,710
|
|
|
|
|
|
|
|
(196
|
)
|
|
|
1,514
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
4,569
|
|
|
$
|
|
|
|
$
|
(877
|
)
|
|
$
|
3,692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
367,333
|
|
|
$
|
77,315
|
|
|
$
|
(27,329
|
)
|
|
$
|
417,319
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table represents the segment results for the three months ended September 30, 2012 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Workers
Compensation
Insurance
|
|
|
Segregated
Portfolio Cell
Reinsurance
|
|
|
Corporate/
Other
|
|
|
Total
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned
|
|
$
|
33,181
|
|
|
$
|
8,216
|
|
|
$
|
|
|
|
$
|
41,397
|
|
Net investment income
|
|
|
749
|
|
|
|
75
|
|
|
|
68
|
|
|
|
892
|
|
Change in equity interest in limited partnerships
|
|
|
258
|
|
|
|
|
|
|
|
32
|
|
|
|
290
|
|
Net realized investment (losses) gains
|
|
|
1,022
|
|
|
|
40
|
|
|
|
(39
|
)
|
|
|
1,023
|
|
Other revenue
|
|
|
|
|
|
|
|
|
|
|
84
|
|
|
|
84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
35,210
|
|
|
|
8,331
|
|
|
|
145
|
|
|
|
43,686
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and LAE incurred
|
|
|
22,365
|
|
|
|
5,484
|
|
|
|
|
|
|
|
27,849
|
|
Acquisition and other underwriting expenses
|
|
|
3,198
|
|
|
|
2,482
|
|
|
|
(194
|
)
|
|
|
5,486
|
|
Other expenses
|
|
|
5,090
|
|
|
|
54
|
|
|
|
1,080
|
|
|
|
6,224
|
|
Amortization of intangibles
|
|
|
|
|
|
|
|
|
|
|
202
|
|
|
|
202
|
|
Policyholder dividend expense
|
|
|
467
|
|
|
|
26
|
|
|
|
|
|
|
|
493
|
|
Segregated portfolio dividend expense
|
|
|
|
|
|
|
285
|
|
|
|
(256
|
)
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
31,120
|
|
|
|
8,331
|
|
|
|
832
|
|
|
|
40,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
4,090
|
|
|
|
|
|
|
|
(687
|
)
|
|
|
3,403
|
|
Income tax expense (benefit)
|
|
|
1,003
|
|
|
|
|
|
|
|
(386
|
)
|
|
|
617
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
3,087
|
|
|
$
|
|
|
|
$
|
(301
|
)
|
|
$
|
2,786
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
332,694
|
|
|
$
|
68,124
|
|
|
$
|
(21,875
|
)
|
|
$
|
378,943
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
The following table represents the segment results for the nine months ended September 30, 2013 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Workers
Compensation
Insurance
|
|
|
Segregated
Portfolio Cell
Reinsurance
|
|
|
Corporate/
Other
|
|
|
Total
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned
|
|
$
|
105,955
|
|
|
$
|
27,027
|
|
|
$
|
|
|
|
$
|
132,982
|
|
Net investment income
|
|
|
2,419
|
|
|
|
226
|
|
|
|
133
|
|
|
|
2,778
|
|
Change in equity interest in limited partnerships
|
|
|
575
|
|
|
|
|
|
|
|
173
|
|
|
|
748
|
|
Net realized investment gains
|
|
|
2,413
|
|
|
|
148
|
|
|
|
601
|
|
|
|
3,162
|
|
Other revenue
|
|
|
|
|
|
|
|
|
|
|
163
|
|
|
|
163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
111,362
|
|
|
|
27,401
|
|
|
|
1,070
|
|
|
|
139,833
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and LAE incurred
|
|
|
69,006
|
|
|
|
15,666
|
|
|
|
|
|
|
|
84,672
|
|
Acquisition and other underwriting expenses
|
|
|
8,357
|
|
|
|
8,090
|
|
|
|
(300
|
)
|
|
|
16,147
|
|
Other expenses
|
|
|
16,911
|
|
|
|
289
|
|
|
|
4,391
|
|
|
|
21,591
|
|
Amortization of intangibles
|
|
|
|
|
|
|
|
|
|
|
480
|
|
|
|
480
|
|
Policyholder dividend expense
|
|
|
763
|
|
|
|
44
|
|
|
|
|
|
|
|
807
|
|
Segregated portfolio dividend expense
|
|
|
|
|
|
|
3,312
|
|
|
|
(1,158
|
)
|
|
|
2,154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
95,037
|
|
|
|
27,401
|
|
|
|
3,413
|
|
|
|
125,851
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
16,325
|
|
|
|
|
|
|
|
(2,343
|
)
|
|
|
13,982
|
|
Income tax expense (benefit)
|
|
|
4,804
|
|
|
|
|
|
|
|
(750
|
)
|
|
|
4,054
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
11,521
|
|
|
$
|
|
|
|
$
|
(1,593
|
)
|
|
$
|
9,928
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
367,333
|
|
|
$
|
77,315
|
|
|
$
|
(27,329
|
)
|
|
$
|
417,319
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table represents the segment results for the nine months ended September 30, 2012 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Workers
Compensation
Insurance
|
|
|
Segregated
Portfolio Cell
Reinsurance
|
|
|
Corporate/
Other
|
|
|
Total
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned
|
|
$
|
92,818
|
|
|
$
|
23,800
|
|
|
$
|
|
|
|
$
|
116,618
|
|
Net investment income
|
|
|
2,385
|
|
|
|
249
|
|
|
|
272
|
|
|
|
2,906
|
|
Change in equity interest in limited partnerships
|
|
|
620
|
|
|
|
|
|
|
|
118
|
|
|
|
738
|
|
Net realized investment gains (losses)
|
|
|
1,618
|
|
|
|
506
|
|
|
|
(613
|
)
|
|
|
1,511
|
|
Other revenue
|
|
|
|
|
|
|
|
|
|
|
239
|
|
|
|
239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
97,441
|
|
|
|
24,555
|
|
|
|
16
|
|
|
|
122,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and LAE incurred
|
|
|
61,480
|
|
|
|
14,855
|
|
|
|
|
|
|
|
76,335
|
|
Acquisition and other underwriting expenses
|
|
|
8,793
|
|
|
|
7,227
|
|
|
|
(629
|
)
|
|
|
15,391
|
|
Other expenses
|
|
|
14,790
|
|
|
|
218
|
|
|
|
3,111
|
|
|
|
18,119
|
|
Amortization of intangibles
|
|
|
|
|
|
|
|
|
|
|
605
|
|
|
|
605
|
|
Policyholder dividend expense
|
|
|
652
|
|
|
|
63
|
|
|
|
|
|
|
|
715
|
|
Segregated portfolio dividend expense
|
|
|
|
|
|
|
2,192
|
|
|
|
(778
|
)
|
|
|
1,414
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
85,715
|
|
|
|
24,555
|
|
|
|
2,309
|
|
|
|
112,579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
11,726
|
|
|
|
|
|
|
|
(2,293
|
)
|
|
|
9,433
|
|
Income tax expense (benefit)
|
|
|
3,278
|
|
|
|
|
|
|
|
(901
|
)
|
|
|
2,377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
8,448
|
|
|
$
|
|
|
|
$
|
(1,392
|
)
|
|
$
|
7,056
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
332,694
|
|
|
$
|
68,124
|
|
|
$
|
(21,875
|
)
|
|
$
|
378,943
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
9. Segregated Portfolio Cell Reinsurance Segment
The segregated portfolio cell reinsurance segment includes the Companys 18 alternative market programs, which are included in the
Companys consolidated financial position and results of operations. The segregated portfolio cell reinsurance segments assets and liabilities as of September 30, 2013 and December 31, 2012, which are included in the
Companys consolidated balance sheets, were as follows (unaudited):
|
|
|
|
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September 30,
2013
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December 31,
2012
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ASSETS
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Investments:
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Fixed income securities, at estimated fair value (amortized cost, $32,863; $30,874)
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$
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32,644
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$
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30,931
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Equity securities, at estimated fair value (cost, $7,039; $7,043)
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8,925
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7,612
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Total investments
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41,569
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38,543
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Cash and cash equivalents
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2,252
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1,495
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Reinsurance recoverable on paid and unpaid losses and loss adjustment expenses
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4,218
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4,716
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Deferred acquisition costs
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5,396
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4,160
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Other assets
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5,277
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4,361
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Due from affiliates, net
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18,603
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12,803
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Total assets
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$
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77,315
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$
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66,078
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LIABILITIES
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Reserves for unpaid losses and loss adjustment expenses
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$
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29,491
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$
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28,295
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Unearned premium reserves
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20,024
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14,817
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Accounts payable and accrued expenses
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104
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3
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Segregated portfolio cell dividend payable
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20,805
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17,353
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Policyholder dividends payable
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164
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150
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Due to affiliates, net
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6,698
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5,435
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Total liabilities
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77,286
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66,053
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SHAREHOLDERS EQUITY
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Preferred stock outstanding
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29
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25
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Total shareholders equity
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29
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25
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Total liabilities and shareholders equity
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$
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77,315
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$
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66,078
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10. Commitments and Contingencies
Legal Proceedings
The Company
is subject to legal proceedings and claims that arise in the ordinary course of its business and have not been finally adjudicated. Although there can be no assurance as to the ultimate disposition of these matters, it is the opinion of the
Companys management, based upon the information available at this time, that the expected outcome of these matters, individually or in the aggregate, will not have a material adverse effect on the Companys results of operations or
financial condition.
Shareholder Demand Related to Merger with ProAssurance
The Company has received letters from attorneys purporting to represent shareholders of the Company and demanding certain actions be taken as a result of the
proposed acquisition of the Company by ProAssurance Corporation (ProAssurance). The letters claim that the proposed acquisition is the result of a flawed process and is fundamentally unfair to the Company, the shareholder and other
public shareholders of the Company. The demands request that the Companys Board of Directors 1) undertake all appropriate and available methods to maximize shareholder value and remove any conflicts of interest that have clouded the
transaction process, 2) revise the proposed acquisition as structured in the merger agreement to eliminate the deal protection devices, including, but not limited to, the restrictions on the Boards ability to seek bona-fide offers set forth in
the merger agreement and reduction of the termination fee, 3) address alleged deficiencies in the Proxy statement, 4) refrain from consummating the proposed acquisition whereby the Companys public shareholders will be cashed out of their
Company stock for inadequate consideration, and 5) take appropriate legal action against each of the members of the Companys Board of Directors.
It
is reasonably possible that others could initiate additional actions or litigation against the Company with respect to the proposed merger. The Company disagrees with the assertions made in the letters and expects to respond fully and vigorously
defend any subsequent litigation.
AIG Arbitration
On September 6, 2011, the Company served a written demand (the Arbitration Demand) initiating arbitration proceedings against various AIG
Companies under 24 reinsurance treaties pursuant to which the Company reinsured AIG Companies for certain pollution
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liability risks related to underground storage tanks for the policy years 1990 through 1999 (the Treaties). The Treaties were cancelled by Eastern Re in 1999. In the Arbitration
Demand, the Company seeks an award from the arbitration panel compelling AIG Companies to permit the Company to examine the bases for certain paid losses and loss reserves ceded by AIG Companies to Eastern Re under the Treaties. The Company believes
that the Treaties permit such an audit.
On October 3, 2011, AIG Companies responded to the Arbitration Demand by advising that they will seek an
award from the arbitration panel of approximately $1,900 plus future amounts that may become due under the Treaties before the final hearing in the arbitration. Both the Company and AIG Companies seek attorneys fees and costs in the
arbitration. Both the Company and AIG Companies have appointed arbitrators.
During the first quarter of 2012, the Company received quarterly claims data
from AIG Companies that reflected unfavorable claim development under the reinsurance treaties. The Company is unable to substantiate the reliability of the claims data reported by AIG Companies and, as a result, has not adjusted its consolidated
financial statements for the amounts reported by AIG Companies. The Company continues to believe it has adequately reserved the claims at issue.
The
Company commenced an audit of the claims covered under the Treaties during the third quarter of 2012. Following the claim audit, the Company requested additional files and further information from AIG Companies in order to allow the Company to
complete the audit. AIG Companies have not provided the requested information, which the Company is now pursuing in the arbitration. Once received, the information will be evaluated to determine whether such information would cause the Company to
revise its estimates or position with respect to the pending arbitration.
During the second quarter of 2013, an umpire was selected in the arbitration
and an organizational meeting was held. Both parties submitted Position Statements which stated their respective positions and requested relief. In addition to seeking a full audit, the Company is seeking an order from the arbitration panel
granting it all appropriate relief relating to or arising from the incorrect, improper, or untimely billings that AIG has sent to the Company. Subject to the results of the audit and discovery, the relief the Company seeks may include a refund of
payments the Company has already made to AIG Companies under the treaties as well as an award in the Companys favor for the damages it has suffered. AIG Companies is seeking approximately $4,100, which AIG Companies contends is the total the
Company owes under 14 of 24 reinsurance treaties the parties entered into between 1989 and 1999. At the organizational meeting, the final hearing was set for the week of March 31, 2014. Following the meeting, the arbitration panel approved
a schedule for the arbitration.
It is reasonably possible that the final outcome of the arbitration could go against the Company, which could result in a
material, adverse effect on the Companys results of operations and financial condition.
Eastern Alliance Insurance Co. v. Managepoint, LLC,
d/b/a Management 2000 Group, Inc., a/k/a Management, Inc.
Eastern Alliance brought this action against Managepoint, Inc., Managepoint, LLC, and
Management 2000 Group, Inc. (collectively, the Defendants) to recover amounts due and owing under five workers compensation deductible insurance policies issued to the Defendants.
On November 21, 2012, the Defendants filed a complaint, denying Eastern Alliances assertion that they operate as the same entity, and thus, are
liable for the debts of the other, and renouncing any liability for any amounts set forth in the complaint. The Defendants also raised a number of affirmative defenses, including that Eastern Alliance breached its duty of good faith and fair dealing
by, among other things, failing to obtain required approvals to settling workers compensation claims and improperly invoicing, collecting, and retaining various overpayments by the Defendants.
On June 12, 2013, Eastern Alliance and the Defendants entered into a Settlement Agreement and Mutual Release (the Settlement) related to the
above matter.
11. Subsequent Events
Management
performed an evaluation of subsequent events through the issuance date of the consolidated financial statements and determined there were no recognized or unrecognized subsequent events that would require an adjustment and/or additional disclosure
in the consolidated financial statements as of September 30, 2013.
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