Net premiums earned increased 41.0% for the nine months ended September 30, 2009, compared to the same period of 2008. The increase was primarily attributable to net premiums earned from our newly acquired Florida insurance subsidiaries, EPIC and EAC, which contributed $128.4 million to net premiums earned for the nine months ended September 30, 2009. This increase was partially offset by lower direct premiums written in certain markets, primarily California and Nevada, which had $30.6 million and $14.5 million lower direct premiums written in the first nine months
of 2009 compared to the same period of 2008, respectively, as a result of rate reductions, competition and impacts of the economic contraction. The acquired operations, particularly in Florida, have also been affected by economic contraction, as indicated by lower estimated payrolls, upon which our premiums are based, combined with rate reductions.
Our average in-force policy size increased 13.5% to $9,087 from $8,006, at September 30, 2009 and 2008, respectively. Excluding the impact of the acquisition, our average in-force policy size would have decreased $1,191, or 14.9%, to $6,815 at September 30, 2009, as compared to September 30, 2008, primarily due to declining payrolls.
Net investment income increased 22.9% for the nine months ended September 30, 2009. The increase in net investment income was related to the increase in invested assets. Fixed maturity securities acquired from the acquisition accounted for a 25.2% increase in invested assets for the nine months ended September 30, 2009, compared to the same period of 2008. The average pre-tax book yield on invested assets remained constant at 4.6% at September 30, 2009, as compared to the same period 2008. The tax equivalent yield on invested assets increased to 5.6% at September 30, 2009, as compared to 5.3% at September 30, 2008. This was primarily due to the increase in the duration of our fixed maturity securities.
For the nine months ended September 30, 2009, realized gains on investments were $1.1 million, compared to realized losses of $3.2 for the same period of 2008. The realized gains are attributable to the sale of previously impaired equity securities. Realized gains for the first nine months of 2009 were partially offset by the other-than-temporary impairments in the first two quarters of 2009, totaling $1.9 million. The realized losses for the nine months ended September 2008 were the result of other-than-temporary impairments of $5.5 million on one fixed maturity and equity securities in our investment portfolio, which were partially offset by realized gains of $2.3 million on the sale of equity securities.
Expenses
Losses and LAE increased $86.3 million for the nine months ended September 30, 2009, compared to the nine months ended September 30, 2008, primarily as a result of the acquisition. Excluding the impact of the acquisition, losses and LAE would have decreased 7.3%, attributable to the decrease in earned premium. The change in overall net premiums earned reduced losses and LAE by approximately $60.5 million. Losses and LAE were 53.0% and 36.0% of net premiums earned for the nine months ended September 30, 2009 and 2008, respectively. During the nine months ended September 30, 2009, favorable prior accident year loss development decreased $13.7 million, to $39.6 million, compared to the same period of 2008. Additionally, our current accident year loss estimates were 69.9% and 66.2% for the nine months ended September 30, 2009 and 2008, respectively.
The table below reflects the losses and LAE reserve adjustments for the nine months ended:
| | | | | | | |
| | September 30, | |
| |
| |
| | 2009 | | 2008 | |
| |
| |
| |
| | (in millions) | |
| | | | | | | |
Prior accident year favorable development, net | | $ | 39.6 | | $ | 53.3 | |
| |
|
| |
|
| |
| | | | | | | |
LPT amortization of the deferred reinsurance gain | | $ | 13.4 | | $ | 13.9 | |
LPT reserve favorable change | | $ | — | | $ | — | |
There was no adjustment to the direct reserves subject to the LPT Agreement in either period. Excluding the impact from the LPT Agreement, losses and LAE would have been $180.0 million and $94.2 million, or 57.3% and 42.3%, of net premiums earned for the nine months ended September 30, 2009 and 2008, respectively.
Commission expense decreased $4.9 million or 15.9%, for the nine months ended September 30, 2009, compared to the nine months ended September 30, 2008. The decrease is primarily attributable to a $14.1 million increase in the LPT contingent profit commission, partially offset by increased commission expense attributable to the acquisition. Excluding the impact of the LPT contingent profit commission, commission expense would have been 12.6% and 13.7% of net premiums earned for the nine months ended September 30, 2009 and 2008, respectively. Excluding the impact of the acquisition and the LPT contingent profit commission, our commission expense would have decreased approximately $3.8 million, or 12.4%, primarily attributable to a decrease in net premiums earned.
Dividends to policyholders increased $5.4 million for the nine months ended September 30, 2009, directly related to the acquired operations of AmCOMP, particularly the policyholders’ dividend plans in Florida and Wisconsin, which are administered pricing states.
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Underwriting and other operating expenses increased 54.2% for the nine months ended September 30, 2009, as compared to the same period in 2008, primarily related to the acquired operations of AmCOMP. The acquired operations contributed $35.2 million to our underwriting expenses for the nine months ended September 30, 2009. Excluding the impact of the acquisition and one-time integration and restructuring charges, our underwriting and other operating expenses would have decreased $4.0 million, primarily due to declining compensation expense not related to restructuring and a decline in premium taxes due to lower net premiums earned. Additionally, during the nine months ended September 30, 2009, we incurred total one-time integration and restructuring charges of $4.9 million, including $2.5 million in severance expenses related to our corporate restructuring.
Interest expense increased $5.6 million for the nine months ended September 30, 2009. For the nine months ended September 30, 2008, we had no debt or related interest expense.
Income taxes decreased 49.8% for the nine months ended September 30, 2009, compared to the same period of 2008. The effective tax rate for the nine months ended September 30, 2009 was 8.5%, as compared to 13.4% for the same period of 2008. The decrease was primarily due to a $20.8 million decrease in pre-tax income, the impact of tax-exempt investment income and change in the LPT contingent profit commission of $14.1 million, which is not subject to income tax. This favorable change was partially offset by the final reversal of the liability for previously unrecognized tax benefits in the amount of $10.6 million, including interest for the nine months ended September 30, 2008.
Tax-exempt income as a percentage of pre-tax income was 37.5% and 26.4% for the nine months ended September 30, 2009 and 2008, respectively. While we expect the levels of tax-preferred investment income to remain relatively stable during 2009, we cannot be certain how changes to pre-tax income may ultimately impact our effective rate in future periods.
Combined Ratio
The combined ratio increased 16.0 percentage points for the nine months ended September 30, 2009, to 95.6%, compared to 79.6% for the nine months ended September 30, 2008. The acquired operations of AmCOMP resulted in an increase in the combined ratio of 13.4 percentage points. Also increasing the combined ratio was the decrease of the favorable prior accident year loss development period over period. The remainder of the increase was primarily the result of lower premiums earned for the period due to rate cuts, competitive pressures, and overall economic conditions, partially offset by the increase in the LPT contingent profit commission.
Liquidity and Capital Resources
Parent Company. We are a holding company and substantially all of our operations have historically been conducted through our insurance subsidiaries, EICN and ECIC. On October 31, 2008, we completed the acquisition of AmCOMP and, as a result, added two new insurance subsidiaries: EPIC and EAC. Dividends to EHI from our insurance subsidiaries are contingent upon our subsidiaries’ earnings and subject to business considerations and regulatory requirements. The primary uses of cash are to pay stockholder dividends, repurchase common stock, pay interest and principal payments on outstanding debt obligations and support general operating expenses.
Historically, we have met our cash requirements and financed our growth principally from underwriting operations, asset maturities, and investment income. The acquisition of AmCOMP was funded through a combination of available cash and funds provided by the Amended Credit Facility.
Our insurance subsidiaries are subject to insurance regulations, which restrict their ability to distribute dividends. The maximum amount that may be paid in 2009 by our insurance subsidiaries to EHI without prior approval by state regulators is $17.7 million. On July 31, 2009, a dividend of $17.7 million was paid by EPIC to Employers Group, Inc. (EGI), its immediate holding company, and subsequently from EGI to EHI.
In February 2008, EHI’s Board of Directors authorized a stock repurchase program (the 2008 Program). The program authorized us to repurchase up to $100 million of our common stock through June 30, 2009. In February 2009, the Board of Directors extended this program through December 31, 2009. Shares may be repurchased from time to time at prevailing market prices in open market or private transactions, in accordance with applicable laws and regulations, and subject to market conditions and other factors. The repurchases may be commenced or suspended from time to time without prior notice. There can be no assurance that we will continue to undertake any repurchase of our common stock pursuant to the 2008 Program. From inception of the 2008 Program through September 30, 2009, we have repurchased 5,403,196 shares of common stock, at the average price paid including commissions of $12.69 per share, for a total of approximately $68.6 million.
On November 4, 2009, the EHI Board of Directors authorized a share repurchase program for up to $50 million of the Company’s common stock. The Company expects that shares may be purchased at prevailing market prices from January 1, 2010 through December 31, 2010 through a variety of methods, including open market or private transactions, in accordance with applicable laws and regulations. The timing and actual number of shares repurchased will depend on a variety of factors, including the share price, corporate and regulatory requirements and other market and economic conditions. Repurchases under the 2010 Stock Repurchase Program may be commenced or suspended from time to time without prior notice, and the program may be suspended or discontinued at any time.
39
Operating Subsidiaries. The primary sources of cash for our insurance operating subsidiaries are funds generated from underwriting operations, asset maturities and income received from investments. The primary uses of cash are to pay claims and operating expenses, to purchase investments, and to pay dividends to the parent holding company subject to state insurance laws and regulations.
Our net cash flows are generally invested in marketable securities. We closely monitor the duration of our investments and investment purchases, and sales are executed with the objective of having adequate funds available for the payment of claims at the subsidiary level and for the subsidiaries to pay dividends to EHI. Because our investment strategy focuses on asset and liability durations, and not on cash flows, asset sales may be required to satisfy obligations or rebalance asset portfolios. At September 30, 2009, our investment portfolio had an effective duration of 5.08, as compared to 4.74 at December 31, 2008, with individual maturities extending out 40 years.
The purchase of reinsurance protects us against the costs of severe claims and catastrophic events. On July 1, 2009, we entered into a new reinsurance program that is effective through July 1, 2010. The reinsurance program consists of two agreements, one excess of loss agreement and one catastrophic loss agreement. The reinsurance program provides coverage up to $200.0 million per loss occurrence, subject to certain exclusions. Our loss retention for the program year beginning July 1, 2009, is $5.0 million. The coverage is subject to an aggregate loss cession limitation in the first layer ($5.0 million in excess of our $5.0 million retention) of $20.0 million. Additionally, in the second through fifth layers of our reinsurance program, our ultimate net loss shall not exceed $10.0 million for any one life, and we are permitted one reinstatement for each layer upon the payment of additional premium. We believe that our reinsurance program meets our needs and that we are sufficiently capitalized for the above described retention.
Our insurance subsidiaries are required to have securities on deposit for the protection of injured workers in accordance with various state laws and regulations. At September 30, 2009, investments with a fair value of $564.2 million were on deposit to comply with such laws and regulations. Based on December 31, 2008, statutory financial statements, we were able to reduce our California deposits by approximately $43 million in the third quarter of 2009.
As of September 30, 2009, we had cash, short-term investments and fixed maturity securities that will mature over the next 24 months of approximately $480.0 million. We plan to repay $50 million of the line of credit provided by the Amended Credit Facility on or before each of December 31, 2009 and 2010 and March 26, 2011. Additionally, we expect one-time integration and restructuring expenditures of approximately $7.5 million in 2009, of which $1.2 million is remaining. Other capital expenditures may include such things as stock repurchases, future stockholder dividends, and support of our growth strategy. We believe that our liquidity needs over the next 24 months will be met with cash from operations, maturing investments and prudent use of credit.
Cash Flows
We monitor cash flows at both the consolidated and subsidiary levels and project future cash needs using trend and variance analyses.
The table below shows our net cash flows for the nine months ended:
| | | | | | | |
| | September 30, | |
| |
| |
| | 2009 | | 2008 | |
| |
| |
| |
| | (in thousands) | |
| | | | | | | |
Cash and cash equivalents provided by (used in): | | | | | | | |
Operating activities | | $ | 46,367 | | $ | 55,195 | |
Investing activities | | | 25,485 | | | (19,705 | ) |
Financing activities | | | (62,124 | ) | | 126,600 | |
| |
|
| |
|
| |
Net increase in cash and cash equivalents | | $ | 9,728 | | $ | 162,090 | |
| |
|
| |
|
| |
Net cash provided by operating activities decreased $8.8 million for the nine months ended September 30, 2009, compared to the same period of 2008.
Items increasing net cash provided by operations included:
| | |
| • | increased net premiums received of $79.9 million; |
| | |
| • | increased investment income of $12.5 million; |
40
| | | |
| | • | decreased commission paid of $0.8 million, including $5.7 million received related to the LPT contingent profit commission; and |
| | | |
| | • | decreased income taxes paid of $25.9 million. |
| | | |
| Items decreasing net cash provided by operations included increased payments for: |
| | | |
| | • | losses and LAE of $89.8 million; |
| | | |
| | • | underwriting and other operating expenses of $33.0 million; |
| | | |
| | • | policyholder dividends of $5.6 million; and |
| | | |
| | • | interest expense of $5.2 million on the Amended Credit Facility and surplus notes. |
A portion of the increase in underwriting expenses paid was related to one-time integration and restructuring expenses incurred in the first nine months of 2009.
Net cash provided by investing activities was $25.5 million for the nine months ended September 30, 2009, as compared to $19.7 million of net cash used for the same period of the prior year. The difference was primarily attributable to a reduction in the purchase of fixed maturities, as cash was used for the repurchase of our common stock.
Net cash used in financing activities was $62.1 million for the nine months ended September 30, 2009, as compared to $126.6 million of net cash provided for the same period in 2008. The majority of cash used by financing activities was to repurchase approximately $53.6 million of our common stock and pay dividends to stockholders. In 2008, the cash was provided by proceeds from our Amended Credit Facility, which cash was later used for the acquisition of AmCOMP.
Investments
We employ an investment strategy that emphasizes asset quality and considers the durations of fixed maturity securities against anticipated claim payments and expenditures, other liabilities and capital needs. Our investment portfolio is structured so that investments mature periodically over time in reasonable relation to current expectations of future claim payments. Currently, we make claim payments from positive cash flow from operations and use excess cash to invest in operations, invest in marketable securities, return capital to our stockholders and fund our growth strategy. As of September 30, 2009, the amortized cost of our investment portfolio was $1.96 billion and the fair value was $2.11 billion.
At September 30, 2009, our investment portfolio, which is classified as available-for-sale, was made up almost entirely of investment grade fixed maturity securities whose fair values may fluctuate due to interest rate changes. We strive to limit interest rate risk by managing the duration of our fixed maturity securities. As of September 30, 2009, our fixed maturity securities (excluding cash and cash equivalents) had a duration of 5.08. To minimize interest rate risk, our portfolio is weighted toward short-term and intermediate-term bonds; however, our investment strategy balances consideration of duration, yield and credit risk. Our current investment guidelines require that the minimum weighted average quality of our fixed maturity securities portfolio shall be “AA.” As of September 30, 2009, our fixed maturity securities portfolio had an average quality of “AA+,” with approximately 77.1% of the carrying value of our investment portfolio rated “AA” or better. Agency-backed mortgage pass-throughs totaled $290.5 million, or 13.7%, of the total portfolio. We had no subprime mortgage debt securities or derivative securities relating thereto as of September 30, 2009.
We carry our portfolio of equity securities on our balance sheet at fair value. In order to minimize our exposure to equity price risk and the resulting increases and decreases to our assets, we invest primarily in equity securities of mid-to-large capitalization issuers and seek to diversify our equity holdings across several industry sectors. At September 30, 2009, the equity allocation of our investment portfolio was 3.1%, slightly above our target of 3%.
Given the economic uncertainty and continued market volatility, we believe our allocation best meets our strategy to preserve capital for policyholders, provide sufficient income to support insurance operations, and to effectively grow book value over a long-term investment horizon.
Our investment guidelines have been modified to meet our consolidated business strategy. The revised guidelines incorporate lower fixed income duration parameters, a reduction in target equity balances, a lower target weight for the tax-exempt municipal fixed income sector and revised benchmark compositions. Our overall investment philosophy is to maximize total investment returns within the constraints of prudent portfolio risk. We employ Conning Asset
41
Management (Conning) to act as our independent investment advisor. Conning follows our written investment guidelines based upon strategies approved by the EHI Board of Directors. In addition to the construction and management of the portfolio, we utilize the investment advisory services of Conning. These services include investment accounting and company modeling using Dynamic Financial Analysis (DFA). The DFA tool is utilized in developing a tailored set of portfolio targets and objectives that are used in constructing an optimal portfolio.
The following table shows the fair values of various categories of invested assets, the percentage of the total fair value of our invested assets represented by each category and the tax equivalent yield based on the fair value of each category of invested assets as of September 30, 2009:
| | | | | | | | | | |
Category | | Estimated Fair Value | | Percentage of
Total | | Yield | |
| |
| |
| |
| |
| | (in thousands, except percentages) | |
| | | | | | | | | | |
U.S. Treasuries | | $ | 166,025 | | | 7.9 | % | | 3.9 | % |
U.S. Agencies | | | 137,455 | | | 6.5 | | | 4.4 | |
States and municipalities | | | 1,053,320 | | | 49.8 | | | 5.8 | |
Corporate securities | | | 344,210 | | | 16.3 | | | 6.2 | |
Residential mortgaged-backed securities | | | 294,958 | | | 13.9 | | | 5.7 | |
Commercial mortgaged-back securities | | | 36,366 | | | 1.7 | | | 5.2 | |
Asset-backed securities | | | 13,782 | | | 0.7 | | | 5.3 | |
Short-term investments | | | 3,000 | | | 0.1 | | | 6.6 | |
Equity securities | | | 65,746 | | | 3.1 | | | 4.3 | |
| |
|
| |
|
| | | | |
Total investments | | $ | 2,114,862 | | | 100.0 | % | | | |
| |
|
| |
|
| | | | |
Weighted average yield | | | | | | | | | 5.6 | |
The average credit rating for our fixed maturity portfolio, using ratings assigned by Standard & Poor’s, was AA+ at September 30, 2009. The following table shows the ratings distribution of our fixed income portfolio as of September 30, 2009, as a percentage of total market value:
| | | | |
Rating | | Percentage of Total
Market Value | |
| |
|
|
“AAA” | | | 41.3 | % |
“AA” | | | 35.7 | % |
“A” | | | 17.6 | % |
“BBB” | | | 5.4 | % |
| |
|
| |
Total | | | 100.0 | % |
| |
|
| |
We regularly assess individual securities as part of our ongoing portfolio management, including the identification of declines in fair values. All securities in an unrealized loss position are reviewed to determine whether the impairment is other-than-temporary. Factors considered in determining whether a decline is other-than-temporary include the length of time and the extent to which fair value has been below cost, historical and projected company financial performance and near-term prospects of the issuer, the outlook for industry sectors, credit ratings and macro-economic changes and our intent on not selling the securities and given that it is not more likely than not that we will be required to sell the securities until fair value recovers above cost, or to maturity.
For the nine months ended September 30, 2009, we recognized an impairment of $1.9 million in the fair value of equity securities in our investment portfolio. The impairment was recognized as a result of the severity and duration of the decline in the market values of these securities primarily due to market conditions. We determined that the remaining unrealized losses on securities in our investment portfolio were not considered to be other-than-temporary due to the financial condition and the near term prospects of the issuers and/or the interest rate environment and not the credit quality of the issuers. Based on our review as described above, we believe that we have appropriately identified other-than-temporary declines in fair value of our remaining unrealized losses at September 30, 2009.
42
The cost or amortized cost, gross unrealized gains, gross unrealized losses and estimated fair value of our investments at September 30, 2009, were as follows:
| | | | | | | | | | | | | |
| | Amortized
Cost | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Estimated
Fair Value | |
| |
| |
| |
| |
| |
| | (in thousands) |
Fixed maturity securities | | | | | | | | | | | | | |
U.S. Treasuries | | $ | 156,549 | | $ | 9,548 | | $ | (72 | ) | $ | 166,025 | |
U.S. Agencies | | | 129,101 | | | 8,354 | | | — | | | 137,455 | |
States and municipalities | | | 983,993 | | | 69,731 | | | (404 | ) | | 1,053,320 | |
Corporate | | | 318,774 | | | 26,129 | | | (693 | ) | | 344,210 | |
Residential mortgaged-backed securities | | | 278,169 | | | 17,558 | | | (769 | ) | | 294,958 | |
Commercial mortgaged-backed securities | | | 36,046 | | | 616 | | | (296 | ) | | 36,366 | |
Asset-backed securities | | | 13,220 | | | 562 | | | — | | | 13,782 | |
| |
|
| |
|
| |
|
| |
|
| |
Total fixed maturity securities | | | 1,915,852 | | | 132,498 | | | (2,234 | ) | | 2,046,116 | |
Short-term investments | | | 2,998 | | | 2 | | | — | | | 3,000 | |
| |
|
| |
|
| |
|
| |
|
| |
Total fixed maturity and short-term investments | | | 1,918,850 | | | 132,500 | | | (2,234 | ) | | 2,049,116 | |
| |
|
| |
|
| |
|
| |
|
| |
| | | | | | | | | | | | | |
Equity securities | | | | | | | | | | | | | |
Consumer goods | | | 14,739 | | | 6,991 | | | (10 | ) | | 21,720 | |
Energy and utilities | | | 4,715 | | | 4,708 | | | — | | | 9,423 | |
Financial | | | 6,611 | | | 2,914 | | | (7 | ) | | 9,518 | |
Technology and communications | | | 7,930 | | | 6,159 | | | (3 | ) | | 14,086 | |
Industrial and other | | | 6,257 | | | 4,743 | | | (1 | ) | | 10,999 | |
| |
|
| |
|
| |
|
| |
|
| |
Total equity securities | | | 40,252 | | | 25,515 | | | (21 | ) | | 65,746 | |
| |
|
| |
|
| |
|
| |
|
| |
Total investments | | $ | 1,959,102 | | $ | 158,015 | | $ | (2,255 | ) | $ | 2,114,862 | |
| |
|
| |
|
| |
|
| |
|
| |
Fixed income risk premiums and credit spread reductions in non-Treasury fixed income sectors, particularly in corporates and municipals, during the nine months ended September 30, 2009, resulted in a $91.1 million increase in net unrealized gains in our fixed maturity securities portfolio from $39.2 million at December 31, 2008 to $130.3 million at September 30, 2009.
We are required by various state laws and regulations to keep securities in a depository account. At September 30, 2009 and 2008, securities having a fair value of $564.2 million and $518.3 million, respectively, were on deposit. These laws and regulations govern not only the amount, but also the type of security that is eligible for deposit and in all cases are restricted or limited to fixed maturity securities. Additionally, certain reinsurance contracts require company funds to be held in trust for the benefit of the ceding reinsurer to secure the outstanding liabilities assumed by us. The fair value of securities held in trust for reinsurance at September 30, 2009 and 2008, was $6.1 million and $5.0 million, respectively. The Amended Credit Facility is secured by fixed maturity securities and cash and cash equivalents, which had a fair value of $211.7 million and $186.7 million at September 30, 2009 and 2008, respectively.
43
Contractual Obligations and Commitments
The following table identifies our long-term debt and contractual obligations as of September 30, 2009:
| | | | | | | | | | | | | | | | |
| | Payment Due By Period | |
| |
| |
| | Total | | Less Than
1 Year | | 1-3 Years | | 4-5 Years | | More Than
5 Years | |
| |
| |
| |
| |
| |
| |
| | (in thousands) | |
| | | | | | | | | | | | | | | | |
Operating Leases | | $ | 35,855 | | $ | 3,187 | | $ | 13,149 | | $ | 9,518 | | $ | 10,001 | |
Purchased Liabilities | | | 7,825 | | | 745 | | | 4,963 | | | 1,921 | | | 196 | |
Notes Payable(1) | | | 220,524 | | | 52,049 | | | 104,661 | | | 2,918 | | | 60,896 | |
Capital Leases | | | 304 | | | 213 | | | 56 | | | 35 | | | — | |
Losses and LAE reserves(2)(3) | | | 2,443,644 | | | 246,702 | | | 302,932 | | | 213,458 | | | 1,680,552 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Total Contractual Obligations | | $ | 2,708,152 | | $ | 302,896 | | $ | 425,761 | | $ | 227,850 | | $ | 1,751,645 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(1) | Notes payable obligations reflect payments for the principal and estimated interest expense that is based on LIBOR rates plus a margin. The estimated interest expense was based on the contractual obligations of the debt outstanding as of September 30, 2009. The interest rates range from 1.54% to 5.50%. The Amended Credit Facility has principal payments of $50 million due December 31, 2009, December 31, 2010 and March 26, 2011. |
| |
(2) | The losses and LAE reserves are presented gross of our reinsurance recoverables on unpaid losses, which are as follows for each of the periods presented above: |
| | | | | | | | | | | | | | | | |
| | Recoveries Due By Period | |
| |
| |
| | Total | | Less Than
1 Year | | 1-3 Years | | 4-5 Years | | More Than
5 Years | |
| |
| |
| |
| |
| |
| |
| | (in thousands) | |
| | | | | | | | | | | | | | | | |
Reinsurance Recoverables | | $ | (1,047,139 | ) | $ | (43,953 | ) | $ | (85,073 | ) | $ | (82,237 | ) | $ | (835,876 | ) |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
(3) | Estimated losses and LAE reserve payment patterns have been computed based on historical information. As a result, our calculation of losses and LAE reserve payments by period is subject to the same uncertainties associated with determining the level of reserves and to the additional uncertainties arising from the difficulty of predicting when claims (including claims that have not yet been reported to us) will be paid. For a discussion of our reserving process, see “—Critical Accounting Policies-Reserves for Losses and Loss Adjustment Expenses.” Actual payments of losses and LAE by period will vary, perhaps materially, from the above table to the extent that current estimates of losses and LAE reserves vary from actual ultimate claims amounts as a result of variations between expected and actual payout patterns. |
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Critical Accounting Policies
These unaudited interim consolidated financial statements include amounts based on informed estimates and judgments of management for those transactions that are not yet complete. Such estimates and judgments affect the reported amounts in the financial statements. Those estimates and judgments that were most critical to the preparation of the financial statements involved the following: (a) reserves for losses and loss adjustment expenses; (b) reinsurance recoverables; (c) recognition of premium income; (d) deferred policy acquisition costs; (e) deferred income taxes; and (f) valuation of investments. These estimates and judgments require the use of assumptions about matters that are highly uncertain and therefore are subject to change as facts and circumstances develop. If different estimates and judgments had been applied, materially different amounts might have been reported in the financial statements. Our accounting policies are discussed under “Critical Accounting Policies” in the Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report. Additional information regarding our accounting policy for reserves for loss and loss adjustment expenses and reinsurance recoverables follows.
Reserves for Losses and Loss Adjustment Expenses
We are directly liable for losses and LAE under the terms of insurance policies our insurance subsidiaries underwrite. Significant periods of time can elapse between the occurrence of an insured loss, the reporting of the loss to the insurer and the insurer’s payment of that loss. Our loss reserves are reflected in our balance sheets under the line item caption “unpaid losses and loss adjustment expenses.” As of September 30, 2009, our reserves for unpaid losses and LAE, net of reinsurance, were $1.40 billion.
44
Accounting for workers’ compensation insurance requires us to estimate the liability for the expected ultimate cost of unpaid losses and LAE, referred to as loss reserves, as of a balance sheet date. Our estimate of loss reserves is intended to equal the difference between the expected ultimate losses and LAE of all claims that have occurred as of a balance sheet date and amounts already paid. Management establishes the loss reserve based on its own analysis of emerging claims experience and environmental conditions in our markets and a review of the results of various actuarial projection methods and their underlying assumptions. Our aggregate carried reserve for unpaid losses and LAE is a point estimate, which is the sum of our reserves for each accident year in which we have exposure. This aggregate carried reserve calculated by us represents our best estimate of our outstanding unpaid losses and LAE.
Although claims for which reserves are established may not be paid for several years or more, we do not discount loss reserves in our financial statements for the time value of money.
The three main components of our reserves for unpaid losses and LAE are case reserves, “incurred but not reported” or IBNR reserves, and LAE reserves.
Case reserves are estimates of future claim payments based upon periodic case-by-case evaluation and the judgment of our claims adjusting staff, as applied at the individual claim level. Our claims examiners determine these case reserves for reported claims on a claim-by-claim basis, based on the examiner’s judgment and experience and on our case reserving practices. We update and monitor our case reserves frequently to appropriately reflect current information.
IBNR is an actuarial estimate of future claim payments beyond those considered in the case reserve estimates, relating to claims arising from accidents that occurred during a particular time period on or prior to the balance sheet date. Thus, IBNR is the compilation of the estimated ultimate losses for each accident year less amounts that have been paid and case reserves. IBNR reserves, unlike case reserves, do not apply to a specific claim, but rather apply to the entire body of claims arising from a specific time period. IBNR primarily provides for costs due to:
| | |
| • | future claim payments in excess of case reserves on recorded open claims; |
| | |
| • | additional claim payments on closed claims; and |
| | |
| • | the cost of claims that have not yet been reported to us. |
Most of our IBNR reserves relate to estimated future claim payments over and above our case reserves on recorded open claims. For workers’ compensation, most claims are reported to the employer and to the insurance company relatively quickly, and relatively small amounts are paid on claims that already have been closed (which we refer to as “reopenings”). Consequently, late reporting and reopening of claims are a less significant part of IBNR for our insurance subsidiaries.
LAE reserves are our estimate of the diagnostic, legal, administrative and other similar expenses that we will pay in the future to manage claims that have occurred on or before the balance sheet date. LAE reserves are established in the aggregate, rather than on a claim-by-claim basis.
A portion of our losses and LAE obligations are ceded to unaffiliated reinsurers. We establish our losses and LAE reserves both gross and net of ceded reinsurance. The determination of the amount of reinsurance that will be recoverable on our losses and LAE reserves includes both the reinsurance recoverable from our excess of loss reinsurance policies, as well as reinsurance recoverable under the terms of the LPT Agreement. Our reinsurance arrangements also include an intercompany pooling arrangement between EICN, ECIC, EPIC and EAC whereby each of the insurance subsidiaries cedes some of its premiums, losses, and LAE to the other, but this intercompany pooling arrangement does not affect our consolidated financial statements.
45
Our reserve for unpaid losses and LAE (gross and net), as well as the above-described main components of such reserves were as follows:
| | | | | | | |
| | September 30,
2009 | | December 31,
2008 | |
| |
| |
| |
| | (in thousands) | |
| | | | | | | |
Case reserves | | $ | 893,769 | | $ | 886,789 | |
IBNR | | | 1,236,793 | | | 1,293,313 | |
LAE | | | 313,082 | | | 326,376 | |
| |
|
| |
|
| |
Gross unpaid losses and LAE | | | 2,443,644 | | | 2,506,478 | |
Less: Reinsurance recoverables on unpaid losses and LAE, gross | | | 1,047,139 | | | 1,076,350 | |
| |
|
| |
|
| |
Net unpaid losses and LAE | | $ | 1,396,505 | | $ | 1,430,128 | |
| |
|
| |
|
| |
Actuarial methodologies are used by workers’ compensation insurance companies, including us, to analyze and estimate the aggregate amount of unpaid losses and LAE. As mentioned above, management considers the results of various actuarial projection methods and their underlying assumptions among other factors in establishing the reserves for unpaid losses and LAE.
Judgment is required in the actuarial estimation of unpaid losses and LAE. The judgments include the selection of methodologies to project the ultimate cost of claims; the selection of projection parameters based on historical company data, industry data, and other benchmarks; the identification and quantification of potential changes in parameters from historical levels to current and future levels due to changes in future claims development expectations caused by internal or external factors; and the weighting of differing reserve indications that result from alternative methods and assumptions. The adequacy of our ultimate loss reserves, which are based on estimates, is inherently uncertain and represents a significant risk to our business, which we attempt to mitigate through our claims management process and by monitoring and reacting to statistics relating to the cost and duration of claims. However, no assurance can be given as to whether the ultimate liability will be more or less than our loss reserve estimates.
We retain an independent actuarial consulting firm (Consulting Actuary) to perform comprehensive studies of our losses and LAE liability on a semi-annual basis. The role of our Consulting Actuary is to conduct sufficient analyses to produce a range of reasonable estimates, as well as a point estimate, of our unpaid losses and LAE liability, and to present those results to our actuarial staff and to management.
For purposes of analyzing claim payment and emergence patterns and trends over time, we compile and aggregate our claims data by grouping the claims according to the year or quarter in which the claim occurred (“accident year” or “accident quarter”), since each such group of claims is at a different stage of progression toward the ultimate resolution and payment of those claims. The claims data is aggregated and compiled separately for different types of claims and/or claimant benefits. For our Nevada business, where a substantial detailed historical database is available from the Nevada State Industrial Insurance System (the Fund), (from which our Nevada insurance subsidiary, EICN, assumed assets, liabilities and operations in 2000), these separate groupings of benefit types include death, permanent total disability, permanent partial disability, temporary disability, medical care and vocational rehabilitation. Third party subrogation recoveries are separately analyzed and projected.
Both the Consulting Actuary and the internal actuarial staff select and apply a variety of generally accepted actuarial methods to our data. The methods applied vary somewhat according to the type of claim benefit being analyzed. The primary methods utilized in recent evaluations are: Paid Bornhuetter-Ferguson Method; Reported Bornhuetter-Ferguson Method; Paid Development Method; Reported Development Method; Frequency-Severity Method; and Initial Expected Loss Method. Each of the methods requires the selection and application of parameters and assumptions. The key parameters and assumptions are: the pattern with which our aggregate claims data will be paid or will emerge over time; claims cost inflation rates; and trends in the frequency of claims, both overall and by severity of claim. Of these, we believe the most important are the pattern with which our aggregate claims data will be paid or emerge over time and claims cost inflation rates.
Management along with internal actuarial staff and the Consulting Actuary separately analyze LAE and estimate unpaid LAE. This analysis relies primarily on examining the relationship between the aggregate amounts that has been spent on LAE historically, as compared with the dollar volume of claims activity for the corresponding historical calendar periods. Based on these historical relationships, and judgmental estimates of the extent to which claim
46
management resources are focused more intensely on the initial handling of claims than on the ongoing management of claims, the Consulting Actuary selects a range of future LAE estimates that is a function of the projected future claim payment activity. The portion of unpaid LAE that will be recoverable from reinsurers is estimated based on the contractual reinsurance terms.
Based on the results of the analyses conducted, the stability of the historical data, and the characteristics of the various claims segments analyzed, the Consulting Actuary selects a range of estimated unpaid losses and LAE and a point estimate of unpaid losses and LAE, for presentation to internal actuarial staff and management. The selected range is intended to represent the range in which it is most likely that the ultimate losses will fall. This range is narrower than the range of indications produced by the individual methods applied because it is not likely, although it is possible, that the high or low result will emerge for every state, benefit type and accident year. The actuarial point estimate of unpaid losses and LAE is based on a judgmental selection for each benefit type from within the range of results indicated by the different actuarial methods.
Management formally establishes loss reserves for financial statement purposes on a quarterly basis. In doing so, we make reference to the most current analyses of our Consulting Actuary, including a review of the assumptions and the results of the various actuarial methods used by the Consulting Actuary. Comprehensive studies are conducted as of June 30 and December 31 by both internal actuarial staff and the Consulting Actuary. On the alternate quarters, the preceding study results are updated for actual claim payment activity during the quarter.
The Consulting Actuary provides the following analyses using information provided by the Company:
| | |
| • | claim frequency and claim severity trends indicated by the claim activity as well as any emerging claims environment or operational issues that may indicate changing trends; and |
| | |
| • | workers’ compensation industry trends as reported by industry rating bureaus, the media, and other similar sources. |
Management determines the IBNR and LAE components of our loss reserves by establishing a point in the range of the Consulting Actuary’s most recent analysis of unpaid losses and LAE with the selection of the point based on management’s own view of recent and future claim emergence patterns, payment patterns, and trends information obtained from internal actuarial staff pertaining to:
| | |
| • | view of the markets in which we are operating, including economic, business and political conditions; |
| | |
| • | the characteristics of the business we have written in recent quarters; |
| | |
| • | recent and pending recoveries from reinsurance; |
| | |
| • | our view of trends in the future costs of managing claims; and |
| | |
| • | other similar considerations as we view relevant. |
The aggregate carried reserve calculated by management represents our best estimate of our outstanding unpaid losses and LAE. We believe that we should be conservative in our reserving practices due to the “long tail” nature of workers’ compensation claims payouts, the susceptibility of those future payments to unpredictable external forces such as medical cost inflation and other economic conditions, and the actual variability of loss reserve adequacy that we have observed in the workers’ compensation insurance industry.
47
The following table provides a reconciliation of the beginning and ending loss reserves on a GAAP basis:
| | | | | | | |
| | For the Nine
Months Ended
September 30, 2009 | | For the
Year Ended
December 31, 2008 | |
| |
| |
| |
| | (in thousands) | |
Unpaid losses and LAE, gross of reinsurance, at beginning of period | | $ | 2,506,478 | | $ | 2,269,710 | |
Less reinsurance recoverables, excluding bad debt allowance, on unpaid losses and LAE | | | 1,076,350 | | | 1,052,641 | |
| |
|
| |
|
| |
Net unpaid losses and LAE at beginning of period | | | 1,430,128 | | | 1,217,069 | |
Losses and LAE, net of reinsurance, acquired in business combinations | | | — | | | 247,006 | |
Losses and LAE, net of reinsurance, incurred in: | | | | | | | |
Current period | | | 219,627 | | | 226,643 | |
Prior periods | | | (39,593 | ) | | (71,707 | ) |
| |
|
| |
|
| |
Total net losses and LAE incurred during the period | | | 180,034 | | | 154,936 | |
Deduct payments for losses and LAE, net of reinsurance, related to: | | | | | | | |
Current period | | | 48,166 | | | 53,397 | |
Prior periods | | | 165,491 | | | 135,486 | |
| |
|
| |
|
| |
Total net payments for losses and LAE during the period | | | 213,657 | | | 188,883 | |
| |
|
| |
|
| |
Ending unpaid losses and LAE, net of reinsurance | | | 1,396,505 | | | 1,430,128 | |
Reinsurance recoverable, excluding bad debt allowance, on unpaid losses and LAE | | | 1,047,139 | | | 1,076,350 | |
| |
|
| |
|
| |
Unpaid losses and LAE, gross of reinsurance, at end of period | | $ | 2,443,644 | | $ | 2,506,478 | |
| |
|
| |
|
| |
Estimates of incurred losses and LAE attributable to insured events of prior years decreased due to continued favorable development in such prior accident years (actual losses and LAE paid and current projections of unpaid losses and LAE were less than we originally anticipated). The reduction in the estimated liability for unpaid losses and LAE related to prior years was $39.6 million for the nine months ended September 30, 2009 and $71.7 million for the year ended December 31, 2008.
The major sources of favorable development include: (a) actual paid losses have been less than expected and (b) the impact of new information on selected patterns of claims emergence and claim payment used in the projection of future loss payments.
We review our loss reserves each quarter and, as previously discussed, our Consulting Actuary assists our review by performing a comprehensive actuarial analysis and projection of unpaid losses and LAE twice each year. We may adjust our reserves based on the results of our reviews and these adjustments could be significant. If we change our estimates, these changes are reflected in our results of operations during the period in which they are made. Our overall actual claims and LAE experience and emergence in recent years have been more favorable than anticipated in prior evaluations. Our insurance subsidiaries have been operating in a period of drastically changing environmental conditions in our major markets, entry into new markets, and operational changes. During periods characterized by such changes, at each evaluation, the actuaries and management must make judgments as to the relative weight to accord to long-term historical and recent company data, external data, evaluations of environmental changes and other factors in selecting the methods to use in projecting ultimate losses and LAE, the parameters to incorporate in those methods, and the relative weights to accord to the different projection indications. Since the loss reserves are providing for claim payments that will emerge over many years, if management’s projections and loss reserves were established in a manner that reacted quickly to each new emerging trend in the data or in the environment, there would be a high likelihood that future adjustments, perhaps significant in magnitude, would be required to correct for trends that turned out not to be persistent. At each balance sheet evaluation, some losses and LAE projection methods have produced indications above the loss reserve selected by management and some losses and LAE projection methods have produced indications lower than the loss reserve selected by management. At each evaluation, management has given weight to new data, recent indications, and evaluations of environmental conditions and changes that implicitly reflect management’s expectation as to the degree to which the future will resemble the most recent information and most recent changes, as compared with long-term claim payment, claim emergence, and claim cost inflation patterns.
48
As patterns and trends recur consistently over a period of quarters or years, management gives greater implicit weight to these recent patterns and trends in developing our future expectations. In our view, in establishing loss reserves at each historical balance sheet date, we have used prudent judgment in balancing long-term data and recent information.
It is likely that ultimate losses and LAE will differ from the loss reserves recorded in our September 30, 2009 balance sheet. Actual losses and LAE payments could be greater or less than our projections, perhaps significantly.
Our reserve estimates reflect expected increases in the costs of contested claims and assume we will not be subject to losses from significant new legal liability theories. While it is not possible to predict the impact of changes in this environment, if expanded legal theories of liability emerge, our IBNR claims may differ substantially from our IBNR reserves. Our reserve estimates assume that there will not be significant future changes in the regulatory and legislative environment. The impact of potential changes in the regulatory or legislative environment is difficult to quantify in the absence of specific, significant new regulation or legislation. In the event of significant new regulation or legislation, we will attempt to quantify its impact on our business.
The range of potential variation of actual ultimate losses and LAE from our current reserve for unpaid losses and LAE is difficult to estimate because of the significant environmental changes in the markets, particularly California and Florida, and because our insurance subsidiaries do not have a lengthy operating history in the markets outside Nevada.
Loss Portfolio Transfer (LPT)
Under the LPT Agreement, $1.525 billion in liabilities for incurred but unpaid losses and LAE related to claims incurred by EICN prior to July 1, 1995 was ceded for consideration of $775.0 million in cash. The estimated remaining liabilities subject to the LPT Agreement were approximately $899.0 million and $929.6 million as of September 30, 2009 and December 31, 2008, respectively. Losses and LAE paid with respect to the LPT Agreement totaled approximately $478.4 million and $447.9 million as of September 30, 2009 and December 31, 2008, respectively.
We account for the LPT Agreement as retroactive reinsurance. Upon entry into the LPT Agreement, an initial deferred reinsurance gain was recorded as a liability in our consolidated balance sheet. This gain is being amortized using the recovery method, whereby the amortization is determined by the proportion of actual reinsurance recoveries to total estimated recoveries, and the amortization is reflected in losses and LAE. In addition, we are entitled to receive a contingent commission under the LPT Agreement. The contingent commission is estimated based on both actual results to date and projections of expected ultimate losses under the LPT Agreement. Increases and decreases in the estimated contingent commission are reflected in our commission expense in the period that the estimate is revised.
New Accounting Standards
In June 2009, the FASB issued SFAS No. 168,The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles a replacement of FASB Statement No. 162 (SFAS No. 168). SFAS No. 168 establishes the FASB Accounting Standards Codification as the single source of authoritative accounting principles in the preparation of financial statements in conformity with GAAP. SFAS No. 168 explicitly recognizes rules and interpretive releases of the Securities and Exchange Commission (SEC) under federal securities laws as authoritative GAAP for SEC registrants. SFAS No. 168 was effective for financial statements issued for periods ending after September 15, 2009. The Company adopted SFAS No. 168 on July 1, 2009 and it had no material impact on the Company’s consolidated financial condition and results of operations.
In April 2009, the FASB issued FSP FAS 115-2,Recognition and Presentation of Other-Than-Temporary Impairments(FSP FAS 115-2). FSP FAS 115-2 changes the accounting for other-than-temporary impairments (OTTI) on debt securities by: (a) replacing the current requirement that a holder has the positive intent to hold an impaired debt security to recovery with a requirement that a holder does not have the intent to sell an impaired debt security and it is not more likely than not that it will be required to sell the debt security before recovery; (b) requiring the OTTI to be separated into: (i) the amount representing the decrease in cash flows expected to be collected (credit loss), which is recognized in earnings and (ii) the amount representing all other factors, which is recognized in other comprehensive income; and (c) amending existing disclosure requirements, extending those requirements to interim periods and requiring new disclosures intended to provide further disaggregated information as well as information about how the amount of OTTI that was recognized in earnings was determined. Upon adoption, FSP FAS 115-2 requires entities to report a cumulative effect adjustment as of the beginning of the period of adoption to reclassify the non-credit loss component, previously recognized in earnings, from retained earnings to other comprehensive income. FSP FAS 115-2 was effective for interim and annual periods ending after June 15, 2009 and had no impact on the consolidated financial position or results of operations. The Company has included the required disclosures in Note 5. The guidance for FSP
49
FAS 115-2 may now be found in the new codification as a component of ASC 320-10-35,Investments–Debt and EquitySecurities.
In April 2009, the FASB issued FSP FAS 157-4,Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Indentifying Transactions That Are Not Orderly(FSP FAS 157-4). FSP FAS 157-4 provides additional guidance on: (a) estimating fair value when the volume of activity for an asset or liability has significantly decreased in relation to normal market activity for the asset or liability; and (b) identifying circumstances that may indicate that a transaction is not orderly. FSP FAS 157-4 requires additional interim disclosures of the inputs and valuation techniques used to measure fair value. Additionally FSP FAS 157-4 modifies the current fair value disclosure categories for debt and equity securities. FSP FAS 157-4 was effective for interim and annual periods ending after June 15, 2009 and did not have a material impact on the consolidated financial statements. The guidance for FSP FAS 157-4 may now be found in the new codification as a component of ASC 820-10-65-4,Fair Value Measurements and Disclosures.
In April 2009, the FASB issued FSP FAS 107-1,Interim Disclosures About Fair Value of Financial Instruments(FSP FAS 107-1). FSP FAS 107-1 extends the annual disclosure requirements of SFAS 107,Fair Value of Financial Instruments, to interim financial statements of publicly traded companies. FSP FAS 107-1 is effective for interim and annual periods ending after June 15, 2009. The Company has included required disclosures in these Notes to Consolidated Financial Statements. The guidance for FSP FAS 107-1 may now be found in the new codification as a component of ASC 825-10-65-1,Financial Instruments.
In May 2009, the FASB issued SFAS No. 165,Subsequent Events, which sets forth general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. SFAS No. 165 is effective for periods ending after June 15, 2009. SFAS No. 165 had no impact on our consolidated financial condition or results of operations. We evaluated subsequent events through November 5, 2009. The guidance for SFAS No. 165 may now be found in the new codification as a component of ASC 855,Subsequent Events.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk is the risk of potential economic loss principally arising from adverse changes in the fair value of financial instruments. The major components of market risk affecting us are credit risk, interest rate risk and equity price risk. We have not experienced any material changes in credit or equity price risk since December 31, 2008.
Interest Rate Risk
Our investment portfolio consists primarily of fixed maturity securities with a fair value of $2.05 billion at September 30, 2009. The primary market risk exposure to our fixed maturity securities portfolio is interest rate risk, which we limit by managing the duration of our investment portfolio.
Fixed maturity securities include residential mortgage-backed securities, which totaled $295.0 million, or 14.0% of the total portfolio as of September 30, 2009. Agency-backed mortgage pass-throughs totaled $290.5 million, 98.5% of the mortgage-backed securities portion of the portfolio, or 13.7%, of the total portfolio.
The following table summarizes our interest rate risk illustrating the sensitivity of the fair value of fixed maturity securities to selected hypothetical changes in interest rates as of September 30, 2009. The selected scenarios are not predictions of future events, but rather illustrate the effect that such events may have on the fair value of our fixed maturity securities portfolio and stockholders’ equity.
| | | | | | | | | |
| | Hypothetical Change in Interest Rates | | Estimated
Increase (Decrease)
in Fair Value | |
|
|
| |
| |
| | | | (in thousands, except percentages) | |
300 | | basis point rise | | $ | (275,502 | ) | | (13.5 | )% |
200 | | basis point rise | | | (190,914 | ) | | (9.3 | ) |
100 | | basis point rise | | | (98,794 | ) | | (4.8 | ) |
50 | | basis point decline | | | 51,108 | | | 2.5 | |
100 | | basis point decline | | | 103,132 | | | 5.0 | |
50
Item 4. Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act) as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report to provide assurance that information we are required to disclose in reports that are filed or submitted under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in the rules and forms specified by the SEC.
There have not been any changes in our internal controls over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
51
PART II – OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, the Company is involved in pending and threatened litigation in the normal course of business in which claims for monetary damages are asserted. In the opinion of management, the ultimate liability, if any, arising from such pending or threatened litigation is not expected to have a material effect on our results of operations, liquidity or financial position.
Item 1A. Risk Factors
We have disclosed in our Annual Report the most significant risk factors that can impact year-to-year comparisons and may affect the future performance of the Company’s business. On a quarterly basis, we review these disclosures and update the risk factors, as appropriate. As of the date of this report, there have been no material changes to the risk factors described in our Annual Report.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchase of Equity Securities
The following table summarizes the repurchase of our common stock for the three months ended September 30, 2009:
| | | | | | | | | | | |
Period | | Total Numbers of
Shares Purchased | | Average Price
Paid Per Share(1) | | Total Number
of Shares
Purchased as
Part of Publicly
Announced
Program | | Maximum
Number (or
Approximate
Dollar Value) of
Shares that May
Yet be
Purchased
Under the
Program(2) | |
| |
| |
| |
| |
| |
| | | | | | | | (millions) | |
July 1—July 31, 2009 | | 478,200 | | $ | 13.17 | | 478,200 | | $ | 47.4 | |
August 1—August 31, 2009 | | 491,834 | | | 14.86 | | 491,834 | | | 40.1 | |
September 1—September 30, 2009 | | 577,072 | | | 15.08 | | 577,072 | | | 31.4 | |
| |
| | | | |
| | | | |
Total Repurchase | | 1,547,106 | | $ | 14.42 | | 1,547,106 | | | | |
| |
| | | | |
| | | | |
| |
|
| |
(1) | Includes fees and commissions paid on stock repurchases. |
| |
(2) | On February 21, 2008, the Board of Directors authorized a stock repurchase program of up to $100.0 million of our common stock through June 30, 2009. On February 25, 2009, the Board of Directors extended this program through December 31, 2009. The shares may be repurchased from time to time at prevailing market prices in open market or private transactions. The repurchases may be commenced or suspended from time to time without prior notice. There can be no assurance that we will continue to undertake any repurchase of our common stock pursuant to the program. |
On November 4, 2009, the EHI Board of Directors authorized a share repurchase program for up to $50 million of the Company’s common stock. The Company expects that shares may be purchased at prevailing market prices from January 1, 2010 through December 31, 2010 through a variety of methods, including open market or private transactions, in accordance with applicable laws and regulations. The timing and actual number of shares repurchased will depend on a variety of factors, including the share price, corporate and regulatory requirements and other market and economic conditions. Repurchases under the 2010 Stock Repurchase Program may be commenced or suspended from time to time without prior notice, and the program may be suspended or discontinued at any time.
Item��3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
The following is provided pursuant to Item 5.03 of Form 8-K, "Amendments to Articles of Incorporation or Bylaws; Change in Fiscal Year." Effective November 4, 2009, the Company's Board of Directors amended the Company's Bylaws. The Bylaws were amended to, among other things, expand the information required to be provided to the Company by a stockholder proposing business or making a director nomination. A summary of the material amendments to the Bylaws follows:
| | 1. | Article I, Sections 9 and 10 were amended to require a stockholder (a) proposing business at an annual meeting or (b) nominating a person for election to the Board of Directors at an annual or special meeting of stockholders to disclose additional information regarding the stockholder. In addition to other matters, the notice to the Company must disclose the stockholder's (i) name and address and a description of the proposal or certain information about the director nominee; (ii) ownership of derivative securities and information regarding any other transaction, agreement, arrangement or understanding involving the stockholder with the effect or intent of mitigating losses, managing risk or benefiting from share price changes, or increasing or decreasing the voting power or economic interest of such stockholder or any of its affiliates or associates; and (iii) other interests in the proposed business or nomination. A stockholder proposing business or making a nomination must update the notice provided to the Company to the extent that the information contained in the notice changes in any material respect as of the record date for the applicable stockholder meeting. |
| |
| | 2. | Article I, Sections 9 and 10 were amended to provide that the Company is required to re-open the advance notice window for business proposed by a stockholder to be brought before an annual meeting and nominations of directors if the date of the annual meeting is not set for within 25 (rather than 30) days of the anniversary date of the prior year's meeting. |
| |
| | 3. | Article I, Section 9 of the Bylaws was amended to make clear that the advance notice applies to any business proposed to be brought before an annual meeting of stockholders, other than any proposal made pursuant to Rule 14a-8 of the SEC. |
The foregoing description of the amendments to the Bylaws does not purport to be complete and is qualified in its entirety by reference to the full text of the Bylaws, a copy of which is attached hereto as Exhibit 3.1 and is incorporated herein by reference.
52
Item 6. Exhibits
| | | | | | | | | | |
Exhibit
No. | | | | Included
Herewith | | Incorporated by Reference Herein |
| | | |
|
| Description of Exhibit | | | Form | | Exhibit | | Filing Date |
| |
| |
| |
| |
| |
|
3.1 | | Amended and Restated By laws of Employers Holdings, Inc. | | X | | | | | | |
31.1 | | Certification of Douglas D. Dirks Pursuant to Section 302 | | X | | | | | | |
31.2 | | Certification of William E. Yocke Pursuant to Section 302 | | X | | | | | | |
32.1 | | Certification of Douglas D. Dirks Pursuant to Section 906 | | X | | | | | | |
32.2 | | Certification of William E. Yocke Pursuant to Section 906 | | X | | | | | | |
53
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | | |
| EMPLOYERS HOLDINGS, INC. | | | |
| | | | | |
| Date: | November 5, 2009 | By: | | /s/ Douglas D. Dirks |
| | | | |
|
| | | | Name: | Douglas D. Dirks |
| | | | Title: | President and Chief Executive Officer |
| | | | | (Principal Executive Officer) |
| | | | | |
| Date: | November 5, 2009 | By: | | /s/ William E. Yocke |
| | | | |
|
| | | | Name: | William E. Yocke |
| | | | Title: | Executive Vice President and Chief Financial Officer |
| | | | | (Principal Financial and Accounting Officer) |
