Lancaster, PA – Eastern Insurance Holdings, Inc. (“EIHI” or the “Company”) (NASDAQ: EIHI) recently reported net income from continuing operations for the three months ended September 30, 2012 of $2.8 million, or $0.36 per diluted share, compared to net income of $656,000, or $0.08 per diluted share, for the same period in 2011. EIHI’s net income for the three months ended September 30, 2012 includes net realized investment gains of $0.08 per diluted share compared to net realized investment losses of $0.11 per diluted share for the same period in 2011.
“I am pleased to report another quarter of solid results in our workers’ compensation insurance business during 2012, including operating earnings of $0.28 per diluted share for the three months ended September 30, 2012,” said Michael L. Boguski, President and Chief Executive Officer. “Our 2012 third quarter consolidated and workers’ compensation insurance segment combined ratios were 97.2 percent and 93.8 percent, respectively. The favorable results were driven by solid growth in workers’ compensation insurance direct written premiums, positive audit premium, renewal rate increases and a reduction in our consolidated expense ratio. Workers’ compensation insurance direct written premium increased by 15.8 percent to $48.4 million for the three months ended September 30, 2012 compared to $41.8 million for the same period in 2011, driven by growth in each of our Mid-Atlantic, Southeast and Midwest regional offices. During the third quarter of 2012, the Company recorded additional audit premium of $1.9 million compared to $1.1 million for the same period in 2011. We secured renewal rate increases of 3.5 percent in 2012 compared to 0.9 percent in 2011. Our consolidated expense ratio was 28.8 percent for the third quarter of 2012, which included a 1.4 point increase attributable to the change in accounting for deferred acquisition costs, compared to 29.9 percent for the same period in 2011. The reduction in the consolidated expense ratio is primarily attributable to growth in net earned premium, prudent expense management strategies, and an increase in Alternative Markets fee-based revenue, which is recorded as a reduction to underwriting expenses, partially offset by the 1.4 point increase attributable to the change in accounting for deferred acquisition costs.”
Boguski continued, “Our diluted book value per share was $16.57 as of September 30, 2012 compared to $16.15 per share as of June 30, 2012, an increase of 2.6 percent. The increase in diluted book value per share during the quarter was primarily due to favorable workers’ compensation insurance operating results and an increase in after-tax accumulated other comprehensive income related to our investment portfolio.”
Boguski added, “I continue to be pleased with our progress on our 2012 strategic plan. We recently announced the hiring of a Regional Business Executive for our Gulf South Regional Office in Madison, Mississippi to support the Company’s geographic diversification initiatives. ‘ParallelPay,’ the Company’s pay-as-you-go initiative, continues to post impressive production results at favorable loss ratios. ParallelPay’s direct written premium was $8.4 million for the third quarter of 2012 compared to $6.4 million for the same period in 2011.”
Consolidated highlights for the third quarter include:
- Revenue for the third quarter of 2012 increased to $43.7 million compared to $33.4 million for the same period in 2011. Net premiums earned were $41.4 million for the third quarter of 2012 compared to $33.9 million for the same period in 2011.
- Net investment income was $892,000 ($615,000 after-tax) for the three months ended September 30, 2012, compared to $1.0 million ($695,000 after-tax) for the same period in 2011.
- The change in equity interest in limited partnerships was income of $290,000 ($200,000 after-tax) for the three months ended September 30, 2012, compared to a loss of $354,000 ($260,000 after-tax) for the same period in 2011, an increase of $644,000.
- Net realized investment gains, excluding the segregated portfolio cell reinsurance segment, were $983,000 ($625,000 after-tax) for the three months ended September 30, 2012 compared to net realized investment losses, excluding the segregated portfolio cell reinsurance segment, of $1.3 million ($835,000 after-tax) for the same period in 2011, which included convertible bond investment portfolio after-tax net realized investment gains of $383,000 for the three months ended September 30, 2012 and convertible bond after-tax net realized investment losses of $976,000 for the three months ended September 30, 2011. The Company accounts for changes in the estimated fair value of its convertible bond portfolio as a realized gain or loss
Segment Operating Results
Workers’ Compensation Insurance
EIHI’s workers’ compensation insurance segment reported net income of $3.1 million for the third quarter of 2012, compared to $1.5 million for the third quarter of 2011. Highlights for the third quarter include:
- Direct written premiums increased to $48.4 million for the three months ended September 30, 2012, compared to $41.8 million for the same period in 2011, an increase of 15.8 percent. Direct written premium includes premium ceded to the segregated portfolio cell reinsurance segment of $8.8 million and $8.1 million for the three months ended September 30, 2012 and 2011, respectively.
- Audit premium, which results from an examination of the policyholders’ payroll and other records, resulted in the recording of additional premium to the Company which increased net premiums earned by $1.9 million for the three months ended September 30, 2012 compared to $1.1 million for the same period in 2011.
- The combined ratio was 93.8 percent for the third quarter of 2012, compared to 87.5 percent for the same period last year.
- The calendar period loss and LAE ratio was 67.4 percent and 64.0 percent for the three months ended September 30, 2012 and 2011, respectively. The calendar period loss and LAE ratio was impacted by additional audit premium to the Company of $1.9 million for the three months ended September 30, 2012, which decreased the 2012 loss and LAE ratio by 4.1 points compared to additional audit premium to the Company of $1.1 million for the same period in 2011, which decreased the 2011 loss and LAE ratio by 2.8 points. There was no loss reserve development recorded on prior accident years in the workers’ compensation insurance segment for the three months ended September 30, 2012 and 2011.
- The expense ratio was 25.0 percent for the three months ended September 30, 2012, which included a 1.7 point increase attributable to the change in accounting for deferred acquisition costs, compared to 22.8 percent for the same period in 2011.
Segregated Portfolio Cell Reinsurance
The segregated portfolio cell reinsurance segment has fourteen active programs. These programs produce fee-based revenue and segregated portfolio cell dividends for EIHI’s other business segments. Highlights for the third quarter include:
- Direct premium assumed from the workers’ compensation insurance segment increased to $8.8 million for the three months ended September 30, 2012, compared to $8.1 million for the same period in 2011, an increase of 8.6 percent.
- Fee-based revenue generated for EIHI’s other business segments by the segregated portfolio cell reinsurance segment was $1.8 million and $1.4 million for the three months ended September 30, 2012 and 2011, respectively.
- The segregated portfolio cell dividend income for programs in which EIHI has an ownership interest was $256,000 for the three months ended September 30, 2012, compared to segregated portfolio cell dividend income of $110,000 for the same period in 2011.
Corporate and Other
The corporate and other segment primarily includes corporate expenses and EIHI’s third party administration business. The corporate and other segment recorded a net loss of $274,000 for the three months ended September 30, 2012, compared to a net loss of $859,000 for the three months ended September 30, 2011. The decrease in the net loss is due primarily to a change in the Company’s internal organizational structure and a decrease in stock compensation expense. Effective January 1, 2012, expenses related to the Company’s executive officers are included in the workers’ compensation insurance segment. Executive expenses included in the corporate/other segment for the three months ended September 30, 2011 totaled approximately $485,000. Stock compensation expense totaled $519,000 for the three months ended September 30, 2012, compared to $641,000 for the same period in 2011.
Financial Condition
Total assets were $378.9 million as of September 30, 2012. Shareholders’ equity was $134.3 million as of September 30, 2012. There were no repurchases of our common stock during the three months ended September 30, 2012. As of September 30, 2012, EIHI’s book value per share and diluted book value per share were $16.98 and $16.57, respectively. Outstanding shares used to calculate book value per share and diluted book value per share were 7,910,609 and 9,006,797, respectively, as of September 30, 2012. The basic book value per share calculation includes the impact of restricted stock awards of 396,375 shares and warrants exercised of 180,291. The diluted book value per share calculation includes the additional dilutive impact of stock options to purchase 1,096,188 common shares, which have a weighted average exercise price of $13.61.
The complete earnings release is available here: Eastern Insurance Holdings Third Quarter 2012 Results
Source: EIHI