Annual Report 2011 - SNL Financial

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Annual Report 2011 - SNL Financial

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 cell’s financial results.

Workers’ compensation insurance coverage is underwritten through EAIG’s alternative markets business unit and ceded

100% to the segregated portfolio cell reinsurance segment. The Company receives fee revenue, based on a percentage of

direct premiums written, for fronting, claims administration, risk management and segregated portfolio cell rental services.

As of December 31, 2011, the segregated portfolio cells and dividend participants provided $45.6 million of irrevocable,

unconditional letters of credit to secure unfunded liabilities and collateralize reserves for unpaid losses and loss adjustment

expenses (“LAE”) and unearned premiums.

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 Company’s share of the segregated portfolio dividend is included in the corporate/other segment.

Corporate/Other The corporate/other segment primarily includes the expenses of the holding company, 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 December 31, 2011. The corporate/other segment also includes the Company’s

10% interest in a segregated portfolio cell with an unaffiliated primary carrier that writes insurance coverage for sprinkler

contractors, known as “SprinklerPro”. The Company non-renewed the contract for its 10% interest in SprinklerPro on a

run-off basis effective April 1, 2009.

Products

Workers’ Compensation Insurance

The Company offers a complete line of workers’ compensation products including guaranteed cost policies,

policyholder dividend policies, retrospectively-rated policies, deductible policies, and alternative market products. Direct

premiums written in the workers’ compensation insurance segment totaled $155.7 million for the year ended December 31,

2011.

• Guaranteed cost policies. Guaranteed cost policies charge a fixed premium, which does not increase or decrease

based upon loss experience during the policy period. For the year ended December 31, 2011, 55.2% of direct

premiums written in the workers’ compensation insurance segment were derived from guaranteed cost policies.

• Policyholder dividend policies. Policyholder dividend policies charge a fixed premium, but the customer may

receive a dividend in the event of favorable loss experience during the policy period. Policyholder dividend plans

are generally restricted to accounts with minimum annual premiums in excess of $20,000. For the year ended

December 31, 2011, 12.3% of direct premiums written in the workers’ compensation insurance segment were

derived from policyholder dividend policies.

• Retrospectively-rated policies. Retrospectively-rated policies charge an initial premium that is subject to

adjustment after the policy period expires, based upon the insured’s actual loss experience incurred during the

policy period, subject to a minimum and maximum premium. These policies are typically subject to annual

adjustment until all claims related to the policy year are closed. Retrospectively-rated policies are generally offered

to employers with minimum annual premiums in excess of $150,000. For the year ended December 31, 2011, 3.4%

of direct premiums written in the workers’ compensation insurance segment were derived from retrospectivelyrated

policies.

• Deductible policies. Deductible policies generally result in a lower premium; however, the insured retains a greater

share of the underwriting risk than under guaranteed cost or dividend paying policies, which reduces the risk to the

Company and further encourages loss control practices by the insured. The insured is contractually obligated to pay

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