Annual Report 2011 - SNL Financial

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Annual Report 2011 - SNL Financial

Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts

In October 2010, the FASB issued ASU 2010-26, “Accounting for Costs Associated with Acquiring or Renewing

Insurance Contracts” (“ASU 2010-26”). ASU 2010-26 provides specific types of costs that should be capitalized in

connection with the acquisition or renewal of insurance contracts. Those costs include incremental direct costs of contract

acquisition incurred in connection with independent third parties and certain costs related to activities performed by the

insurer for the contract, including underwriting, policy issuance and processing, medical and inspection, and sales force

contract selling. Under ASU 2010-26, costs incurred by an entity related to unsuccessful acquisition or renewal efforts must

be charged to expense as incurred. ASU 2010-26 is effective for fiscal years, and interim periods within those fiscal years,

beginning after December 15, 2011 and is to be applied prospectively. Retrospective application to all prior periods upon the

date of adoption is permitted, but not required. Early adoption is permitted but only at the beginning of an entity’s annual

reporting period. The Company currently capitalizes and defers commissions and related expenses, premium taxes and

certain underwriting personnel salaries. The Company will adopt ASU 2010-26 effective January 1, 2012 and apply it

prospectively. Upon adoption, the Company will reduce the amount of acquisition costs capitalized related to certain

underwriting personnel salaries to give effect to unsuccessful acquisition or renewal activities. If the Company had adopted

ASU 2010-26 effective January 1, 2011, underwriting salaries capitalized and deferred would have been reduced by

approximately $1,340, which would have decreased the Company’s net income by approximately $870.

3. Discontinued Operations

During the year ended December 31, 2010, the Company disposed of its group benefits insurance operations and the

majority of its run-off specialty reinsurance operations. As a result of the disposals, the group benefits insurance and the

run-off specialty reinsurance segments have been reflected in the consolidated financial statements as discontinued

operations.

Sale of Eastern Life

On June 21, 2010, EIHI completed the sale of its wholly-owned group benefits insurance subsidiary, Eastern Life, to

Security Life Insurance Company of America (“Security”). The agreement effected a statutory merger of Eastern Life into

Security, with Security continuing as the surviving corporation. Total transaction consideration to EIHI was $34,102, which

represented Eastern Life’s GAAP shareholder’s equity as of May 31, 2010 plus $250. The consideration consisted of cash

and a $1,750 promissory note from Security’s parent. The note bears interest at 4.0%, payable quarterly, and is due in full on

July 1, 2013. The issuance of the $1,750 promissory note related to the sale of Eastern Life is considered a non-cash

investing activity and has been excluded from the consolidated statement of cash flows for the year ended December 31,

2010.

The sale of Eastern Life resulted in the recognition of a gain totaling $564, which is included in discontinued operations.

Transaction expenses related to the sale of Eastern Life totaled $873 ($567, net of tax) for the year ended December 31,

2010, and have been included in discontinued operations. Certain corporate expenses previously reported in the group

benefits insurance segment were reclassified to continuing operations. The reclassification of these corporate expenses

totaled $500 for each of the years ended December 31, 2010 and 2009.

For the years ended December 31, 2010 and 2009, the group benefits insurance segment reported net premiums earned

of $18,262 and $35,937, respectively, and total revenue of $20,563 and $40,745, respectively. Income before income taxes in

the group benefits insurance segment totaled $952 and $4,157 for the years ended December 31, 2010 and 2009, respectively.

During the third quarter of 2011, the Company filed its 2010 corporate federal income tax return. The Company’s tax

liability related to Eastern Life’s operations for the period from January 1, 2010 to June 21, 2010 and the related sale of

Eastern Life was less than the estimated tax liability recorded on the Company’s balance sheet as of December 31, 2010. As

a result, the Company recorded a prior year tax return adjustment of $368, which was recorded as an income tax benefit in

discontinued operations for the year ended December 31, 2011.

Sale of Eastern Atlantic RE

On December 9, 2010, EIHI completed the sale of Eastern Atlantic RE (“Atlantic RE”) to an investor group advised by

Dowling Advisors, Inc. (“Dowling”). Atlantic RE is a Cayman Islands reinsurance company and was part of EIHI’s run-off

specialty reinsurance segment. Under the terms of the sale, Dowling purchased 100% of the outstanding stock of Atlantic RE

for $2,300 of cash.

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