Eastern Insurance Holdings, Inc. Announces First Quarter 2010 Results

LANCASTER, Pa., May 6 /PRNewswire-FirstCall/ -- Eastern Insurance Holdings, Inc. ("EIHI" or the "Company") (Nasdaq: EIHI) today reported earnings for the three months ended March 31, 2010. EIHI reported net income of $1.9 million, or $0.21 per diluted share, for the first quarter of 2010, compared to a net loss of $555,000, or $0.06 per diluted share, for the same period in 2009. EIHI's diluted book value per share was $16.07 as of March 31, 2010 compared to $15.78 as of December 31, 2009, an increase of $0.29 per share or 1.8 percent.

"Our workers' compensation insurance business segment recorded a solid increase in new business submissions and written premiums during the first quarter," said Bruce M. Eckert, Chief Executive Officer. "This result was achieved across all three operating territories, but the increases were particularly noticeable in our Midwest and Southeast markets.  ParallelPay, our pay-as-you-go workers' compensation product, continues to play an important role in new business production and passed the $10.0 million sales milestone during the quarter.  Offsetting these sales trends were a persistent pattern of rate pressures in the marketplace and a continuing decline in employment levels and payroll audits."

Eckert noted the press release of May 4, 2010 reporting on the sale of the Company's group benefits subsidiary, Eastern Life and Health Insurance Company, to Security Life Insurance Company of America and continued; "We are proud of the successes we achieved at Eastern Life and Health since the 2006 merger and have every expectation that its acquisition by Security Life will continue the success of its people, products and services into the future."

Eckert further noted, "Proceeds from the sale of Eastern Life and Health Insurance Company will be used to underwrite a multi-year expansion, both organic and by acquisition of our workers' compensation insurance segment, and to fund share repurchases."

Eckert concluded by adding, "We continue to evaluate our run-off Specialty Reinsurance segment and recently commenced a follow-up claims audit at the ceding company with the intention of reviewing the entirety of the open claims inventory.  This segment historically has been volatile with adverse development in 2008 and prior years.  The results of this claims audit will be incorporated in our reserve evaluation process."

Net income (loss) for the three months ended March 31, 2010 and 2009 consisted of the following (in thousands):

Diluted earnings per share for the three months ended March 31, 2010 and 2009 consisted of the following:

Weighted average fully diluted shares considered outstanding used to calculate diluted earnings per share for the three months ended March 31, 2010 and 2009 consisted of the following:

Consolidated highlights for the first quarter include:

• Revenue from continuing operations for the first quarter of 2010 increased to $28.1 million compared to $24.4 million for the same period in 2009. The increase in revenue is due primarily to an increase in net premiums earned and income from limited partnerships and a change to net realized investment gains in 2010 from net realized investment losses in 2009.  Revenue from discontinued operations was $9.9 million for the three months ended March 31, 2010, compared to $9.7 million for the same period in 2009;
• Net premiums earned from continuing operations were $25.3 million for the first quarter of 2010 compared to $24.8 million for the same period in 2009. The increase in net premiums earned is due primarily to an increase in direct written premium production and more favorable reinsurance terms in 2010 compared to 2009 partially offset by the termination of the reinsurance treaty effective July 1, 2008 that comprised the run-off specialty reinsurance segment, reductions in workers' compensation insurance premiums during the first quarter of 2010 related to payroll audit premium adjustments and renewal rate decreases;
• Net investment income from continuing operations was $1.4 million ($986,000 after-tax) for the three months ended March 31, 2010, compared to $1.5 million ($1.1 million after-tax) for the same period in 2009. The decrease in net investment income is due primarily to the current lower interest rate environment;
• The change in equity interest in limited partnerships from continuing operations increased $353,000 to income of $259,000 ($187,000 after-tax) for the three months ended March 31, 2010, compared to a loss of $94,000 ($61,000 after-tax) for the same period in 2009;
• Net realized investment gains from continuing operations, excluding the segregated portfolio cell reinsurance segment, were $432,000 ($346,000 after-tax) for the three months ended March 31, 2010 compared to net realized investment losses from continuing operations, excluding the segregated portfolio cell reinsurance segment, of $966,000 ($1.0 million after-tax) for the same period in 2009; and
• There was no loss reserve development recorded on prior accident years in the workers' compensation insurance segment for the three months ended March 31, 2010, compared to $549,000 ($357,000 after-tax) of favorable loss reserve development on prior accident years in the workers' compensation insurance segment for the three months ended March 31, 2009.

Segment Operating Results

Workers' Compensation Insurance

EIHI's workers' compensation insurance segment reported net income of $1.7 million for the first quarter of 2010, compared to $1.8 million for the first quarter of 2009. Highlights for the first quarter include:

• Direct written premiums increased to $38.9 million for the three months ended March 31, 2010, compared to $36.2 million for the same period in 2009, an increase of 7.5 percent;
• Net premiums earned increased to $19.4 million for the first quarter of 2010, compared with $17.9 million for the first quarter of 2009, an increase of 8.4 percent.  The increase in net premiums earned relates primarily to first quarter 2010 production increases and more favorable reinsurance terms in 2010 compared to 2009, partially offset by payroll audit premium adjustments and continued renewal rate decreases;
• Audit premium, which results from an examination of the policyholders' payroll and other records, resulted in the Company recording return premium to policyholders of $382,000 for the three months ended March 31, 2010 compared to additional premium to the Company of $283,000 for the same period in 2009, a decrease of $665,000;
• Net investment income was $830,000 for the first quarter of 2010, compared to $958,000 for the same period in 2009. The decrease in net investment income is due primarily to the lower interest rate environment;
• The change in equity interest in limited partnerships was income of $205,000 for the three months ended March 31, 2010, compared to a loss of $94,000 for the same period in 2009;
• After-tax net realized investment gains of $293,000 were recorded for the three months ended March 31, 2010, compared to after-tax net realized investment losses of $6,500 for the same period in 2009;
• The combined ratio was 95.1 percent for the first quarter of 2010, compared to 91.2 percent for the same period last year;
• The calendar period loss and LAE ratio was 66.0 percent and 62.0 percent for the three months ended March 31, 2010 and 2009, respectively. For the three months ended March 31, 2009, $549,000 of favorable loss reserve development on prior accident years was recorded, which decreased the 2009 loss ratio by 3.1 percentage points, compared to no loss reserve development recorded for the same period in 2010; and
• The expense ratio was 28.2 percent for the three months ended March 31, 2010 and 2009.

Segregated Portfolio Cell Reinsurance

The segregated portfolio cell reinsurance segment has fourteen active programs, which produce fee-based revenue and segregated portfolio cell dividends for EIHI's other business segments. Marketing activity in this segment has increased despite current economic trends, largely as a result of our expansion into the Southeast and Midwest markets.

Run-Off Specialty Reinsurance

Prior to July 1, 2008, business in the run-off specialty reinsurance segment was assumed through participation in a reinsurance treaty with an unaffiliated ceding company related to an underground storage tank insurance program, referred to as "EnviroGuard," and a non-hazardous waste transportation product, referred to as "EIA Liability." Effective July 1, 2008, EIHI terminated the reinsurance treaty that comprised the run-off specialty reinsurance segment.

EIHI's run-off specialty reinsurance segment reported net income of $692,000 for the first quarter of 2010, compared to a net loss of $957,000 for the same period last year. Highlights for the first quarter include:

• Net premiums earned were $6,000 for the first quarter of 2010, compared to $899,000 in 2009. The decrease in net premiums earned is due to the July 1, 2008 termination of the reinsurance treaty that comprised the run-off specialty reinsurance segment;
• Net investment income was $305,000 for the three months ended March 31, 2010, compared to $258,000 for the same period last year;
• The change in equity interest in limited partnerships was income of $54,000 for the three months ended March 31, 2010, compared to no change for the same period in 2009;
• After-tax net realized investment gains of $185,000 were recorded for the three months ended March 31, 2010, compared to after-tax net realized investment losses of $1.2 million for the same period in 2009; and
• There was no loss reserve development recorded for the three months ended March 31, 2010 and 2009.  EIHI recently commenced a follow-up claims audit at the ceding company with the intention of reviewing the entirety of the open claims inventory.  This segment historically has been volatile with adverse development in 2008 and prior years.  The results of this claims audit will be incorporated in our reserve evaluation process.

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 $1.1 million for the three months ended March 31, 2010, compared to a net loss of $1.6 million for the three months ended March 31, 2009.  The 2009 net loss was impacted by a deferred tax valuation allowance, which increased income tax expense by $678,000.

Discontinued Operations

EIHI's discontinued operations, formerly its group benefits insurance segment, reported net income of $535,000 for the three months ended March 31, 2010, compared to net income of $250,000 for the same period in 2009.

Financial Condition

Total assets were $402.0 million as of March 31, 2010. Shareholders' equity was $156.9 million as of March 31, 2010. As of March 31, 2010, EIHI's book value per share and diluted book value per share were $16.19 and $16.07, respectively. Outstanding shares used to calculate book value per share and diluted book value per share were 9,691,257 and 10,340,445, respectively, as of March 31, 2010. The basic book value per share calculation includes the impact of restricted stock awards of 251,675 shares and warrants exercised of 180,291. The diluted book value per share calculation includes the additional dilutive impact of stock options to purchase 649,188 common shares, which have a weighted average exercise price of $14.36.

Conference Call with Investors

EIHI will hold a conference call with investors beginning at 10:00 a.m. Eastern Time on Friday, May 7, 2010 to review the Company's 2010 first quarter results. The conference call will be available via a live webcast accessed through the Investor Relations section of www.easterninsuranceholdings.com.  The dial-in numbers for the conference call are as follows:

A replay of the conference call will be available through May 17, 2010, at 877-344-7529 (domestic) and 412-317-0088 (international).  The replay conference number for the conference call is 440122.  An online archive of the webcast will be available on the Investor Relations section of www.easterninsuranceholdings.com.

Consolidated Financial Results

Set forth in the tables below are the unaudited consolidated balance sheets as of March 31, 2010 and December 31, 2009 and unaudited statements of income for the three months ended March 31, 2010 and 2009.

Cautionary Statement

Some of the statements contained in this press release are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, as amended.  In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "expect," "project," "plan," "intend," "anticipate," "believe," "estimate," "predict," "potential" or "continue," the negative of these terms or other similar terminology.  Forward-looking statements are based on the opinions and estimates of management at the time the statements are made and are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated in the forward-looking statements.  No assurance can be given that management's expectations, beliefs or projections will occur or be achieved or accomplished.  Factors that could affect the Company's actual results include, among others, the fact that our loss reserves are based on estimates and may be inadequate to cover our actual losses; the uncertain effects of emerging claim and coverage issues on our business; an inability to obtain or collect on our reinsurance protection; a downgrade in the A.M. Best rating of our insurance subsidiaries; the impact of extensive regulation of the insurance industry and legislative and regulatory changes; a failure to realize our growth strategies and investment objectives; the further deterioration in the fixed income and equity security markets, the effects of intense competition; the loss of one or more principal employees; the geographic concentration of our business; the failure of independent insurance brokers to adequately market our products; and other factors described in our filings with the U.S. Securities and Exchange Commission.  Readers are cautioned not to place undue reliance upon these forward-looking statements, which speak only as of the date of this release.  The Company undertakes no obligation to update any forward-looking statements.

SOURCE Eastern Insurance Holdings, Inc.