The Company’s net income for the year ended December 31, 2015 decreased to $74.5 million, or $1.35 per diluted share, from $177.9 million, or $3.23 per diluted share, for the same period in 2014. Included in net income is $126.3 million of pre-tax investment income that was generated during 2015 on a portfolio of $3.4 billion at fair value at December 31, 2015, compared to $125.7 million of pre-tax investment income that was generated during 2014 on a portfolio of $3.4 billion at fair value at December 31, 2014. Included in net income are net realized investment losses of $83.8 million and gains of $81.2 million in 2015 and 2014, respectively.
Loss ratio is calculated by dividing losses and loss adjustment expenses by net premiums earned. The Company’s loss ratio was affected by unfavorable development of approximately $13 million and favorable development of approximately $3 million on prior accident years’ losses and loss adjustment expense reserves for the years ended December 31, 2015 and 2014, respectively. The unfavorable development in 2015 was primarily from the California homeowners and automobile lines of business outside of California, which was partially offset by favorable development in the California personal automobile line of business. The favorable development in 2014 was primarily from California personal automobile lines of insurance business partially offset by adverse development in other states. The 2015 loss ratio was also negatively impacted by a total of $19 million of catastrophe
At December 31, 2015, 72.9% of the Company’s total investment portfolio at fair value and 85.6% of its total fixed maturity investments at fair value were invested in tax-exempt state and municipal bonds. Equity holdings consist of non-redeemable preferred stocks, dividend-bearing common stocks on which dividend income is partially tax-sheltered by the 70% corporate dividend received deduction, and private equity funds. At December 31, 2015, 56.9% of short-term investments consisted of highly rated short-duration securities redeemable on a daily or weekly basis. The Company does not have any direct investment in sub-prime lenders.
The Company considers the strength of the underlying credit as a buffer against potential market value declines which may result from future rating downgrades of the bond insurers. In addition, the Company has a long-term time horizon for its municipal bond holdings which generally allows it to recover the full principal amounts upon maturity and avoid forced sales prior to maturity of bonds that have declined in market value due to the bond insurers’ rating downgrades. Based on the uncertainty surrounding the financial condition of these insurers, it is possible that there will be additional downgrades to below investment grade ratings by the rating agencies in the future, and such downgrades could impact the estimated fair value of municipal bonds.
Among other considerations, industry and regulatory guidelines suggest that the ratio of a property and casualty insurer’s annual net premiums written to statutory policyholders’ surplus should not exceed 3.0 to 1. Based on the combined surplus of all the Insurance Companies of $1.45 billion at December 31, 2015, and net premiums written of $3.0 billion, the ratio of premiums written to surplus was 2.1 to 1.
The average severity method analyzes historical loss payments and/or incurred losses divided by closed claims and/or total claims to calculate an estimated average cost per claim. From this, the expected ultimate average cost per claim can be estimated. The average severity method coupled with the claim count development method provide meaningful information regarding inflation and frequency trends that the Company believes is useful in establishing loss reserves. The claim count development method analyzes historical claim count development to estimate future incurred claim count development for current claims. The Company applies these development factors against current claim counts by accident period to calculate ultimate expected claim counts.
The fair value of each restricted stock unit grant was determined based on the market price on the grant date. Compensation cost is recognized based on management’s best estimate of the performance goals that will be achieved. If such goals are not met, no compensation cost is recognized and any recognized compensation cost would be reversed. See Note 15. Share-Based Compensation for additional disclosures.
In May 2015, the FASB issued ASU 2015-09, "Financial Services-Insurance (Topic 944) Disclosures About Short-Duration Contracts." ASU 2015-9 requires insurance entities to provide additional disclosures related to claims liabilities. The additional disclosure requirements for the annual reports include: (1) the claims development information by accident year, on a net of reinsurance basis, for the number of years for which claims incurred remain outstanding but not to exceed the most recent 10 years, and for the most recent reporting period presented, an insurer also needs to disclose the amount of total net outstanding claims for all accident years included in the claims development tables; (2) a reconciliation of claims development information and the aggregate carrying amount of the liability for unpaid claims and claim adjustment expenses; and (3) information about the claims frequency and the amount of the incurred-but-not-reported liabilities for each accident year presented. In addition, a description of the methodologies and assumptions used to determine the amounts disclosed and significant changes in methodologies and assumptions are required. The roll forward of the liability for unpaid claims and claims adjustment expenses, currently required only for annual periods, will also be required for interim periods. This standard will be effective for annual periods beginning after December 15, 2015, and interim periods within annual reporting periods beginning after December 15, 2016. Although the adoption of this standard will not have a material impact on its consolidated financial statements, the Company will expand the nature and extent of its insurance contracts disclosures.
On December 12, 2014, the Company extended the maturity date of the $20 million bank loan from January 2, 2015 to December 3, 2017. The $20 million bank loan has collateral requirements similar to those of the $120 million credit facility.
The following tables present the location and amounts of derivative fair values in the consolidated balance sheets and derivative (losses) gains in the consolidated statements of operations:
generating sufficient taxable income of the appropriate character within the carryback and carryforward periods available under the tax law. Management considers the reversal of deferred tax liabilities, projected future taxable income of an appropriate nature, and tax-planing strategies in making this assessment. The Company believes that through the use of prudent tax planning strategies and the generation of capital gains, sufficient income will be realized in order to maximize the full benefits of its deferred tax assets.
The Company experienced estimated pre-tax catastrophe losses and loss adjustment expenses from severe weather events of $19 million, $11 million, and $17 million in 2015, 2014, and 2013, respectively. The losses in 2015 were primarily the result of severe storms outside of California, and rainstorm and wildfire losses in California. The losses in 2014 were primarily related to winter freeze events on the East Coast and severe rainstorms in California. The losses in 2013 were primarily due to tornadoes in Oklahoma and severe storms in the Midwest and the Southeast regions during the second quarter.
On February 5, 2016, the Board of Directors declared a $0.62 quarterly dividend payable on March 31, 2016 to shareholders of record on March 17, 2016.
Potentially dilutive securities representing approximately 67,000, 252,000, and 359,000 shares of common stock for 2015, 2014, and 2013, respectively, were excluded from the computation of diluted earnings per common share because their effect would have been anti-dilutive.