As of December 31, 2014, we leased 9,450 square feet of office space in Irving, Texas and the monthly rent for this space was $11,597 payable in equal monthly installments. Rent may be increased each December 31st, with a maximum increase equal to 95% of our pro rata share, based on occupancy, of any increase in the landlord's operating costs. The cost of utilities is charged separately, prorated based on occupancy. The lease for this office space expires on May 31, 2017.
As mentioned previously, the Company sells insurance policies predominately in Texas. As such, the health of the Texas economy and housing market has a direct impact on the Company's business activity. The following selected statistics published monthly by the Real Estate Center at Texas A&M University are key indicators that management monitors when evaluating the Company's current financial condition and operating results:
· Texas nonfarm employment rate increased 4.0% at December month end, as compared to an increase of the national U.S. rate of 2.2%.
These favorable employment and housing economic trends, along with our competitive pricing in our target markets have resulted in improved premium production during 2014. The resulting increase in earned premium, along with improved reinsurance terms for the 2014 - 2015 treaty year are all factors which aided in the positive results recorded by the Company for the year ended December 31, 2014.
The recent decline in the price of oil during the 4th quarter of 2014 is expected to have a negative impact on the Texas economy. If so, this will affect job growth and home sales, both which were robust in 2014. The Company is taking steps to at least partially ameliorate the effects of a downturn. Expanding geographically into other states, as well as expansion into other parts of Texas is the main component of this strategy.
The Company's private passenger automobile book of business, written in support of its homeowners programs in Texas, was terminated with our last policy expiring in October, 2013. The Texas private passenger automobile program was discontinued as we were unable to capture a sufficient portion of the market at pricing which we deemed adequate to cover our expenses and provide a margin for profits.
At the end of 2014, our market share of the approximately $7.8 billion Texas homeowners insurance market was estimated to be 0.76% by SNL Financial, making us the 18th largest Texas homeowners company in terms of Texas premium. As of December 31, 2014, our property insurance policy in force count of 74,698 represents annualized premiums of approximately $74.4 million as compared to the same time last year when our policy in force count was 60,873 and our in force premium was approximately $58.3 million as of December 31, 2013. Our policy growth year over year was 22.71 %, while our in force premium grew 27.62 %.
Operating income for the year ended December 31, 2014 was unfavorably impacted by an increase in loss and loss adjustment expenses, primarily the result of increased severe convectional thunderstorm activity. During 2014, the Company sustained gross losses (prior to reinsurance recoveries) from such storms in the amount of $27.7 million as compared to $18.2 million of gross losses (prior to reinsurance recoveries) during 2013.
Our results of operations for the year ended December 31, 2014 reflect income available to common stockholders of $2,164,125, or $0.12 earnings per diluted common share, compared to income available to common stockholders of $994,584, or $0.11 earnings per diluted common share, for the year ended December 31, 2013.
Commencing April 1, 2014 and ending March 31, 2015, the Company reinsured its property and casualty risk under quota share reinsurance treaties with third party reinsurers. The treaties cover 80% of its risk under property coverage on any one loss occurrence not to exceed $110 million; 10% of its risk under property coverage on any one loss occurrence not to exceed $4 million and approximately 64% of its risk under casualty coverages.
Property catastrophe treaties, which went into effect on the same day and having the same term as the quota share treaties, develop over four layers and 20% of our risk on property coverage on a gross loss of $110 million, excess of $4 million per occurrence. The Company's net retention is $400,000 per loss occurrence.
Ceding Commission and Other Fee Income for the year ended December 31, 2014 was $22.1 million compared to $16.4 million for the year ended December 31, 2013. The primary factors for this improvement include increased earned premium, further supported by improved reinsurance terms for the 2014 - 2015 treaty year.
The following is a reconciliation of our total net premiums written to net premiums earned for the year ended December 31, 2014 and 2013 (values in thousands):
Policy Acquisition and Other Underwriting Expenses for the years ended December 31, 2014 and 2013 were $16.5 million and $13.1 million, respectively, which primarily reflect the amortization of deferred acquisition costs including commissions payable to agents for production and renewal of policies, premium taxes and other costs associated with the acquisition of insurance policies. The net increase from the corresponding period in 2013 is primarily attributable to the increase in our overall production.
Income Taxes for the years ended December 31, 2014 and 2013 were $1.2 million and $1.0 million, respectively, for state and federal taxes resulting in an effective tax rate of 34.98 % for 2014 and 34.55 % for 2013. The effective tax rate for the year ended December 31, 2014 was impacted primarily as a result of permanent tax differences on meals and entertainment and stock-based compensation.
Trends within our insurance business are seasonal, both as they relate to premium production and as they relate to incurred losses. Premium production tends to increase during the late spring and summer due to increased home purchases, while our claims activity increase with the occurrence of convectional thunderstorms which often produce strong winds, tornadoes and hail typically during the period from March 1 through June 30 each year. With the commencement of our reinsurance treaty year on April 1, any variation in reinsurance costs whether due to changes in rates or in total values insured will be reflected in our financial results beginning April 1 each year.
The Company has completed negotiations with a panel of third party reinsurers on what management considers to be favorable terms, including extending coverage on the quota share portions of its reinsurance program to the end of 2016.
HAIC's operational goals of premium growth and state expansion are dependent upon adequate capital and surplus.
Deferred policy acquisition costs "DAC" are reviewed quarterly by management and are expected to be recoverable from future income, including investment income. However, the amount of DAC considered recoverable could be reduced in the near term if management's estimates of future premium and investment income is reduced which could impair the Company's ability to recover these costs.
Our cash flows from operating, investing and financing activities for the years ended December 31, 2014 and 2013 are summarized below.
Net cash used by operating activities for the year ended December 31, 2013 was approximately $1.9 million. Significant factors in this movement consisted primarily of an increase in cash received from higher net written premiums, less cash used for paid claims and operating expenses, as well as increased disbursements related to the settlement of the Company's reinsurance treaties. Net cash used in investing activities of $0.2 million was primarily due to purchases of short-term investments of $1.8 million, purchases of long-term investments of $2.0 million and the purchases of furniture, equipment, and software of approximately $99,000, offset by maturities of short-term investments of $1.5 million and maturities of long-term investments of $2.2 million. Net cash used in financing activities total $5,400 for repurchase of common stock.
The credit risk we are exposed to on ceded premium and losses recoverable from reinsurers is managed through the careful selection of reinsurance companies. When selecting reinsurance coverage, we consider the financial strength and stability of the providers, their history of responding to claims, and their overall reputation. We require that all reinsurers have an A.M. Best rating of A- (Excellent), or better, or an S&P rating of AA- or better, in order to minimize the risk of uncollectable balances. HAIC continually monitors the financial condition of its reinsurers with the aid of AON Benfield, its reinsurance broker. As of December 31, 2014, no reinsurance recoverable balance is outstanding beyond 30 days. We do not use credit default swaps to mitigate our credit exposure from either investments or counterparties.
The Company leases its corporate office space and certain office equipment under non-cancelable operating leases. None of these lease commitments subjects the Company to material uncertainties through escalation clauses or other cost adjustments.
As of December 31, 2014 and 2013, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K.
We establish reserves for the estimated total unpaid costs of losses including loss adjustment expenses, or LAE. Unless otherwise specified below, the term "loss reserves" shall encompass reserves for both losses and LAE. Loss reserves reflect management's best estimate of the total cost of (i) claims that have been incurred, but not yet paid, and (ii) claims that have been "incurred but not yet reported". Loss reserves established by us are not an exact calculation of our liability. Rather, loss reserves represent management's best estimate of our company's liability based on application of actuarial techniques and other projection methodology, taking into consideration other facts and circumstances known at the balance sheet date. The process of establishing loss reserves is complex and necessarily imprecise, as it involves judgment which is affected by many variables such as past loss experience, current claim trends and the prevailing social, economic and legal environments. The impact of both internal and external variables on ultimate loss and LAE costs is difficult to estimate. Our exposure is impacted by both the risk characteristics of the physical locations where we write policies, such as weather-related risks, as well as risks associated with varying social, judicial and legislative characteristics in Texas, the state in which we operate. In determining loss reserves, we give careful consideration to all available data and actuarial analyses, however this process involves significant judgment.
Reserves are developed by using accident month / reported month grids, which are then rolled up into a cumulative incurred loss triangle. Loss factors are calculated based on aggregating the month to month diagonals (i.e. month 2 incurred / initial accident month incurred, month 3 incurred / month 2 incurred). For each accident month, development is reviewed for consistency, and outlying results (on the high and the low side) as well as the most recent couple of months, for which data is considered immature, are deleted from the data for smoothing purposes. Period to period development factors are then calculated, from which period to ultimate loss incurred factors are calculated. Factors are reviewed quarterly and adjusted as needed. Factor changes for the periods under review, from period to period, are considered to be insignificant. Therefore the methodology used is considered to be consistent from period to period. IBNR reserve calculations used during the 2011 year were extended from 13 months past the accident month to 24 months past the accident month to improve upon the estimation of the final loss incurred.
Traditional monthly loss reserving factors are not deemed appropriate for determining IBNR estimates for catastrophic events as these events do not occur evenly throughout a month, as regular loss events do. So an alternative approach to loss development has to be used, one that takes into consideration development and reporting from a specific loss date, rather than from the end of a specific month. In addition, since the HAIC is subject to catastrophic loss events (hurricane and convectional thunderstorms) which have differing cycles for loss reporting and claim development, calculations need to be made for each type event. Each analysis is made by projecting the ultimate loss value into the future and subtracting it from the known incurred losses. The Company's claim system has the ability to track incurred claims on a "days to report" basis, so that we can look at incurred claim values for claims reported in the following bands:
Data can be pulled in by event and by accident period. However, since events individually behave inconsistently, data is pulled on an accident year basis (so that variability could be reviewed), and rolled up to an ITD basis for this evaluation. For each of the above bands, the $ incurred and % of total incurred from claims reported during those time frames is calculated by accident year, as were cumulative values. This data is then spread out into days from the event (so that 1-5 band became individual days 1, 2, 3, 4, 5 and so on for the other bands) on a straight line basis, which is then adjusted to scale over the time period so that claim reporting was greater earlier in the bands than later in the bands (so for the 1-5 band, proportionally more was reported on day 1 than day 2, etc.). Initially, this is done on a daily basis for days 0-30, with subsequent periods grouped broken into bands of 5, 15 and 30 days. These factors are then rolled up into cumulative factors and further scaled so that reporting is maxed out at 365 days, when the vast majority of reported claims are thought to be known. In application, the factors are stratified to a daily scale, so that actual days from event are used to select the specific factor to be used.
The following table sets forth the amount of the gross reserves for loss and loss adjustment expense:
Management utilizes the criteria established under Accounting Standards Codification (ASC) 740 to annually evaluate the need for a deferred tax valuation allowance. All available evidence, including potential effects of both positive and negative evidence, is assessed in making the determination. The Company has established a relatively consistent pattern of annual taxable income and currently has no operating loss carryback or carryforward balances. Further, the majority of the deferred tax assets have a short recovery period from a future realization standpoint. Accordingly, the deferred tax asset has been deemed to be a fully realized amount as of December 31, 2014.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Homeowners of America Holding Corporation and Subsidiaries as of December 31, 2014 and 2013, and the consolidated results of their operations and their cash flows for each of the two years in the period ended December, 2014, in conformity with accounting principles generally accepted in the United States of America.
Homeowners of America Holding Corporation ("HAHC") is an insurance holding company established to hold insurance entities for the purpose of marketing homeowner's insurance products on a national basis. HAHC owns 100% of Homeowners of America Insurance Company ("HAIC"). HAIC is domiciled in Texas, licensed in multiple states and is authorized to write various forms of homeowners and auto insurance. Coverage is concentrated in Texas. HAHC also owns 100% of Homeowners of America MGA, Inc. ("MGA"), a Texas Corporation, formed as a captive managing general agency to produce business for HAIC. HAHC, along with its subsidiaries HAIC and MGA, are collectively referred to as "the Company".
General and other accrued expenses payable as of December 31, 2014 and December 31, 2013, include $1.7 million and $1.2 million, respectively, of checks issued in excess of cash book balances, not yet presented for payment.
The Company's investments are comprised of short-term, restricted, long-term investments, and fixed-maturity securities classified as available-for-sale as of December 31, 2014 and short-term, restricted, and long-term investments as of December 31, 2013. Restricted investments and long-term investments are described below. Short-term investments include certificates of deposit with original maturities greater than three months and maturities of one year or less. Due to the short-term nature of these investments, significant changes in prevailing interest rates and economic conditions should not adversely affect the timing and amount of cash flows on such investments or their related values. Accordingly, certificates of deposit are carried at cost, which approximates fair value. Fixed-maturity securities are classified as available-for-sale when it is not management's intent to make profits by buying and selling the securities within a short period of time or when it is not management's intent to hold the securities to maturity. Fixed-maturity securities classified as available-for-sale are carried at fair value. The unrealized holding gains and losses, net of applicable deferred income taxes, are shown as a separate component of stockholders' equity as a part of accumulated other comprehensive income (loss) and, as such, are not included in the determination of net income (loss).
The following table provides the Company's restricted cash and investments as of December 31, 2014 and December 31, 2013.
FASB ASC Topic 220 - Comprehensive Income, requires that recognized revenues, expenses, gains and losses be included in net income (loss). Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the consolidated balance sheet, these items, along with net income (loss), are components of comprehensive income. The Company characterizes their fixed income portfolio as available-for-sale securities when it is not management's intent to make profits by buying and selling the securities within a short period of time or when it is not management's intent to hold the securities to maturity, with appropriate adjustments to other comprehensive income. For the year ended December 31, 2014, the Company recorded $73 of unrealized gains on available-for-sale securities in other comprehensive income. There were no qualifying items reported in comprehensive income for the years ended December 31, 2013.
Ceding commissions represent acquisition costs associated with insurance risk ceded to reinsurers and is earned on a pro-rata basis over the life of the associated policy. Reinsurance profit share is additional ceding commissions payable to the Company based upon attaining specified loss ratios within individual treaty years. Reinsurance profit share income is recognized when earned, which includes adjustments to earned reinsurance profit share based on changes in incurred losses.
Loss adjustment and other fee income is recognized as income when collected. There is no amount over 5 % of total revenue within this classification on the consolidated statements of operations for the year ended December 31, 2014 and December 31, 2013.
Due and deferred premiums consist of uncollateralized premiums and agents' balances in the course of collection as well as premiums booked but not yet due.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The Company's primary areas of estimate are for liabilities for unpaid losses and loss adjustment expenses, deferred policy acquisition costs, deferred tax asset valuation, and reinsurance. Actual results could differ significantly from those estimates.
The carrying value for the Company's cash and cash equivalents and short-term investments approximate fair values as of December 31, 2014 and 2013 due to their short-term nature. Fair value for securities are based on the framework for measuring fair value established by FASB ASC Topic 820, Fair Value Measurements and Disclosures.
In August 2013, the Company effected a 2.5 for 1 forward stock split (the "Stock Split") of all of its issued and outstanding shares of common stock. All holders of the Company's Series A and Series B preferred shares converted their preferred shares to common stock prior to the effectiveness of the stock split. All share and per share information provided in this report reflects the effect of the split for all periods presented.
Accounting Standards Update No. 2014-09. On May 28, 2014, the FASB issued Accounting Standards Update No. 2014-09 ("ASU 2014-09"), Revenue from Contracts with Customers, which modifies the guidance for revenue recognition. While insurance contracts are not within the scope of this updated guidance, the Company's fee income may be subject to this updated guidance. The Company is in the process of evaluating the new guidance, however, the adoption of this guidance is not expected to have a material effect on the Company's consolidated financial statements. ASU 2014-09 is effective for annual and interim reporting periods beginning after December 16, 2016.
In August 2013, HAHC entered into an agreement or the "Advisory Agreement", with Inter-Atlantic Advisors III, Ltd., or "Inter-Atlantic", under which Inter-Atlantic agrees to perform certain management services for the Company. A number of our directors are among the beneficial owners of Inter-Atlantic. The Advisory Agreement has an initial term of six years, to be automatically renewed from year-to-year thereafter, unless terminated by either party upon 60 days notice prior to the termination of the initial or any renewal term. For its services, the Company will pay Inter-Atlantic an annual fee of $300,000, as well as, an annual grant of shares of our common stock with an aggregate fair market value of $150,000 at the time of grant, plus reimburse Inter-Atlantic's expenses incurred in connection with the performance of its service. As long as the Advisory Agreement is in effect and the fees and expense reimbursements are paid, the directors of the Company that are affiliated with Inter-Atlantic have agreed to waive any other compensation for their service as directors.
For the year ended December 31, 2013, the Company incurred an expense of $125,000 for services performed under the Advisory Agreement.
For the year ended December 31, 2014, there were $73 in unrealized gains/(losses) on fixed-maturity securities held as available-for-sale. There were no realized gains or losses recognized for the periods due to the short term nature of the investments held. The intent is to hold to maturity certificates of deposit carried at amortized cost.
The following table provides the Company's fixed-maturity securities classified as available-for-sale which are carried at fair value as of December 31, 2014:
The amortized cost and fair value of available-for-sale fixed-maturity securities at December 31, 2014, by contractual maturity, are shown in the following table. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
 Level 3 - termed unobservable inputs which are utilized in situations where there is little or no market activity for the asset or liability at the measurement date. The approach typically involves a significant subjective management judgment toward the pricing of the security.
The Company's short-term investments comprised of certificates of deposit held at financial institutions which are not measured at fair value on a recurring basis. A portion of the Company's cash and cash equivalents include money market mutual fund accounts held at financial institutions which are measured at fair value on a recurring basis. Fixed-maturity securities held as available-for-sale are carried at fair value in our consolidated financial statements. The following tables provide information as of December 31, 2014 and 2013, about the Company's financial assets measured at fair value on a recurring basis:
The following methods and assumptions were used to estimate the fair value disclosures for financial instruments:
Money market mutual funds are valued at the closing price reported by the fund sponsor from an actively traded exchange. As the funds are generally maintained at a net asset value which does not fluctuate, cost approximates fair value. These are included as a Level 1 measurement in the table above. The fair values for available-for-sale fixed-maturity securities are based upon prices provided by an independent pricing service. The Company has reviewed these prices for reasonableness and has not adjusted any prices received from the independent provider. Level 2 securities represent assets whose fair value is determined using observable market information such as previous day trade prices, quotes from less active markets or quoted prices of securities with similar characteristics. There were no transfers between Level 1 and Level 2 during the year ended December 31, 2014.
Total capitalized deferred policy acquisition costs as of December 31, 2014 and December 31, 2013, comprised of commissions, premium taxes and costs associated with underwriting and issuing policies were $7,897,806 and $6,214,334, respectively.
Losses and loss adjustment expenses (LAE), less related reinsurance and deductibles, are charged to operations as incurred. Unpaid losses and LAE are based on claims adjusters' estimates of the cost of settlement plus an estimate for losses IBNR based upon historical experience, industry loss experience, and management's estimates. Loss reserves reflect Company management's best estimate of the total cost of (i) claims that have been incurred but not yet paid, and (ii) claims that have been incurred, but not yet reported (IBNR). Loss reserves that are established by Company management are not an exact calculation of our liability, but rather loss reserves represent management's best estimate for our Company's liability based on the application of actuarial techniques and other projection methodology, taking into consideration other facts and circumstances known as of the balance sheet date. The process of setting reserves is complex and necessarily imprecise. The impact of both internal and external variables on ultimate loss and LAE costs is difficult to estimate. To arrive at its best estimate for losses, the Company uses damage estimating software developed and owned by acknowledged industry leader, Insurance Service Office. Reserve factors for IBNR are reviewed quarterly by an independent actuarial consultant. In addition, our appointed independent actuary attests to the adequacy of our unpaid claim reserve, including IBNR at calendar year end.
As of December 31, 2014 and December 31, 2013, the Company has 20,500,000 shares of preferred stock, convertible, 12.50 % cumulative, $0.0001 par value per share, authorized and none issued and outstanding.
As of December 31, 2013, the Company had 40,000,000 shares authorized and 17,181,140 shares issued and 15,831,140 shares outstanding of $0.0001 par value common stock. Holders of common stock are entitled to one (1) vote for each share of common stock held at all meetings of stockholders.
As of December 31, 2014, the Company expects to record compensation expense in the future as follows:
Stock options granted in 2014 had a weighted average grant date fair value of $0.02. Stock options granted in 2013 had a weighted average grant date fair value of $0.10.
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows:
In assessing the realizability of deferred tax assets, management utilizes the criteria established under Accounting Standards Codification (ASC) 740 to annually evaluate the need for a deferred tax valuation allowance in order to determine whether it is more likely than not that some or all of the deferred tax assets will not be realized. Management considers the reversal of deferred tax liabilities and projected future taxable income in making this assessment. The results of operations during the years ended December 31, 2014 and 2013, continued growth in the Company's insurance policy and premium base with a wider demographic and geographic spread, as well as changes in the Company's reinsurance and catastrophe coverage were also considered important factors in assessing the realizability of deferred tax assets.
The total income tax provision (benefit) incurred is different from that which would be obtained by applying the statutory federal income tax rate to income before income taxes. The significant items causing this difference for 2014 and 2013 are as follows:
Property catastrophe treaties, which went into effect on the same day and having the same term as the quota share treaties, develop over four layers and 20% of our risk on property coverage on a gross loss of $110 million excess of $4 million per occurrence. The Company's net retention is $400,000 per loss occurrence.
The effects of reinsurance on premiums written and earned were as follows, for the years ended December 31, 2014 and December 31, 2013:
Following is a summary of HAIC's reinsurance balances under the above described reinsurance treaties as of December 31, 2014 and December 31, 2013:
The Company leases its corporate office space and certain office equipment under non-cancelable operating leases which expire at various dates through 2019. Future minimum lease payments required under the non-cancelable operating leases are as follows for the years ending December 31:
The Company is the defendant in routine litigation involving matters that are incidental to the claims function of the Company's insurance business for which estimated losses are included in unpaid loss and loss adjustment expense reserves in the Company's consolidated financial statements. It is management's opinion that these lawsuits are not material individually or in the aggregate to the Company's financial position, results of operations, or cash flow.
As of December 31, 2014, HAIC's total statutory surplus was $12,317,735 (capital stock of $2,500,000 and surplus of $9,817,735).
The Texas Insurance Code limits dividends from insurance companies to their stockholders to net income accumulated in the Company's surplus account, or "earned surplus".
HAIC prepares its statutory-based financial statements in conformity with accounting practices prescribed or permitted by the Texas Department of Insurance. Prescribed statutory accounting practices primarily include those published as statements of SAP by the NAIC, as well as state laws, regulations and general administrative rules. Permitted statutory accounting practices encompass all accounting practice not so prescribed. As of December 31, 2014 and 2013, there were no material permitted statutory accounting practice utilized by HAIC.
On February 2, 2015, the Company issued 227,273 shares of common stock at $0.66 a share to Inter-Atlantic Management, Inc. or "Inter-Atlantic". A number of our directors are among the beneficial owners of Inter-Atlantic. Per the terms of the Advisory Agreement dated August 1, 2013, Inter-Atlantic Management, Inc. will be issued annually on February 1st , a grant of the Company's common stock which in aggregate will have a fair market value of $150,000 at the time of grant.