Commercial liability: We offer business owners policies, which consist primarily of small business retail, service, and office risks without a residential exposure. We also write artisan’s liability policies for small independent contractors with seven or fewer employees. In addition, we write special multi-peril policies for larger and more specialized business owners’ risks, including those with limited residential exposures.
(1) For the years ended December 31, 2015 and 2014, includes the effects of severe winter weather (which we define as a catastrophe). The year ended December 31, 2014 also includes catastrophe reinstatement premiums resulting from Superstorm Sandy, which occurred on October 29, 2012. We define a “catastrophe” as an event or series of related events that involve multiple first party policyholders, or an event or series of events that produce a number of claims in excess of a preset, per-event threshold of average claims in a specific area, occurring within a certain amount of time constituting the event or series of events. Catastrophes are caused by various natural events including high winds, excessive rain, winter storms, severe winter weather, tornadoes, hailstorms, wildfires, tropical storms, and hurricanes.
Direct written premiums during the year ended December 31, 2015 (“2015”) were $91,004,000 compared to $76,255,000 during the year ended December 31, 2014 (“2014”). The increase of $14,749,000, or 19.3%, was primarily due to an increase in policies in-force during 2015 as compared to 2014. We wrote more new policies as a result of continued demand for our products in the markets that we serve. Policies in-force increased by 17.9% as of December 31, 2015 compared to December 31, 2014.
Net written premiums increased $17,091,000, or 39.5%, to $60,385,000 in 2015 from $43,294,000 in 2014. Net written premiums include direct and assumed premiums, less the amount of written premiums ceded under our reinsurance treaties (quota share, excess of loss, and catastrophe). Our personal lines business is currently subject to a quota share treaty and our commercial lines business was subject to a quota share treaty through June 30, 2014. A reduction to the quota share percentage or elimination of a quota share treaty will reduce our ceded written premiums, which will result in a corresponding increase to our net written premiums.
Effective July 1, 2014, we terminated our commercial lines quota share treaty. The previous commercial lines quota share treaty effective July 1, 2013 had a quota share percentage of 25%. Also, effective July 1, 2014, we decreased the quota share percentage in our personal lines quota share treaty from 75% to 55%. The Cut-off of these treaties on July 1, 2014 resulted in a $6,597,000 return of unearned premiums from our reinsurers that were previously ceded under the expiring quota share treaties.
Most of the premiums written under our personal lines are also subject to our catastrophe treaty. An increase in our personal lines business gives rise to more property exposure, which increases our exposure to catastrophe risk; therefore, our premiums for catastrophe insurance will increase. This results in an increase in premiums ceded under our catastrophe treaty, which reduces net written premiums. With the inception of our personal lines quota share treaty being on a “net” basis effective July 1, 2015, our catastrophe premiums are ceded based on substantially all of our personal lines direct written premiums, compared to catastrophe premiums being ceded only on the amount of personal lines written premiums that we retained under the expired “gross” basis. As a result of the increase in our personal lines business and the change to a “net” basis for our personal lines quota share treaty, ceded catastrophe premiums increased by $3,937,000, or 150.8%, to $6,548,000 in 2015 from $3,937,000 in 2014.
The term of our expired personal lines reinsurance quota share treaty covered the period from July 1, 2013 to June 30, 2015 (“2013/2015 Treaty”). The computation to arrive at contingent ceding commission revenue under the 2013/2015 Treaty included catastrophe losses and LAE incurred from severe winter weather during 2015 and 2014 (see discussion of “Net Loss and LAE” below). Such losses increased our ceded loss ratio in our 2013/2015 Treaty, which reduced our contingent ceding commission revenue in accordance with the sliding scale discussed above in 2015 and 2014 by $1,281,000 and $517,000, respectively. See “Reinsurance” below for changes to our personal lines quota share treaty effective July 1, 2015.
Net investment income was $2,564,000 in 2015 compared to $1,800,000 in 2014. The increase of $764,000, or 42.4%, was due to an increase in average invested assets in 2015. The increase in cash and invested assets resulted primarily from: (1) the proceeds of $18,804,000 that we received on December 13, 2013 from our public offering being fully deployed in 2015 as compared to the partial deployment in 2014, (2) increased operating cash flows for the period after December 31, 2014, and (3) a decrease in investment expenses due to a rate decrease in our custodial fees. The increase in operating cash flows is due in part from the reduction in quota share rates on July 1, 2015 and 2014. The reduction in quota share ceding rates results in a decline in ceded premiums, which leads to more cash flow and more invested funds. The pre-tax equivalent investment yield on estimated annual income, excluding cash, was 4.77% and 4.67% as of December 31, 2015 and 2014, respectively.
Net loss and LAE was $23,180,000 in 2015 compared to $17,032,000 in 2014. The net loss ratio was 47.7% in 2015 compared to 52.2% in 2014, a decrease of 4.5 percentage points. The following graphs summarize the changes in the components of net loss ratio for the periods indicated:
During 2015, our calendar year net loss ratio decreased by 4.5 points as compared to 2014. The primary driver of the decrease is an improvement in prior year loss development, as we recorded 1.0 points of favorable prior year loss development in 2015 compared to 5.4 points of adverse (unfavorable) prior year development in 2014, or an improvement of 6.4 points. Offsetting some of the improvement in prior year loss development was the impact of severe winter weather, determined as the losses incurred over and above those expected in an average winter season. Severe winter weather had a 4.3 point impact on the net loss ratio in 2015 compared to 2.9 points in 2014, an increase of 1.4 points. The core loss ratio (excluding prior year loss development and severe winter weather) was stable, at 44.4% in 2015 compared to 43.9% for 2014, an increase of 0.5 points. The provision in our current year catastrophe reinsurance treaty that adds coverage for winter storm losses in excess of $4,000,000 over any 28 day period was not triggered by the winter weather in 2015. See table below under “Additional Financial Information” summarizing net loss ratios by line of business.
Effective October 1, 2014 we decided to no longer accept applications for new commercial auto coverage. The action was taken following a series of underwriting and pricing measures which were intended to improve the profitability of this line of business. The actions taken did not yield the hoped for results. In February 2015, we decided to no longer offer renewals to our existing commercial auto policies beginning with those that expired on or after May 1, 2015. As of December 31, 2015, we had 134 commercial auto policies in force, which represented 0.3% of our policies in force. As of December 31, 2014, we had 730 commercial auto policies in force, which represented 1.6% of our policies in force.
Other underwriting expenses were $12,833,000 in 2015 compared to $10,656,000 in 2014. The increase of $2,177,000, or 20.4%, in other underwriting expenses was primarily due to expenses directly and indirectly related to growth in direct written premiums. Expenses directly related to the increase in direct written premiums primarily consist of underwriting expenses, software usage fees and state premium taxes. Expenses indirectly related to the increase in direct written premiums primarily consist of salaries along with related other employment costs. Salaries and employment costs were $5,858,000 in 2015 compared to $4,914,000 in 2014. The increase of $944,000, or 19.2%, was due to hiring of additional staff to service our current level of business and anticipated growth in volume. In addition, there were annual rate increases in both salaries and the cost of employee benefits. Other underwriting expenses as a percentage of direct written premiums increased to 14.1% in 2015 from 14.0% in 2014. Other underwriting expenses as a percentage of direct earned premiums decreased to 15.5% in 2015 from 15.6% in 2014.
The key measures for our insurance underwriting business for the years ended December 31, 2015 and 2014 are as follows:
(3) For the year ended December 31, 2015 and 2014, the effect of catastrophe loss from severe winter weather on our net combined ratio only includes the direct effects of loss and loss adjustment expenses and ceding commission revenue and does not include the indirect effects of a $324,906 and $163,673, respectively, decrease in other underwriting expenses.
The following table presents a breakdown of the amortized cost, aggregate fair value and unrealized gains and losses by investment type as of December 31, 2015 and 2014:
A summary of the amortized cost and fair value of the Company’s investments in held-to-maturity securities by contractual maturity as of December 31, 2015 and 2014 is shown below:
As more fully described in Note 3 to our Consolidated Financial Statements, “Investments-Impairment Review,” we completed a detailed review of all our securities in a continuous loss position as of December 31, 2015 and 2014, and concluded that the unrealized losses in these asset classes are temporary in nature and the result of a decrease in value due to technical spread widening and broader market sentiment, rather than fundamental collateral deterioration.
The table below summarizes the gross unrealized losses of our fixed-maturity securities available-for-sale and equity securities by length of time the security has continuously been in an unrealized loss position as of December 31, 2015 and 2014:
There were 57 securities at December 31, 2015 that accounted for the gross unrealized loss, none of which were deemed by us to be other than temporarily impaired. There were 35 securities at December 31, 2014 that accounted for the gross unrealized loss, none of which were deemed by us to be other than temporarily impaired. Significant factors influencing our determination that unrealized losses were temporary included the magnitude of the unrealized losses in relation to each security’s cost, the nature of the investment and management’s intent not to sell these securities and it being not more likely than not that we will be required to sell these investments before anticipated recovery of fair value to our cost basis.
Through the quarter ended March 31, 2015, the primary sources of cash flow for our holding company operations were in connection with the fee income we received from premium finance. On March 27, 2015, we received $350,000 in connection with the early termination of the agreement that generated placement fees in our premium finance business (see Note 19 to the Consolidated Financial Statements). We also receive cash dividends from KICO, subject to statutory restrictions. For the year ended December 31, 2015, KICO paid dividends of $1,650,000 to us. In January 2016, we received the remaining outstanding balance of $250,000 on a note receivable from the June 2009 sale of our former Pennsylvania retail business.
Effective December 31, 2015 we cancelled our $600,000 bank line of credit which had been intended to be used for general corporate needs. There were no borrowings on the credit line during years ended December 31, 2015 and 2014.
Net cash provided by operating activities was $20,402,000 in 2015 as compared to $17,333,000 provided in 2014. The $3,069,000 increase in cash flows provided by operating activities in 2015 was primarily a result of an increase in cash arising from net fluctuations in assets and liabilities relating to operating activities of KICO as affected by the growth in its operations which are described above, and an increase in net income (adjusted for non-cash items) of $2,230,000.
Net cash used in investing activities was $14,902,000 in 2015 compared to $25,999,000 used in 2014. The $11,097,000 decrease in cash used in investing activities is the result of a $17,143,000 decrease in acquisitions of invested assets, offset by a $5,526,000 increase in sales of invested assets.
The following table provides summary information with respect to each reinsurer that accounted for more than 10% of our reinsurance recoverables on paid and unpaid losses and loss adjustment expenses as of December 31, 2015:
Effective July 1, 2014, our catastrophe treaty also covers losses caused by severe winter weather during any consecutive 28 day period.
The single maximum risks per occurrence to which we are subject under the treaties that expired on June 30, 2015 and 2014 are as follows:
Financial strength ratings are important factors in establishing the competitive position of insurance companies and generally have an effect on an insurance company's business. Many insurance buyers, agents, brokers and secured lenders use the ratings assigned by A.M. Best and other agencies to assist them in assessing the financial strength and overall quality of the companies from which they are considering purchasing insurance or in determining the financial strength of the company that provides insurance with respect to the collateral they hold. KICO currently has an A.M. Best financial strength rating of B++ (Good). A.M. Best ratings are derived from an in-depth evaluation of an insurance company’s balance sheet strengths, operating performances and business profiles. A.M. Best evaluates, among other factors, the company’s capitalization, underwriting leverage, financial leverage, asset leverage, capital structure, quality and appropriateness of reinsurance, adequacy of reserves, quality and diversification of assets, liquidity, profitability, spread of risk, revenue composition, market position, management, market risk and event risk. On an ongoing basis, rating agencies such as A.M. Best review the financial performance and condition of insurers and can downgrade or change the outlook on an insurer's ratings due to, for example, a change in an insurer's statutory capital, a reduced confidence in management or a host of other considerations that may or may not be under the insurer's control. KICO currently has a Demotech financial stability rating of A (Excellent), which generally permits lenders to accept our policies. All ratings are subject to continuous review; therefore, the retention of these ratings cannot be assured. A downgrade in any of these ratings could have a material adverse effect on our competitiveness, the marketability of our product offerings and our ability to grow in the marketplace.
In addition, market volatility can make it difficult to value certain of our securities if trading becomes less frequent. As such, valuations may include assumptions or estimates that may have significant period to period changes which could have a material adverse effect on our consolidated results of operations or financial condition. If significant, continued volatility, changes in interest rates, changes in defaults, a lack of pricing transparency, market liquidity and declines in equity prices, individually or in tandem, could have a material adverse effect on our results of operations, financial condition or cash flows through realized losses, impairments, and changes in unrealized positions.
Reinsurance may be unavailable at current levels and prices, which may limit our ability to write new business.
Our personal lines catastrophe reinsurance program was designed, utilizing our risk management methodology, to address our exposure to catastrophes. Market conditions beyond our control impact the availability and cost of the reinsurance we purchase. No assurances can be given that reinsurance will remain continuously available to us to the same extent and on the same terms and rates as currently available. For example, our ability to afford reinsurance to reduce our catastrophe risk may be dependent upon our ability to adjust premium rates for its cost, and there are no assurances that the terms and rates for our current reinsurance program will continue to be available in the future. If we are unable to maintain our current level of reinsurance or purchase new reinsurance protection in amounts that we consider sufficient and at prices that we consider acceptable, we will have to either accept an increase in our exposure risk, reduce our insurance writings or develop or seek other alternatives.
We have determined it to be in the best interests of our shareholders to prudently reduce our reliance on quota share reinsurance. Any such reduction would result in higher net earned premiums and a reduction in ceding commission revenue in future years. Such an approach would also lead to increased exposure to net insurance losses.
We recognize the scientific view that the world is getting warmer. Climate change, to the extent it produces rising temperatures and sea levels, could impact the frequency and/or severity of weather-related claim events. This may ultimately affect the affordability and availability of homeowners insurance and our ability to grow profitably in certain lines of business and geographic regions.
Our operating results and financial condition may be adversely affected by the cyclical nature of the property and casualty business.
We are highly dependent on a small number of insurance brokers for a large portion of our revenues.
We market our insurance products primarily through insurance brokers. A large percentage of our gross premiums written are sourced through a limited number of brokers. These brokers provided a total of 33.5% of our gross premiums written for the year ended December 31, 2015. The nature of our dependency on these brokers relates to the high volume of business they consistently refer to us. Our relationship with these brokers is based on the quality of the underwriting and claims services we provide to our clients and on our financial strength ratings. Any deterioration in these factors could result in these brokers advising clients to place their risks with other insurers rather than with us. A loss of all or a substantial portion of the business provided by one or more of these brokers could have a material adverse effect on our financial condition and results of operations.
Actual claims incurred may exceed current reserves established for claims, which may adversely affect our operating results and financial condition.
We are a holding company and a legal entity separate and distinct from our operating subsidiary, KICO. As a holding company with limited operations of our own, the principal sources of our funds are dividends from KICO. Consequently, we must rely on KICO for our ability to repay debts, pay expenses and pay cash dividends to our shareholders.
Our ability to receive dividends from KICO is restricted by the state laws and insurance regulations of New York. These restrictions are related to surplus and net investment income. Maximum permissible dividends are restricted to the lesser of 10% of surplus or 100% of net investment income (on a statutory accounting basis) for the trailing 36 months, less dividends paid during the preceding 24 months of the current 12 month period. As of December 31, 2015, the maximum permissible distribution that KICO could pay without prior regulatory approval was approximately $3,357,000.
Our future success will depend, in part, upon the efforts of Barry Goldstein, our President and Chief Executive Officer. The loss of Mr. Goldstein or other key personnel could prevent us from fully implementing our business strategies and could materially and adversely affect our business, financial condition and results of operations. As we continue to grow, we will need to recruit and retain additional qualified management personnel, but we may not be able to do so. Our ability to recruit and retain such personnel will depend upon a number of factors, such as our results of operations and prospects and the level of competition then prevailing in the market for qualified personnel. Mr. Goldstein is a party to an employment agreement with us that expires on December 31, 2016.
steal, corrupt, or destroy data, including our intellectual property, financial data or the personal information of our customers or employees
Accordingly, our executive officers and directors, through their beneficial ownership of our common stock, will be able to significantly influence the vote on all matters submitted to a vote of our shareholders, including the election of directors, amendments to our restated certificate of incorporation or amended and restated bylaws, mergers or other business combination transactions and certain sales of assets outside the usual and regular course of business. The interests of our executive officers and directors may not coincide with the interests of our other shareholders, and they could take actions that advance their own interests to the detriment of our other shareholders.