We lease office space in Birmingham, Michigan, where our principal executive office is located. We also lease offices in Jacksonville, Longwood and Miami, Florida; Somerset, Pennsylvania; Brentwood, Tennessee; and Waco, Texas. We believe that our facilities are adequate for our current needs and that suitable additional or substitute space will be available as needed.
These historical results are not necessarily indicative of results to be expected for any future period. The following financial information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes thereto included elsewhere in this report (dollars in thousands, except for per share data).
For our Insurance Company Subsidiaries, the excess of assets over liabilities are determined in accordance with statutory accounting principles as determined by the NAIC.
We are an insurance holding company that markets and services our product offerings through specialty commercial and specialty personal insurance business lines. Our growth has been significant since our founding in 2009. Currently, we are authorized to write insurance as an excess and surplus lines carrier in 44 states, we are licensed to write insurance in 29 states as an admitted carrier and we offer our insurance products in all 50 states.
Our revenues are primarily derived from premiums earned from our insurance operations. We also generate other revenues through investment income and other income which mainly consists of: installment fees and policy issuance fees generally related to the policies we write and commission income from SIA's 50% owned agency in South Carolina (the "Affiliate"). The Affiliate places small commercial risks mainly for alarm and security guard markets.
On February 25, 2016, the Company announced its Board of Directors authorized a stock repurchase program, under which the Company may repurchase up to $2.1 million of its outstanding common stock over a one-year period. Under this program, management is authorized to repurchase shares at prevailing market prices through open market purchases, privately negotiated transactions, block purchases or otherwise in accordance with applicable federal securities laws, including Rule
10b5-1 and 10b-18 of the Securities Exchange Act of 1934, as amended. The actual timing, number and value of shares repurchased under the program will be determined by management in its discretion and will depend on a number of factors, including the market price of the Company’s stock, general market conditions, and other factors. Repurchases may be made from time to time, without prior notice. The Company may suspend or discontinue the program at any time.
On August 18, 2015, we completed our IPO, raising net proceeds of $30.4 million, after deducting offering underwriting discounts and commissions of $2.4 million and other offering expenses of $1.8 million. We used $17.0 million of the proceeds to pay down all of the Revolver and $6.3 million to buy back all of the outstanding preferred stock. The remaining $10.2 million ($7.1 million plus $3.1 million raised from preferred shareholders reinvesting their proceeds from the repurchase of the preferred shares into common shares at the IPO price), is available to contribute capital to the Insurance Company Subsidiaries in order to support our growth initiatives, and other general corporate purposes.
IBNR reserves are determined by subtracting case reserves from total estimated loss and LAE reserves, which are based on the ultimate expected losses and LAE less paid loss and LAE. Our actuarial department develops estimated ultimate loss and
The carried reserves reflect management’s best estimate of the outstanding loss and LAE liabilities. Management arrives at this estimate after reviewing an internal analysis prepared by the Company's certified actuary.
Our actuaries give different weights to each of these methods based upon the amount of historical experience data by line of business and by accident year, and based on judgment as to what method is believed to result in the most accurate estimate. The application of each method by line of business and by accident year may change in the future if it is determined that a different emphasis for each method would result in more accurate estimates.
Our reserves consist entirely of reserves for property and liability losses, consistent with the coverages provided for in the insurance policies directly written or assumed by us under reinsurance contracts. Occasionally, several years may elapse between the occurrence of an insured loss, the reporting of the loss to us and our payment of the loss. The level of IBNR reserves in relation to total reserves depends upon the characteristics of the specific line of business, particularly related to the speed with which claims are reported and outstanding claims are paid. Lines of business for which claims are reported slowly will have a higher percentage of IBNR reserves than lines of business that report and settle claims more quickly.
The following table shows the ratio of IBNR reserves to total reserves net of reinsurance recoverables as of December 31, 2015 (dollars in thousands):
We generated a sensitivity analysis of our net reserves which represents reasonably likely levels of variability in our selected loss development factors. We believe the most meaningful approach to the sensitivity analysis is to vary the loss development factors that drive the ultimate loss and LAE estimates. We applied this approach on an accident year basis, reflecting the reasonably likely differences in variability by level of maturity of the underlying loss experience for each accident year. Generally, the most recent accident years are characterized by more unreported losses and less information available for settling claims, and have more inherent uncertainty than the reserve estimates for more mature accident years. Therefore, we used variability factors of plus or minus 10% for the most recent accident year, 5% for the preceding accident year, and 2.5% for the second preceding accident year. There is minimal expected variability for accident years at four or more years’ maturity.
If, in the future, we determine we can support the recoverability of a portion or all of the deferred tax assets under the guidance, the tax benefits relating to any reversal of the valuation allowance on deferred tax assets as of December 31, 2015, will be accounted for as a reduction of income tax expense and result in an increase in equity. Changes in tax laws and rates may affect recorded deferred tax assets and liabilities and our effective tax rate in the future.
The Company's senior debt facility is comprised of three notes: a $17.5 million Revolver; a $5.0 million five-year term note ("Term Note") which commenced in October 2013; and a $7.5 million five-year term note which commenced in September 2014 ("2014 Term Note").
As of December 31, 2015, we have no off-balance sheet arrangements as defined in Item 303(a) (4) of Regulation S-K.
The Company reported a net loss of $17,000 for the year ended December 31, 2015, compared to a net loss of $6.9 million for the year ended December 31, 2014. Net loss allocable to common shareholders was $476,000 or $0.09 per share for the year ended December 31, 2015, compared to a net loss of $7.2 million or $2.69 per share for the same period in 2014.
Operating loss, a non-GAAP measure, allocable to common shareholders was $865,000 or $0.16 per share for the year ended December 31, 2015, compared to an operating loss allocable to common shareholders of $7.6 million or $2.85 per share for the year ended December 31, 2014.
Our combined ratio improved 11.7 percentage points for the year ended December 31, 2015 to 102.1%, compared to 113.8% for the same period in 2014.
Our results for the year ended December 31, 2015, also reflect the continued expansion of our commercial lines and repositioning of our personal lines. Our commercial lines gross written premiums grew by 23.9% for the year ended December 31, 2015, as compared to the same period in 2014. Gross written premiums in our personal lines declined by 11.2% for the year ended December 31, 2015, compared to the same period in 2014. The premium decline was driven by the termination of our personal automobile line in 2015, which saw a $7.3 million decline in premiums, year over year, in 2015.
Earned premiums are earned ratably over the term of the policy, whereas written premiums are reflected on the effective date of the policy. All commercial lines and homeowners products have annual policies, under which premiums are earned evenly over one year. Almost all personal automobile policies are six month term policies under which premiums are earned evenly over a six month period. The resulting net earned premiums are impacted by the gross and ceded written premiums, earned ratably over time.
Gross written premiums increased $9.9 million, or 11.8%, to $93.8 million for the year ended December 31, 2015, as compared to $83.8 million for the same period in 2014. The increase was driven by continued growth in our commercial lines, offset by the run-off personal automobile line. These results reflect our continued execution of our growth initiatives in the niche commercial insurance markets and our strategic change in the mix of business of our personal lines.
Commercial lines gross written premiums increased $13.1 million, or 23.9%, to $68.2 million for the year ended December 31, 2015, as compared to $55.1 million for the year ended December 31, 2014. This increase was primarily driven by the commercial multi-peril and other liability lines, which together grew by 22.1% year over year, largely due to expansion in the hospitality and security services product lines.
Net written premiums increased $13.4 million, or 20.2%, to $79.7 million for the year ended December 31, 2015, as compared to $66.3 million for the year ended December 31, 2014. Of this increase, $7.3 million is due to the termination of a quota share reinsurance agreement which occurred on August 1, 2015. The quota share arrangement was terminated as management determined the Company no longer needed the leverage support of this reinsurance arrangement due to the added capital raised from the IPO. Excluding the impact of the quota share reinsurance agreement, the net written premiums for the year ended December 31, 2015 increased $6.1 million compared to the same period in 2014.
Net losses and LAE decreased by $1.8 million, or 4.5%, for the year ended December 31, 2015, as compared to the same period in 2014. The decrease in our net losses and LAE was attributable to a number of factors, including a significant reduction in weather-related property losses which were historically high in 2014, a decrease in losses in low-value dwelling resulting from our underwriting changes in late 2014, and an increase in ceded losses under the quota share reinsurance agreement. Partially offsetting these items were increases to net losses and LAE due to increases in the overall growth of our business as well as the strengthening of our commercial automobile reserves and losses in our run-off personal automobile line of business.
administrative expenses related to our run-off personal automobile line (that had very little earned premium in 2015). The expenses related to the run-off business are expected to significantly decline in 2016.
We measure the performance of our consolidated results, in part, based on our underwriting gain or loss. The following table provides the underwriting gain or loss for the years ended December 31, 2015 and 2014 (dollars in thousands):
Our premiums are presented below for the years ended December 31, 2014 and 2013 (dollars in thousands):
Commercial lines gross written premiums increased $27.7 million, or 101.5%, to $55.1 million for the year ended December 31, 2014, as compared to $27.3 million for the same period in 2013. Of the $27.7 million increase, $17.7 million was attributable to our commercial multi-peril and other liability products in our owner-operated, small business target market and $8.5 million was attributable to our commercial automobile line. Our commercial lines growth was primarily generated from expansion of our existing products. In addition, the Company grew geographically and entered ten additional states in 2014, as compared to 2013, accounting for $1.2 million of additional premiums.
The increased premiums in personal lines business was partially offset by a decline in premium volume from our low-value dwelling line and personal automobile products near the end of 2014 as we made significant changes to both programs. We implemented underwriting, pricing and marketing changes to our low-value dwelling line in late 2014 that resulted in the termination of a number of low-performing agencies.
of the addition of a quota share reinsurance arrangement entered into on December 31, 2014. The quota share reinsurance arrangement allowed us to grow while utilizing the balance sheet of a reinsurer at a time when our growth outpaced our capital. Under this agreement, we ceded 25% of the subject premium, net of other reinsurance, and ceded 25% of our losses for the layer within our existing retention, which was for losses up to $500,000.
Other income for the year ended December 31, 2014 increased $1.0 million, or 116.9%, to $1.8 million as compared to $0.8 million for the same period in 2013. Other income consists primarily of fees charged to policyholders by the Company for services outside of the premium charge, such as installment billings or policy issuance costs. Commission income is also received by the Company’s insurance agencies for writing policies for third party insurance companies. The increase was a result of the growth in premium volume in personal automobile and commercial multi-peril lines.
The tables below detail our losses and LAE and loss ratios for the years ended December 31, 2014 and 2013 (dollars in thousands).
Additional increases in losses and LAE were attributable to weather-related losses in excess of what we would expect to occur based on our historical experience. Total weather-related losses were $7.3 million in 2014, consisting of $4.4 million attributable to personal lines and $2.9 million attributable to commercial lines. The primary cause of these excessive losses was the “polar vortex” occurring in the Midwestern and Eastern United States in the winter of 2014, which included sustained record-low temperatures and snow fall that triggered a high frequency of property claims. Our low-value dwelling line was also impacted by an increase in non-weather related losses during 2014. As a result of the increased losses in the low-value dwelling line, we increased Midwest homeowners rates by an average of 8% in both Indiana and Illinois and terminated a number of agents with poor performing results. We also modified our underwriting guidelines to add non-structural damage
exclusions in Illinois, reduce the number of prior claims allowed for certain homeowners policies, and eliminate certain broad coverage forms. Most of these changes took effect on or before January 1, 2015.
Our expense ratio decreased 13.9 percentage points for the year ended December 31, 2014 as compared to 2013, due to the premium volume growth rate exceeding the increase in the cost of our infrastructure.
Also contributing to the improvement in policy acquisition costs were small reductions in expense ratios as seen across most lines as efficiencies improved in the underwriting department. These efficiencies are the result of prior policies written entering the renewal stage, as renewal policies are less expensive to underwrite than new policies.
The reduction in the expense ratio was substantially driven by the increased premium volume. Since 2012, we have invested heavily in our infrastructure and highly qualified personnel to execute our growth strategy. Necessarily, those costs are incurred prior to our writing sufficient premium to support that expense structure. As we continue to grow we expect the expense ratio to continue to decline as our current infrastructure and personnel is adequate, with minimal additional operating costs, to write substantially more premium volume.
We measure the performance of our consolidated results, in part, based on our underwriting gain or loss. The following table provides the underwriting gain or loss for the years ended December 31, 2014 and 2013 (dollars in thousands):
The portfolio’s average quality was AA and produced a tax equivalent book yield of 1.91% and 2.12% for the years ended December 31, 2014 and 2013, respectively. The decrease in book yield in 2014 compared to 2013 is a result of continued lower reinvestment rates related to the decline in the interest rate market. The average duration of the fixed maturity portfolio decreased from 3.4 at December 31, 2013 to 3.1 at December 31, 2014 as a result of reinvestment activity.
We reported an income tax benefit of $281,000 in 2014, as compared to an income tax expense of $3,000 in 2013. The 2014 income tax benefit primarily relates to the impact of changes to net unrealized gains during the year in which tax effect is included in the change in other comprehensive income and the corresponding change to the valuation allowance is reflected in the statement of operations as a deferred tax benefit.
The Company has established a $6.9 million valuation allowance against 100% of the net deferred tax assets for 2014 and a $4.6 million valuation allowance for 2013. Included in our deferred tax assets is $6.9 million relating to net operating loss carryforwards in 2014, $2.2 million of which are expected to expire without realization due to Internal Revenue Code Section 382 limitations.
On August 18, 2015, the Company completed its IPO in which it issued and sold 3,300,000 shares of common stock at an IPO of $10.50 per share. The Company received net proceeds of $30.4 million after deducting underwriting discounts and commissions of $2.4 million and other offering expenses of $1.8 million.
At December 31, 2015, we had $19.1 million in cash and short-term investments. Our principal sources of funds, excluding capital raises, are insurance premiums, investment income, proceeds from maturity and sale of invested assets and installment fees. These funds are primarily used to pay claims, commissions, employee compensation, taxes and other operating expenses, and service debt.
We believe that our existing cash, short-term investments and investment securities balances and the $14.0 million available under our revolving credit line, will be adequate to meet our capital and liquidity needs and the needs of our subsidiaries on a short-term and long-term basis.
We contributed $7.5 million to our Insurance Company Subsidiaries in 2015 to increase their statutory surplus levels. We believe that the current statutory surplus levels and the funds available at the holding company level will provide the necessary statutory capital to support our premium volume growth over the next two years.
Cash provided by operating activities for the year ended December 31, 2014 was $6.3 million as compared to $2.5 million for December 31, 2013, an increase of $3.8 million. The increase in cash from operations was attributable to increased premium volume. The increase in cash was partially offset by an increase in losses and other operating expenses.
Investing Activities. Cash used in investing activities for the year ended December 31, 2015, was $15.3 million as compared to $47.7 million for the same period in 2014. The fluctuation in the funds used in routine investing activities correlates with the growth in the Company’s business. The Company continued to grow in 2015, however the current year growth has been at a slower pace than in 2014 and, therefore, the funds used in investing activities have decreased.
Net cash used in investing activities for the year ended December 31, 2014 was $47.7 million and was primarily attributable to net investments into fixed maturity securities of $38.3 million and short term investments of $7.5 million.
Financing Activities. Cash provided by financing activities for the year ended December 31, 2015, was $12.6 million as compared to $48.6 million for the same period in 2014. During the year ended December 31, 2015, we received net funds of $30.4 million from our IPO, received proceeds of $3.1 million for common stock issued to former holders of preferred stock. In addition, we used $6.3 million of the proceeds to repurchase outstanding shares of preferred stock and pay accrued preferred , used $17.0 million to pay off our revolving line of credit, received proceeds from our revolving line of credit of $4.4 million, and used $1.8 million for our routine payments on our term loans.
(2) Includes estimated future payments under the software license agreement relating to our policy issuance system. This agreement requires minimum monthly payments of $40,000, and is variable with premium volume. The future payment assumptions are based on the minimum monthly payments. The software license agreement expires on July 1, 2018.
The NAIC has a RBC formula to be applied to all property and casualty insurance companies. The formula measures required capital and surplus based on an insurance company’s products and investment portfolio and is used as a tool to evaluate the capital of regulated companies. The RBC formula is used by state insurance regulators to monitor trends in statutory capital and surplus for the purpose of initiating regulatory action. In general, an insurance company must submit a calculation of its RBC formula to the insurance department of its state of domicile as of the end of the previous calendar year. These laws require increasing degrees of regulatory oversight and intervention as an insurance company’s RBC declines.
The NAIC’s Insurance Regulatory Information System (“IRIS”) was developed to assist state insurance departments in executing their statutory mandates to oversee the financial condition of insurance companies operating in their respective states. IRIS identifies thirteen industry ratios and specifies “usual values” for each ratio. State insurance regulators review the IRIS ratio results to determine if an insurer is in need of further regulatory scrutiny or action. While the ratios, individually and