Overall, net income was $100.7 million, $63.8 million, and $106.9 million in 2014, 2013, and 2012, respectively and we recognized underwriting income (losses) of $20.6 million, $(24.8) million, and $23.3 million for the same periods, respectively. Underwriting income or loss is determined by deducting losses and LAE, commission expense, and underwriting and other operating expenses from net premiums earned. Key factors that affected our financial performance during 2014 and 2013, each compared to the previous year, respectively, include:
Income tax expense was $5.9 million in 2014, while we had income tax benefits of $10.7 million and $9.3 million in 2013 and 2012, respectively.
In 2014, we began execution of a number of key strategic initiatives, including: centralizing management of sales and underwriting operations; creating a new department focused on internal and customer facing business process excellence; slowing policy count growth in California as we diversify our risk exposure across our markets; establishing a three-company pricing platform in California with newly approved rates and territorial multipliers; increasing pricing for under-performing class codes; and targeting attractive classes of business across all of our markets.
The following items were included in our 2014 results of operations: (1) favorable development in the estimated reserves ceded under the LPT Agreement that resulted in a $31.1 million cumulative adjustment to the Deferred reinsurance gain-LPT Agreement (Deferred Gain) and reduced our losses and LAE by the same amount (LPT Reserve Adjustment); (2) an increase in the contingent commission receivable under the LPT Agreement that resulted in a $10.8 million cumulative adjustment, which reduced our losses and LAE by the same amount (LPT Contingent Commission Adjustment); and (3) a reallocation of $13.1 million of reserves from non-taxable periods prior to January 1, 2000, which reduced our effective tax rate by 3.4 percentage points, or $3.6 million. Collectively, these items increased net income by $45.5 million for the year ended December 31, 2014.
The following items were included in our 2012 results of operations: (1) favorable development in the estimated reserves ceded under the LPT Agreement, which resulted in a $73.3 million LPT Reserve Adjustment; (2) an increase in the contingent commission receivable under the LPT Agreement that resulted in a $9.6 million LPT Contingent Commission Adjustment; and (3) guidance issued by the Financial Accounting Standards Board that, beginning in 2012, changed the definition of policy acquisition costs which may be capitalized, resulting in a $7.1 million increase in our underwriting and other operating expenses during 2012. Collectively, these items increased net income by $75.8 million for the year ended December 31, 2012.
A primary measure of our performance is our ability to increase stockholders' equity, including the impact of the Deferred Gain, over the long-term; however, during periods of rising interest rates, the fair value of the fixed income component of our investment portfolio may be negatively impacted, thereby reducing stockholders' equity. The following table shows our stockholders' equity including the Deferred Gain, stockholders' equity on a GAAP basis, and number of common shares outstanding at December 31:
Our ability to increase stockholders' equity is dependent on our maintaining focus on disciplined underwriting and continuing to pursue profitable growth opportunities across market cycles; however, we continue to be affected by persistently low investment yields.
Net premiums earned were $684.5 million, $642.3 million, and $501.5 million for the years ended December 31, 2014, 2013, and 2012, respectively. The increase in net premiums earned over the past three years was primarily due to increasing policy count, increasing average policy size, and higher net rate.
Net investment income was $72.4 million, $70.8 million, and $72.4 million for the years ended December 31, 2014, 2013, and 2012, respectively. The average pre-tax book yield on invested assets was 3.2%, 3.4%, and 3.7% at December 31, 2014, 2013, and 2012, respectively, while the tax-equivalent yield on invested assets was 3.8%, 4.0%, and 4.4% as of the same dates, respectively.
We analyze our loss and LAE ratios on both a calendar year and accident year basis. A calendar year loss and LAE ratio is calculated by dividing the losses and LAE incurred during the calendar year, regardless of when the underlying insured event occurred, by the net premiums earned during that calendar year. The calendar year loss and LAE ratio includes changes made during the calendar year in reserves for losses and LAE established for insured events occurring in the current and prior years. A calendar year loss and LAE ratio is calculated using premiums and losses and LAE that are net of amounts ceded to reinsurers. The calendar year loss and LAE ratio for a particular year will not change in future periods.
We analyze our calendar year loss and LAE ratio to measure our profitability in a particular year and to evaluate the adequacy of our premium rates charged in a particular year to cover expected losses and LAE from all periods, including development (whether favorable or unfavorable) of reserves established in prior periods. In contrast, we analyze our accident year loss and LAE ratios to evaluate our underwriting performance and the adequacy of the premium rates we charged in a particular year in relation to ultimate losses and LAE from insured events occurring during that year. The loss and LAE ratios provided in this report are calendar year basis, except where they are expressly identified as accident year loss and LAE ratios.
Our indemnity claims frequency (the number of claims expressed as a percentage of payroll) has decreased year-over-year; however, our loss experience indicates an upward trend in medical and indemnity costs per claim that are reflected in our current accident year loss estimate. Specifically, we experienced increased costs associated with an increase in the number of cumulative trauma claims filed in California during 2014, compared to 2013. In 2013, we experienced increased costs associated with claims litigation, driven by a nearly eight percentage point increase in the number of claims that were litigated in our southern California operations during the fourth quarter of 2013, compared to a six percentage point increase during the first three quarters of the year. In 2014, the rate of increase in the number of litigated claims in California moderated. We believe our current accident year loss estimate is adequate; however, ultimate losses will not be known with any certainty for many years. We assume that increasing medical and indemnity cost trends will continue to impact our long-term claims costs and current accident year loss estimate, which may be offset by rate increases. Additional information regarding our reserves for losses and LAE is set forth under “-Critical Accounting Policies-Reserves for Losses and LAE.”
Overall, losses and LAE were $453.4 million, $463.6 million, and $287.9 million for the years ended December 31, 2014, 2013, and 2012, respectively. The decrease from 2013 to 2014 was primarily due to a decrease in the current accident year loss estimate, partially offset by higher net premiums earned. The increase from 2012 to 2013 was primarily due to higher net premiums earned in 2013. Additionally, there were favorable LPT Reserve Adjustments of $31.1 million, $19.0 million, and $73.3 million that decreased losses and LAE by those amounts for the years ended December 31, 2014, 2013, and 2012, respectively. Unfavorable prior accident year development in 2013 included $5.0 million related to California loss reserves for the 2009 through 2011 accident years and $1.9 million related to our assigned risk business. Prior accident year loss development in 2014 and 2012 was primarily related to our assigned risk business. There was no material unfavorable loss development related to our voluntary business in 2014 or 2012. Our current accident year loss estimates were 73.6%, 77.0%, and 77.0% for the years ended December 31, 2014, 2013, and 2012, respectively. The trend in the current accident year loss estimates reflects the impact of higher net rate, which is a function of a variety of factors, including rate changes, underwriting risk profiles and pricing, and changes in business mix related to economic and competitive pressures, particularly in California, which was offset by increasing loss costs in 2013.
Additionally, implementation of the accounting guidance for deferred policy acquisition costs (DAC) resulted in a $7.1 million increase in our underwriting and other operating expenses, partially offset by a $1.4 million change in estimate for guaranty fund assessments for the year ended December 31, 2012. Excluding the impact of the DAC guidance and the change in estimate for guaranty fund assessments, underwriting and other operating expenses would have increased $6.4 million for the year ended December 31, 2013 compared to 2012.
Our commission expense ratio was 11.9%, 12.2%, and 13.1%, while our commission expense was $81.4 million, $78.3 million, and $65.6 million for the years ended December 31, 2014, 2013, and 2012, respectively. While our commission expense is up
over the past three years, primarily due to higher net premiums earned, our commission expense ratio has decreased over the past three years, primarily due to lower base commissions and agency incentives as a percentage of premiums earned.
Income tax expense (benefit) was $5.9 million, $(10.7) million, and $(9.3) million for the years ended December 31, 2014, 2013, and 2012, respectively. The effective tax rate was 5.5%, (20.0)%, and (9.6)% for the years ended December 31, 2014, 2013, and 2012, respectively. The increased income tax expense for the year ended December 31, 2014, compared to 2013, was primarily due to the the increase in underwriting income to $20.6 million in 2014, compared to an underwriting loss of $24.8 million in 2013.
In September 2013, EHI made a cash capital contribution totaling $40 million to its operating subsidiaries to support future growth and maintain the subsidiaries' financial strength ratings.
The holding company had $63.3 million of cash and cash equivalents and fixed maturity securities maturing within the next 24 months at December 31, 2014. A principal payment of $60 million on our line of credit is due on December 31, 2015. We believe that the liquidity needs of the holding company over the next 24 months will be met with cash, investments, and dividends from our insurance subsidiaries.
We purchase reinsurance to protect us against the costs of severe claims and catastrophic events. On July 1, 2014, we entered into a new reinsurance program that is effective through June 30, 2015. The reinsurance program consists of one treaty covering excess of loss and catastrophic loss events in five layers of coverage. Our reinsurance coverage is $195.0 million in excess of our $5.0 million retention on a per occurrence basis, subject to a $2.0 million annual aggregate deductible and certain exclusions. We believe that our reinsurance program meets our needs and that we are sufficiently capitalized.
Our insurance subsidiaries are required by law to maintain a certain minimum level of surplus on a statutory basis. Surplus is calculated by subtracting total liabilities from total admitted assets. The amount of capital in our insurance subsidiaries is maintained relative to standardized capital adequacy measures such as risk-based capital (RBC), as established by the National Association
Various state regulations require us to keep securities or letters of credit on deposit with certain states in which we do business. Securities having a fair market value of $783.9 million and $602.4 million were on deposit at December 31, 2014 and 2013, respectively. These laws and regulations govern both the amount and types of fixed maturity securities that are eligible for deposit. Additionally, certain reinsurance contracts require company funds to be held in trust for the benefit of the ceding reinsurer to secure the outstanding liabilities we assumed. We held fixed maturity securities and restricted cash and cash equivalents that had a fair value of $31.2 million and $32.2 million in trust for the benefit of ceding reinsurers at December 31, 2014 and 2013, respectively.
The table below shows our net cash flows. For additional information regarding our cash flows, see Item 8., Consolidated Statement of Cash Flows.
Operating Cash Flows. Major components of net cash provided by operating activities in 2014 included net premiums received of $673.7 million, and investment income received of $82.7 million. These were partially offset by claims payments of $386.6 million (net of $33.2 million recovered from reinsurers), underwriting and other operating expenses paid of $122.6 million (including premium taxes paid of $27.1 million), and commissions paid of $78.9 million.
Major components of net cash provided by operating activities in 2013 included net premiums received of $624.0 million, and investment income received of $78.8 million. These were partially offset by claims payments of $332.8 million (net of $33.1 million recovered from reinsurers), underwriting and other operating expenses paid of $131.2 million (including premium taxes paid of $22.7 million), and commissions paid of $75.1 million.
Investing Cash Flows. The majority of net cash used in investing activities in 2014, 2013, and 2012 was related to the investment of premiums received and the reinvestment of funds from maturities and redemptions.
Our capital structure is comprised of outstanding debt and stockholders' equity. As of December 31, 2014, our capital structure consisted of a $60.0 million principal balance on our Amended Credit Facility, $32.0 million in surplus notes maturing in 2034, and $893.9 million of stockholders' equity, including the Deferred Gain. Outstanding debt was 9.3% of total capitalization, including the Deferred Gain, as of December 31, 2014.
The following table shows our stockholders' equity including the Deferred Gain, with a reconciliation to our stockholders' equity on a GAAP basis.
Contractual Obligations and Commitments. The following table identifies our long-term debt and contractual obligations as of December 31, 2014.
The cost or amortized cost of our investment portfolio was $2.3 billion and the fair value was $2.4 billion as of December 31, 2014.
We employ an investment strategy that emphasizes asset quality and considers the durations of fixed maturity securities against anticipated claim payments and expenditures, other liabilities, and capital needs. Our investment portfolio is structured so that investments mature periodically in reasonable relation to current expectations of future claim payments. Currently, we make claim payments from positive cash flow from operations and use excess cash to invest in operations, invest in marketable securities, return capital to our stockholders, and fund growth.
As of December 31, 2014, our investment portfolio, which is classified as available-for-sale, consisted of 93.0% fixed maturity securities whose fair values may fluctuate due to interest rate changes. We strive to limit interest rate risk by managing the duration of our fixed maturity securities. Our fixed maturity securities (excluding cash and cash equivalents) had a duration of 4.0 at December 31, 2014. To minimize interest rate risk, our portfolio is weighted toward short-term and intermediate-term bonds; however, our investment strategy balances consideration of duration, yield, and credit risk. Our investment guidelines require that the minimum weighted average quality of our fixed maturity securities portfolio shall be “AA-.” Our fixed maturity securities portfolio had a weighted average quality of “AA-” as of December 31, 2014, with 57.4% of the portfolio rated “AA” or better, based on market value.
We seek to maximize total investment returns within the constraints of prudent portfolio management. The asset allocation is reviewed by the Finance Committee of the Board of Directors on a quarterly basis. We employ Conning Asset Management (Conning) to act as our independent investment manager. Conning follows our written investment guidelines based upon strategies approved by the Board of Directors. In addition to the construction and management of the portfolio, we utilize the investment advisory services of Conning.
Based on our review of fixed maturity and equity securities, we believe that we appropriately identified the declines in the fair values of our unrealized losses for the years ended December 31, 2014 and 2013. We determined that the unrealized losses on fixed maturity securities were primarily the result of prevailing interest rates and not the credit quality of the issuers. The fixed maturity securities whose fair value was less than amortized cost were not determined to be other-than-temporarily impaired given the severity and duration of the impairment, the credit quality of the issuers, the Company’s intent to not sell the securities, and a determination that it is not more likely than not that the Company will be required to sell the securities until fair value recovers to above cost, or maturity.
The preparation of financial statements in accordance with GAAP requires both the use of estimates and judgment relative to the application of appropriate accounting policies. Our accounting policies are described in the Notes to our Consolidated Financial Statements, but we believe that the following matters are particularly important to an understanding of our financial statements because changes in these estimates or changes in the assumptions used to make them could have a material impact on our results of operations, financial condition, and cash flows.
The Consulting Actuary determines its point estimate for Nevada losses based on a combination of methodologies, similar to those utilized for our other insurance subsidiaries, as described below. While such a determination, based on a combination of methodologies, is valid, management believes that using strictly paid loss methods for Nevada losses for 2007 and prior is the preferred approach given our depth of knowledge of Nevada losses and the consistency of paid data over time resulting from and related to the statutory prohibition of entering into full and final settlements of Nevada losses. This paid data provides a stable base for estimation of reserves. The Consulting Actuary has provided us with a sensitivity analysis for Nevada losses for 2007 and prior that is based strictly on the historically utilized paid loss methods.
Each actuarial methodology requires the selection and application of various parameters and assumptions. The key parameters and assumptions include: the pattern with which our aggregate claims data will be paid or will emerge over time; claims cost inflation rates; the effects of legislative benefit changes and/or judicial changes; and trends in the frequency of claims, both overall and by severity of claim. We believe the pattern with which our aggregate claims data will be paid or emerge over time, claims cost inflation rates, and claim frequencies are the most important parameters and assumptions.
As of December 31, 2014, California and Nevada represented approximately 78% of our reserves for unpaid losses and LAE on our consolidated balance sheet.
In California, where our operations began in 2002, the actuaries' and management's initial expectations of ultimate losses and patterns of loss emergence and payment were based on benchmarks derived from analyses of historical insurance industry data in California. No historical data from our California insurance subsidiary existed prior to July 1, 2002; however, some historical data was available for the prior years for some of the market segments we entered in California, but was limited as to the number of loss reserve evaluation points available. The industry-based benchmarks were judgmentally adjusted for the anticipated impact of significant environmental changes, specifically the enactment of major changes to the statutory workers' compensation benefit structure and the manner in which claims are administered and adjudicated in California. The actual emergence and payment of claims by our California insurance subsidiary have been more favorable than those initial expectations through 2008, due at least in part to the impact of the enactment of major changes in the California workers' compensation environment. Our recent loss experience, beginning in 2010, indicates an upward trend in medical and indemnity costs that are reflected in our loss reserves; however, our indemnity claims frequency (the number of claims expressed as a percentage of payroll) decreased year-over-year in 2014. Our reserve estimates assume that increasing medical cost trends will continue and will impact our long-term claims costs and loss reserves.
In Nevada, we have compiled a lengthy history of workers' compensation claims payment patterns based on the business of the Nevada State Industrial Insurance System (the Fund) and EICN, but the emergence and payment of claims in recent years has been more favorable than in the long-term history in Nevada with the Fund. The expected patterns of claim payments and emergence used in the projection of our ultimate claim payments are based on both long and short-term historical data. In recent evaluations, claim patterns have continued to emerge in a manner consistent with short-term historical data. Consequently, our selection of claim projection patterns has relied more heavily on patterns observed in recent years.
More than 60% of our claims payments during the three years ended December 31, 2014 related to medical care for injured workers. The utilization and cost of medical services in the future is a significant source of uncertainty in the establishment of loss reserves for workers' compensation. Our loss reserves are established based on reviewing the results of actuarial methods, some of which
Actual losses are affected by a more complex combination of forces and dynamics than any one model or actuarial methodology can represent, and each methodology is an approximation of these complex forces and dynamics. None of the methods are designed or intended to produce an indication that is systematically higher or lower than the other methods. At any given evaluation date, some of the actuarial projection methods produce indications outside the Consulting Actuary's selected range. Accordingly, we believe that the range of potential outcomes is considerably wider than the actuarially estimated range of the most likely outcomes. We have no basis for anticipating whether actual future payments of losses and LAE may be either greater than or less than the reserve for unpaid losses and LAE currently on our balance sheet.
Consolidated Statements of Comprehensive Income for each of the three years ended December 31, 2014
Management conducted an assessment of the effectiveness of the Company's internal control over financial reporting as of December 31, 2014 based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission 2013 framework (COSO Framework).
Based on this assessment, management did not identify any material weaknesses in the internal control over financial reporting and management has concluded that the Company's internal control over financial reporting was effective as of December 31, 2014.
We have audited Employers Holdings, Inc. and Subsidiaries' internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). Employers Holdings, Inc. and Subsidiaries' management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company's internal control over financial reporting based on our audit.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Employers Holdings, Inc. and Subsidiaries as of December 31, 2014 and 2013, and the related consolidated statements of comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2014 and our report dated February 19, 2015 expressed an unqualified opinion thereon.
We have audited the accompanying consolidated balance sheets of Employers Holdings, Inc. and Subsidiaries as of December 31, 2014 and 2013, and the related consolidated statements of comprehensive income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2014. Our audits also included the financial statement schedules listed in the Index at Item 15. These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.
The preparation of the consolidated 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 assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. As a result, actual results could differ from these estimates. The most significant areas that require management judgment are the estimate of unpaid losses and loss adjustment expenses (LAE), evaluation of reinsurance recoverables, recognition of premium revenue, deferred income taxes, investments, and the valuation of goodwill and intangible assets.
Loss and LAE reserves represent management's best estimate of the ultimate net cost of all reported and unreported losses incurred for the applicable periods, less payments made. The estimated reserves for losses and LAE include the accumulation of estimates for all claims reported prior to the balance sheet date, estimates of claims incurred but not reported, and estimates of expenses for investigating and adjusting all incurred and unadjusted claims (based on projections of relevant historical data). Amounts reported are necessarily subject to the impact of future changes in economic, regulatory and social conditions. Management believes that, subject to the inherent variability in any such estimate, the reserves are within a reasonable and acceptable range of adequacy. Estimates for claims prior to the balance sheet date are continually monitored and reviewed, and as settlements are made or reserves adjusted, the differences are reported in current operations. Salvage and subrogation recoveries are estimated based on a review of the level of historical salvage and subrogation recoveries.
The following methods and assumptions were used by the Company in estimating the fair value for financial instruments in the accompanying consolidated financial statements and in these notes for the years ended 2014 and 2013:
Intangible assets related to state licenses are not subject to amortization. Intangibles related to insurance relationships will be amortized in proportion to the expected period of benefit over the next four years.
The Company's estimates of fair value for financial liabilities are based on the variable interest rate for the Company's existing line of credit to discount future payments on notes payable, and have been determined to be Level 2 fair value measurements, as defined below.
The cost or amortized cost, gross unrealized gains, gross unrealized losses, and estimated fair value of the Company’s investments were as follows:
Based on reviews of the equity securities for the years ended December 31, 2014 and 2013, the Company recognized total impairments of $0.5 million and $0.1 million in the fair values of seven and one equity securities as a result of the Company's intent to sell and the severity and duration of the change in fair values of those securities as of December 31, 2014 and 2013, respectively. The remaining unrealized losses on equity securities were not considered to be other than temporary due to the financial condition and near-term prospects of the issuers.
The Company is required by various state laws and regulations to keep securities or letters of credit in depository accounts with the states in which it does business. As of December 31, 2014 and 2013, securities having a fair value of $783.9 million and $602.4 million, respectively, were on deposit. These laws and regulations govern not only the amount but also the type of security that is eligible for deposit. The deposits are limited to fixed maturity securities in all states. Additionally, certain reinsurance contracts require Company funds to be held in trust for the benefit of the ceding reinsurer to secure the outstanding liabilities assumed by the Company. The fair value of securities held in trust for reinsurance at December 31, 2014 and 2013 was $31.2 million and $32.2 million, respectively. The Company's debt was secured by fixed maturity securities and restricted cash and cash equivalents that had a fair value of $74.6 million and $95.1 million at December 31, 2014 and 2013, respectively.
Depreciation and amortization expenses related to property and equipment for the years ended December 31, 2014, 2013, and 2012 were $6.3 million, $5.2 million, and $4.4 million, respectively. Internally developed software costs of $0.8 million were capitalized during each of the years ended December 31, 2014 and 2013.
The LPT Reserve Adjustments for the years ended December 31, 2014, 2013, and 2012 increased GAAP net income by $31.1 million, $19.0 million, and $73.3 million, respectively, but did not increase taxable income. The LPT Contingent Commission
Adjustments increased net income by $10.8 million, $4.3 million, and $9.6 million during 2014, 2013, and 2012, respectively, but did not increase taxable income.
At December 31, 2014, the Company had a $46.2 million net operating loss carryforward. This is due to expire beginning 2031 through 2033.
In 2014 and 2012, the increase in the estimate of incurred losses and LAE attributable to insured events in prior years was primarily related to the Company's assigned risk business. In 2013, the increase in the estimate of incurred losses and LAE attributable to insured events in prior years included $5.0 million related to actual paid losses that were more than expected and the impact of new information on selected patterns of claims emergence and payments used in the projection of future loss payments and $1.9 million related to the Company's assigned risk business.
EPIC has a $10.0 million surplus note to Dekania CDO II, Ltd. issued as part of a pooled transaction. The note matures in 2034 and became callable by the Company in the second quarter of 2009. The terms of the note provide for quarterly interest payments at a rate 425 basis points in excess of the 90-day LIBOR. Both the payment of interest and repayment of the principal under this note and the surplus notes described in the succeeding two paragraphs are subject to the prior approval of the Florida Department of Financial Services. Interest paid during each of the years ended December 31, 2014, 2013, and 2012 was $0.5 million. Interest accrued as of December 31, 2014 and 2013 was $0.1 million.
EPIC has a $10.0 million surplus note to Alesco Preferred Funding V, LTD issued as part of a pooled transaction. The note matures in 2034 and became callable by the Company in the fourth quarter of 2009. The terms of the note provide for quarterly interest payments at a rate 405 basis points in excess of the 90-day LIBOR. Interest paid during the years ended December 31, 2014, 2013,
Principal payment obligations on notes payable outstanding at December 31, 2014, were as follows:
The Company leases office facilities and certain equipment under operating and capital leases. Most leases have renewal options, typically with increased rental rates during the option period. Certain of these leases contain options to purchase the property at amounts that approximate fair market value; other leases contain options to purchase at a bargain purchase price. At December 31, 2014, the remaining lease terms expire over the next five years.
The future lease payments for the next five years on these non-cancelable operating and capital leases at December 31, 2014, were as follows:
Included in the future minimum capital lease payments are future interest charges of $0.2 million. Facilities rent expense was $4.8 million, $5.0 million, and $5.2 million for the years ended December 31, 2014, 2013, and 2012, respectively.
All of the states where the Company's insurance subsidiaries are licensed to transact business require property and casualty insurers doing business within the respective state to pay various insurance assessments. The Company accrues a liability for estimated insurance assessments as direct premiums are written, losses are recorded, or as other events occur in accordance with various states' laws and regulations, and defers these costs and recognizes them as an expense as the related premiums are earned. The Company had an accrued liability for guaranty fund assessments, second injury funds assessments, and other insurance assessments totaling $18.8 million and $13.1 million as of December 31, 2014 and 2013, respectively. These liabilities are generally expected to be paid over one to eighty year periods based on individual state's regulations. The Company also recorded an asset of $13.0 million and $5.1 million, as of December 31, 2014 and 2013, respectively, for prepaid policy charges still to be collected in the future from policyholders, assessments that may be recovered through a reduction in future premium taxes in certain states, and
for expected refunds of certain prepaid assessments based on a change in the Company's premium over time. These assets are expected to be realized over one to ten year periods in accordance with their type and individual state's regulations.
As of December 31, 2014, nonqualified stock options, RSUs, and PSUs have been granted, but no incentive stock options, stock appreciation rights, or shares of restricted stock have been granted under the Plan.
The fair value of the stock options granted is estimated using a Black-Scholes option pricing model that uses the assumptions noted in the following table. During the years ended December 31, 2014, 2013, and 2012, the expected stock price volatility used to value the options granted in 2014, 2013, and 2012 was based on the volatility of the Company's historical stock price since February 2007. The expected term of the options granted in 2014, 2013, and 2012 was calculated using the 'plain-vanilla' calculation provided in the guidance of the Securities and Exchange Commission's Staff Accounting Bulletin No. 107. The dividend yield was calculated using amounts authorized by the Board of Directors. The risk-free interest rate is the yield on the grant date of the options of U.S. Treasury zero coupon securities with a maturity comparable to the expected term of the options.
The fair value of the stock options granted during the years ended December 31, 2014, 2013, and 2012 was calculated using the following weighted average assumptions:
Net income for the Company's insurance subsidiaries prepared in accordance with SAP for the years ended December 31, 2014, 2013 and 2012 was $58.6 million, $19.3 million and $13.5 million, respectively.
Treatment of the LPT Agreement, deferred policy acquisition costs, fair value of financial instruments, and the surplus notes (see Notes 5, 10, and 11) are the primary differences in the SAP-basis capital stock and total surplus of the insurance subsidiaries of $635.9 million and $568.7 million, and the GAAP-basis equity of the Company of $686.8 million and $568.7 million as of December 31, 2014 and 2013, respectively. Under SAP accounting, the retroactive reinsurance gain resulting from the LPT Agreement is recorded as a special component of surplus (special surplus funds) in the initial year of the contract, and not reported as unassigned surplus until the Company has recovered amounts in excess of the original consideration paid. The special surplus funds are also reduced by the amount of extraordinary dividends as approved by the Nevada Division of Insurance. Under SAP, the surplus notes are recorded as a separate component of surplus. Under SAP, changes to the estimated contingent profit commission under the LPT Agreement are reflected in commission expense in the period that the estimate is revised.
EPIC and EAC are subject to regulation by the Florida Department of Financial Services (FDFS). Florida statute Section 624.408 requires EPIC and EAC to maintain minimum capital and surplus of the greater of $4.0 million or 10% of total liabilities. Florida statute Section 624.4095 requires EPIC and EAC to maintain a ratio of written premiums times 1.25 to surplus of no greater than 10-to-1 for gross written premiums and 4-to-1 for net written premiums. During the years ended December 31, 2014, 2013, and 2012, EPIC and EAC were in compliance with these statutes.
Additionally, EICN, ECIC, EPIC, and EAC are required to comply with NAIC RBC requirements. RBC is a method of measuring the amount of capital appropriate for an insurance company to support its overall business operations in light of its size and risk profile. NAIC RBC standards are used by regulators to determine appropriate regulatory actions relating to insurers that show signs of weak or deteriorating conditions. As of December 31, 2014, 2013, and 2012, EICN, ECIC, EPIC, and EAC each had total adjusted capital above all regulatory action levels.