The following tables set forth our selected historical consolidated financial and operating information for the periods ended and as of the dates indicated. The income statement data for the years ended December 31, 2018, 2017 and 2016 and the balance sheet data as of December 31, 2018 and 2017 are derived from our audited financial statements included elsewhere in this annual report. These historical results are not necessarily indicative of results to be expected from any future period.
You should read the following selected consolidated financial information together with the other information contained in this annual report, including “
We manage our business through two segments: Property and Casualty (“P&C”) and Accident and Health (“A&H”). We transact business primarily through our twenty-one regulated domestic insurance subsidiaries: Integon Casualty Insurance Company, Integon General Insurance Corporation, Integon Indemnity Corporation, Integon National Insurance Company, Integon Preferred Insurance Company, New South Insurance Company, MIC General Insurance Corporation, National General Insurance Company, National General Assurance Company, National General Insurance Online, Inc., National Health Insurance Company, National General Premier Insurance Company, Imperial Fire and Casualty Insurance Company, Agent Alliance Insurance Company, Century-National Insurance Company, Standard Property and Casualty Insurance Company, Direct General Insurance Company, Direct General Insurance Company of Mississippi, Direct General Life Insurance Company, Direct Insurance Company and Direct National Insurance Company. Our insurance subsidiaries have an “A-” (Excellent) group rating by A.M. Best Company, Inc. (“A.M. Best”). We currently conduct a limited amount of business outside the United States, primarily in Bermuda, Luxembourg and Sweden.
The operating results of insurance companies are subject to quarterly and yearly fluctuations due to the effect of competition on pricing, the frequency and severity of losses, the effect of weather and natural disasters on losses, general economic conditions, the general regulatory environment in states in which an insurer operates, state regulation of premium rates, changes in fair value of investments, and other factors such as changes in tax laws. The industry has been highly cyclical with periods of high premium rates and shortages of underwriting capacity followed by periods of severe price competition and excess capacity. While these cycles can have a large impact on a company’s ability to grow and retain business, we have sought to focus on niche markets and regions where we are able to maintain premium rates at generally consistent levels and maintain underwriting discipline throughout these cycles. We believe that the nature of our insurance products, including their relatively low limits, the relatively short duration of time between when claims are reported and when they are settled, and the broad geographic distribution of our customers, have allowed us to grow and retain our business throughout these cycles. In addition, we have limited our exposure to catastrophe losses through reinsurance. With regard to seasonality, we tend to experience higher claims and claims expense in our P&C segment during periods of severe or inclement weather. Our operating results for the year ended December 31, 2018 have been negatively impacted by losses resulting from severe weather, including Hurricanes Florence and Michael, and losses from California wildfires.
To achieve our targeted net combined ratio (non-GAAP) we continually seek ways to reduce our operating costs and lower our expense ratio. For the year ended December 31, 2018, our operating leverage (the ratio of net earned premium to average total stockholders’ equity) was 1.8x, which was within our planned target operating leverage of between 1.5x and 2.0x.
Investment income is also an important part of our business. Because we often do not settle claims until several months or longer after we receive the original policy premiums, we are able to invest cash from premiums for significant periods of time. We invest our capital and surplus in accordance with state and regulatory guidelines. Our net investment income was $119.0 million, $102.0 million and $115.2 million for the years ended December 31, 2018, 2017 and 2016, respectively. We held 5.2% and 8.9%, of total invested assets in cash, cash equivalents and restricted cash as of December 31, 2018 and 2017, respectively.
Ceding commission income. Ceding commission income is commission we receive based on the earned premium ceded to third-party reinsurers to reimburse us for our acquisition, underwriting and other operating expenses. We earn commissions on reinsurance premium ceded in a manner consistent with the recognition of the earned premium on the underlying insurance policies on a pro-rata basis over the terms of the policies reinsured. The portion of ceding commission revenue which represents reimbursement of successful acquisition costs related to the underlying policies is recorded as an offset to acquisition costs and other underwriting expenses.
We also collect service fees in the form of commissions and general agent fees by selling policies issued by third-party insurance companies. Commission income and general agent fees are recognized, net of an allowance for estimated policy cancellations, at the time when the policy is sold. The allowance for estimated third-party cancellations is periodically evaluated and adjusted as necessary.
Net gains and losses on investments. Net realized gains occur when we sell our investment securities for more than their costs or amortized costs, as applicable. Net realized losses occur when we sell our investment securities for less than their costs or amortized costs, as applicable, or we write down the investment securities as a result of other-than-temporary impairment loss. We report net unrealized gains (losses) on debt securities classified as available for sale within accumulated other comprehensive income (loss) in our balance sheet. We report all gains (losses) on equity securities within net gains (losses) on investments in our statement of income. Net gains and losses on investments also include foreign exchange gains and losses which are generated by the remeasurement of financial statement balances that are denominated or stated in another currency into the functional currency.
Income tax expense. We incur federal, state and local income tax expenses as well as income tax expenses in certain foreign jurisdictions in which we operate.
Net operating expense. These expenses consist of the sum of general and administrative expenses and acquisition costs and other underwriting expenses less ceding commission income, service and fee income and significant corporate litigation expenses.
Net operating expense ratio before amortization and impairment (non-GAAP). The net operating expense ratio before amortization and impairment (non-GAAP) is one component of an insurance company’s operational efficiency in administering its business. Expressed as a percentage, this is the ratio of net operating expense before non-cash amortization of intangible assets and non-cash impairment of goodwill to net earned premium.
applicable SEC rules because a component of those ratios, net operating expense, is calculated by offsetting acquisition costs and other underwriting expenses and general and administrative expenses by ceding commission income and service and fee income, and is therefore a non-GAAP measure. We use net operating expense ratio (non-GAAP), net operating expense ratio before amortization and impairment (non-GAAP), net combined ratio (non-GAAP) and net combined ratio before amortization and impairment (non-GAAP) to evaluate financial performance against historical results and establish targets on a consolidated basis. We believe this presentation enhances the understanding of our results by eliminating what we believe are volatile and unusual events and presenting the ratios with what we believe are the underlying run rates of the business. Other companies may calculate these measures differently, and, therefore, their measures may not be comparable to those used by us. For a reconciliation showing the total amounts by which acquisition costs and other underwriting expenses and general and administrative expenses were offset by ceding commission income, service and fee income and significant corporate litigation expenses in the calculation of net operating expense, see “Results of Operations - Consolidated Results of Operations” below.
Our significant accounting policies are discussed in Note 2, “Significant Accounting Policies” in the notes to our Consolidated Financial Statements.
Use of estimates and assumptions. The preparation of financial statements in accordance 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 financial statements and the reported amounts of revenues and expenses during the reporting period. Our principal estimates include unpaid losses and LAE reserves; deferred acquisition costs; reinsurance recoverables, including the provision for uncollectible amounts; recording of impairment losses for other-than-temporary declines in fair value; determining the fair value of investments; determining the fair value of share-based awards for stock compensation; the valuation of intangibles and the determination of goodwill and goodwill impairment; and income taxes. In developing the estimates and assumptions, management uses all available evidence. Because of uncertainties associated with estimating the amounts, timing and likelihood of possible outcomes, actual results could differ from estimates.
Premiums and Other Receivables. We recognize earned premium on a pro rata basis over the terms of the policies, generally periods of six or twelve months. Unearned premium represents the portion of premiums written applicable to the unexpired terms of the policies. Net premiums receivable represent premium written and not yet collected, net of an allowance for uncollectible premium. We regularly evaluate premium and other receivables and adjust for uncollectible amounts as appropriate. Receivables specifically identified as uncollectible are charged to expense in the period the determination is made.
provided and do not entail any obligation to return any portion of those funds. The costs associated with generating fee income are not separately tracked. We estimate an allowance for doubtful accounts based on a percentage of fee income.
Deferred acquisition costs. Deferred acquisition costs include commissions, premium taxes, payments to affinity partners, promotional fees, and other direct sales costs that vary and are directly related to the successful acquisition of insurance policies. These costs are deferred and amortized to the extent recoverable over the policy period in which the related premiums are earned. Anticipated investment income is considered in the calculation of premium deficiency losses for short-duration contracts. Management believes that these costs are recoverable.
insurance companies and for the operating expenses of such agencies. A typical obligating event would be the issuance of an insurance policy or the occurrence of a claim. These assessments are accrued in the period in which they have been incurred. We use estimated assessment rates in determining the appropriate assessment expense and accrual. We use estimates derived from state regulators and/or National Association of Insurance Commissioners (“NAIC”) Tax and Assessments Guidelines.
other items, including management, media exposure, sponsors, marketing and advertising agreements, debt restructurings, regulatory changes, acquisitions and dispositions, pending litigation, distribution agreements and general industry trends.
Goodwill and intangible assets. We account for goodwill and intangible assets in accordance with ASC 350, “Intangibles - Goodwill and Other.” A purchase price paid that is in excess of net assets (“goodwill”) arising from a business combination is recorded as an asset and is not amortized. Intangible assets with a finite life are amortized over the estimated useful life of the asset. Intangible assets with an indefinite useful life are not amortized. Goodwill and intangible assets are tested for impairment on an annual basis or more frequently if changes in circumstances indicate that the carrying amount may not be recoverable. If the goodwill or intangible asset is impaired, it is written down to its realizable value with a corresponding expense reflected in the Consolidated Statements of Income.
Business combinations. We account for business combinations under the acquisition method of accounting, which requires us to record assets acquired, liabilities assumed and any non-controlling interest in the acquiree at their respective fair values as of the acquisition date. We account for the insurance and reinsurance contracts under the acquisition method as new contracts, which requires us to record assets and liabilities at fair value. We adjust the fair value of loss and LAE reserves by recording the acquired loss reserves based on our existing accounting policies and then discounting them based on expected reserve payout patterns using a current risk-free rate of interest. This risk-free interest rate is then adjusted based on different cash flow scenarios that use different payout and ultimate reserve assumptions deemed to be reasonably possible based upon the inherent uncertainties present in determining the amount and timing of payment of such reserves. The difference between the acquired loss and LAE reserves and our best estimate of the fair value of such reserves at the acquisition date is recorded as either an intangible asset or another liability, as applicable and is amortized proportionately to the reduction in the related loss reserves (e.g., over the estimated payout period of the acquired loss and LAE reserves). We assign fair values to intangible assets acquired based on valuation techniques including the income and market approaches. We record contingent consideration at fair value based on the terms of the purchase agreement with subsequent changes in fair value recorded through earnings. The purchase price is the fair value of the total consideration conveyed to the seller and we record the excess of the purchase price over the fair value of the acquired net assets, where applicable, as goodwill. We expense costs associated with the acquisition of a business in the period incurred.
Non-controlling Interest. Non-redeemable non-controlling interest is the portion of equity (net assets) not attributable, directly or indirectly, to a parent. We have no ownership interest in the Reciprocal Exchanges. Therefore, the difference between the value of their assets and liabilities represent the value of the non-controlling interest.
Fair value of financial instruments. Our estimates of fair value for financial assets and financial liabilities are based on the framework established in ASC 820, “Fair Value Measurements and Disclosures.” The framework is based on the inputs used in valuation and gives the highest priority to quoted prices in active markets and requires that observable inputs be used in the valuations when available. The disclosure of fair value estimates in the ASC 820 hierarchy is based on whether the significant inputs into the valuation are observable. In determining the level of the hierarchy in which the estimate is disclosed, the highest priority is given to unadjusted quoted prices in active markets and the lowest priority to unobservable inputs that reflect our significant market assumptions. Additionally, valuation of debt securities investments is more subjective when markets are less liquid due to lack of market-based inputs, which may increase the potential that the estimated fair value of an investment is not reflective of the price at which an actual transaction could occur. Fair values of other financial instruments which are short-term in nature approximate their carrying values.
Level 3 - Unobservable inputs are supported by little or no market activity. The unobservable inputs represent management’s best assumptions of how market participants would price the assets or liabilities. Generally, Level 3 assets and liabilities are valued using pricing models, discounted cash flow methodologies, or similar techniques that require significant judgment or estimation.
We utilize the fair values received from the pricing service to estimate fair value measurements for all our debt securities and equity securities. The following describes the valuation techniques we used to determine the fair value of financial instruments held as of December 31, 2018 and 2017:
•States and Political Subdivision Bonds - Comprised of bonds and auction rate securities issued by U.S. states and municipal entities or agencies. The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, these are classified within Level 2 of the fair value hierarchy. We also hold certain municipal bonds that finance economic development, infrastructure and environmental projects which do not have an
active market. These bonds are valued based on non-binding broker quotes where the inputs have not been corroborated to be market observable and are classified as Level 3 in the fair value hierarchy.
•Mortgage, Asset-backed and Structured Securities - Comprised of commercial and residential mortgage-backed, asset-backed and structured securities. The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields, prepayment speeds, collateral performance and credit spreads, these are classified within Level 2 of the fair value hierarchy. We also hold certain mortgage and structured securities valued based on non-binding broker quotes received from brokers who are familiar with the investments and where the inputs have not been corroborated to be market observable, these are classified within Level 3 of the fair value hierarchy.
•Equity Securities - The pricing service utilizes market quotations for equity securities that have quoted market prices in active markets and their respective quoted prices are provided as fair value. We classified the values of these equity securities as Level 1. The pricing service also provides fair value estimates for certain equity securities whose fair value is based on observable market information rather than market quotes. We classified the value of these equity securities as Level 2. From time to time, we also hold certain equity securities that are issued by privately-held entities or equity investments that do not have an active market. We estimate the fair value of these securities primarily based on inputs such as third-party broker quote, issuers’ book value, market multiples, and other inputs. These bonds are valued based on non-binding broker quotes where the inputs have not been corroborated to be market observable and are classified as Level 3 in the fair value hierarchy.
Stock Compensation Expense. We recognize shared-based employee compensation expense including stock options and restricted stock units (“RSUs”), to be measured based on the grant date fair value of the awards, with the resulting expense recognized on a straight-line basis over the period during which the employee is required to perform service in exchange for the award. The majority of our awards are earned over a service period of three or four years.
Earnings per Share. Basic earnings per share are computed by dividing income available to common stockholders by the number of weighted average common shares outstanding. Dilutive earnings per share are computed by dividing income available to common stockholders, adjusted for the effects of the presumed issuance of potential common shares, by the number of weighted average common shares outstanding, plus potentially issuable shares, such as options, unvested share-based payment awards and convertible securities.
Deferred income taxes reflect the impact of temporary differences between the amount of our assets and liabilities for financial reporting purposes and such amounts as measured by tax laws and regulations. The deferred tax asset and liability primarily consists of book versus tax differences for earned premiums, loss and LAE reserve discounting, deferred acquisition costs, earned but unbilled premiums, and unrealized holding gains and losses on debt securities. We record changes in deferred income tax assets and liabilities that are associated with components of other comprehensive income, primarily unrealized investment gains and losses, to other comprehensive income. We include changes in deferred income tax assets and liabilities as a component of income tax expense.
For more information on our reinsurance agreements, refer to Note 10, “Reinsurance” in the notes to our Consolidated Financial Statements.
Consolidated Results of Operations for the Year Ended December 31, 2018 Compared to the Year Ended December 31, 2017
mainly attributable to increased ceded earned premium to the Quota Shares ($463.2 million), partially offset by organic growth ($441.2 million). The increase in the A&H segment was primarily due to domestic organic growth ($88.7 million).
Ceding commission income. Ceding commission income increased by $108.2 million, or 92.9%, from $116.5 million for the year ended December 31, 2017 to $224.7 million for the year ended December 31, 2018, primarily driven by an increase in P&C ceded earned premium.
Service and fee income. Service and fee income increased by $58.7 million, or 11.7%, from $502.9 million for the year ended December 31, 2017 to $561.6 million for the year ended December 31, 2018.
Loss and loss adjustment expense; net loss ratio. Loss and LAE increased by $36.1 million, from $2,626.1 million for the year ended December 31, 2017 to $2,662.2 million for the year ended December 31, 2018, reflecting losses ceded to the Quota Shares ($278.8 million) partially offset by organic growth ($272.0 million) and growth in the Reciprocal Exchanges ($42.9 million). The changes by segment were: P&C - increased by $33.3 million and A&H - increased by $2.9 million. P&C weather-related events, excluding the Reciprocal Exchanges, were $128.7 million in 2018 compared to $130.3 million in 2017, a decrease of $1.6 million year over year.
Acquisition costs and other underwriting expenses. Acquisition costs and other underwriting expenses increased by $62.8 million, from $672.4 million for the year ended December 31, 2017 to $735.3 million for the year ended December 31, 2018, due to an increase of $33.0 million in the P&C segment and an increase of $29.8 million in the A&H segment in the domestic business. The increase was primarily due to premium growth.
General and administrative expenses. General and administrative expenses increased by $25.1 million, from $913.0 million for the year ended December 31, 2017 to $938.0 million for the year ended December 31, 2018, with
The consolidated net operating expense ratio decreased from 26.4% for the year ended December 31, 2017 to 23.5% for the year ended December 31, 2018. Excluding the Reciprocal Exchanges, the net operating expense ratio was 23.0% and 25.9% for the years ended December 31, 2018 and 2017, respectively. The Reciprocal Exchanges’ net operating expense ratio was 33.9% and 38.4% for the years ended December 31, 2018 and 2017, respectively. Net operating expense and net operating expense ratio is discussed in more detail in the segment discussions that follow.
Net investment income. Net investment income increased by $17.1 million, or 16.8%, from $102.0 million for the year ended December 31, 2017 to $119.0 million for the year ended December 31, 2018. The increase was primarily due to increased income from our equity method investments and increased invested assets.
Gross premium written. Gross premium written increased by $1,255.1 million, or 35.9%, from $3,500.9 million for the year ended December 31, 2016 to $4,756.0 million for the year ended December 31, 2017, due to an increase of $1,137.7 million from the P&C segment as a result of the acquisitions of Direct General ($374.2 million), Century-National ($81.6 million) and SPCIC ($34.1 million), from organic growth ($537.2 million) and the consolidation of the Reciprocal Exchanges ($142.2 million), partially offset by a decline in lender-placed premiums ($31.7 million); and an increase of $117.4 million from the A&H segment as a result of the acquisition of Direct General ($10.4 million) and organic growth ($107.0 million).
Service and fee income. Service and fee income increased by $122.1 million, or 32.1%, from $380.8 million for the year ended December 31, 2016 to $502.9 million for the year ended December 31, 2017. The increase was attributable to an increase in our P&C segment ($106.4 million), primarily resulting from the acquisition of Direct General ($85.7 million) and from organic growth ($13.8 million); and an increase in the A&H segment ($15.7 million) primarily due to growth in our domestic business.
Our consolidated net loss ratio increased from 69.9% for the year ended December 31, 2016 to 71.9% for the year ended December 31, 2017, with a higher P&C segment net loss ratio and a lower A&H segment net loss ratio in 2017 compared to 2016. Net loss ratio is discussed in more detail in the segment discussions that follow.
General and administrative expenses. General and administrative expenses increased by $203.8 million, or 28.7%, from $709.1 million for the year ended December 31, 2016 to $913.0 million for the year ended December 31, 2017, due to an increase of $160.7 million in the P&C segment, primarily as a result of the acquisition of Direct General ($152.4 million); and an increase of $43.2 million in the A&H segment, primarily from organic growth ($27.5 million).
Interest expense. Interest expense for the years ended December 31, 2017 and 2016 was $47.1 million and $40.2 million, respectively. The increase of $6.9 million is primarily due to interest payable under our credit facility and debt assumed from our 2016 acquisitions.
Gross premium written. Gross premium written increased by $544.1 million, or 13.0%, from $4,174.6 million for the year ended December 31, 2017 to $4,718.7 million for the year ended December 31, 2018, as a result of organic growth ($479.0 million) and growth in the Reciprocal Exchanges ($65.2 million).
Net earned premium. Net earned premium decreased by $5.1 million, from $3,120.9 million for the year ended December 31, 2017 to $3,115.8 million for the year ended December 31, 2018, mainly attributable to increased ceded premiums to the Quota Shares ($463.2 million), partially offset by organic growth ($441.2 million).
General and administrative expenses. General and administrative expenses decreased by $15.3 million, or 2.1%, from $741.5 million for the year ended December 31, 2017 to $726.2 million for the year ended December 31, 2018. The decrease was primarily due to lower amortization of intangible assets in 2018.
Underwriting income; net combined ratio (non-GAAP). Underwriting income increased from $18.0 million for the year ended December 31, 2017 to $91.4 million for the year ended December 31, 2018. Our P&C segment net combined ratio decreased from 99.4% for the year ended December 31, 2017 to 97.0% for the year ended December 31, 2018. The increase in underwriting income and the decrease in net combined ratio were primarily as a result of increased ceding commission revenue from the Quota Shares, additional service and fee income and lower intangible assets amortization.
Ceding commission income. Ceding commission income increased by $71.2 million, from $44.3 million for the year ended December 31, 2016 to $115.4 million for the year ended December 31, 2017, primarily from the Quota Shares ($51.2 million) and the consolidation of the Reciprocal Exchanges ($16.7 million).
Loss and loss adjustment expense; net loss ratio. Loss and LAE increased by $516.5 million, or 28.8%, from $1,791.1 million for the year ended December 31, 2016 to $2,307.6 million for the year ended December 31, 2017, reflecting the acquisitions of Direct General ($234.7 million), SPCIC ($29.4 million) and Century-National ($26.4 million), increased premiums from organic growth ($341.6 million), catastrophe losses in 2017 compared to 2016 ($72.1 million) and the consolidation of the Reciprocal Exchanges ($50.6 million), partially offset by the Quota Shares ($221.1 million).
Our P&C segment net loss ratio, which includes the Reciprocal Exchanges, increased from 69.4% for the year ended December 31, 2016 to 73.9% for the year ended December 31, 2017, primarily due to higher catastrophe losses in 2017 compared to 2016, a decline in lender-placed premiums and higher catastrophe losses in the Reciprocal Exchanges in 2017 compared to 2016, partially offset by the Quota Shares.
Acquisition costs and other underwriting expenses. Acquisition costs and other underwriting expenses increased by $123.3 million, or 31.3%, from $394.3 million for the year ended December 31, 2016 to $517.6 million for the year ended December 31, 2017, primarily as a result of the acquisitions of Direct General ($33.8 million) and Century-National ($33.5 million), from organic growth ($62.3 million) and the consolidation of the Reciprocal Exchanges ($35.0 million), partially offset by the Quota Shares ($47.4 million).
A&H Segment Results of Operations for the Year Ended December 31, 2018 Compared to the Year Ended December 31, 2017
Net premium written. Net premium written increased by $91.2 million, or 17.0%, from $535.3 million for the year ended December 31, 2017 to $626.5 million for the year ended December 31, 2018, primarily as a result of domestic organic growth, partially offset by a new quota share entered into on certain European business.
Loss and loss adjustment expense; net loss ratio. Loss and LAE increased by $2.9 million, from $318.5 million for the year ended December 31, 2017 to $321.3 million for the year ended December 31, 2018. Our A&H net loss ratio decreased from 59.7% for the year ended December 31, 2017 to 52.1% for the year ended December 31, 2018. The loss ratio decrease was primarily as a result of favorable development on prior year loss.
Acquisition costs and other underwriting expenses. Acquisition costs and other underwriting expenses increased by $29.8 million, or 19.3%, from $154.9 million for the year ended December 31, 2017 to $184.7 million for the year ended December 31, 2018, primarily from domestic organic growth. The increase was primarily from commissions.
General and administrative expenses. General and administrative expenses increased by $30.3 million, or 17.7%, from $171.5 million for the year ended December 31, 2017 to $201.8 million for the year ended December 31, 2018. The increase was due to domestic organic growth.
Gross premium written. Gross premium written increased by $117.4 million, or 25.3%, from $464.0 million for the year ended December 31, 2016 to $581.4 million for the year ended December 31, 2017, as a result of the acquisition of Direct General ($10.4 million) and organic growth, both domestic ($90.4 million) and international ($16.6 million).
Net premium written. Net premium written increased by $116.6 million, or 27.9%, from $418.7 million for the year ended December 31, 2016 to $535.3 million for the year ended December 31, 2017, as a result of the acquisition of Direct General ($10.4 million) and organic growth, both domestic ($89.7 million) and international ($16.6 million).
Loss and loss adjustment expense; net loss ratio. Loss and LAE increased by $17.3 million, from $301.2 million for the year ended December 31, 2016 to $318.5 million for the year ended December 31, 2017. Our A&H net loss ratio decreased from 72.7% for the year ended December 31, 2016 to 59.7% for the year ended December 31, 2017. The loss ratio decrease was a result of higher premiums with lower loss experience due to a change in product mix primarily in our domestic business.
The average yield on our investment portfolio was 3.1% and 3.3% for the years ended December 31, 2018 and 2017, respectively, and the average duration of the portfolio was 4.2 and 4.0 years as of December 31, 2018 and 2017, respectively.
We may generate liquidity through the issuance of debt or equity securities or financing through borrowings under credit facilities, or a combination thereof. We also have a $245.0 million credit agreement, under which there was $160.0 million outstanding as of December 31, 2018. The proceeds of borrowings under the credit agreement may be used for working capital, acquisitions and general corporate purposes. See “Revolving Credit Agreement” below.
Net cash provided by operating activities increased by $280.8 million, primarily due to higher net income in 2018.
Net cash provided by (used in) financing activities increased by $155.4 million, primarily due to proceeds received from issuances of common and preferred stock in 2018.
Our subsidiary, Direct General Corporation, is the issuer of junior subordinated debentures (the “Subordinated Debentures”) relating to an issuance of trust preferred securities. The Subordinated Debentures require interest-only payments to be made on a quarterly basis, with principal due at maturity. The Subordinated Debentures’ principal amounts of $41.2 million and $30.9 million mature on 2035 and 2037, respectively, and bear interest at an annual rate equal to LIBOR plus 3.40% and LIBOR plus 4.25%, respectively. The Subordinated Debentures are redeemable by us at a redemption price equal to 100% of their principal amount. Interest expense on the Subordinated Debentures for the years ended December 31, 2018, 2017 and 2016, was $4.3 million, $3.8 million and $0.5 million, respectively.
fee on the available commitments of the lenders (a range of 0.20% to 0.30% based on our consolidated leverage ratio, and which rate was 0.25% as of December 31, 2018).
On February 25, 2019 we repaid the Credit Agreement and entered into a new credit agreement (the “2019 Credit Agreement”), among JPMorgan Chase Bank, N.A., as Administrative Agent, KeyBank National Association and Fifth Third Bank, as Syndication Agents, and the various lending institutions party thereto. The 2019 Credit Agreement is currently a $340.0 million base revolving credit facility with a letter of credit sublimit of $150.0 million and a expansion feature of up to $50.0 million. Any borrowing under the 2019 Credit Agreement will bear interest at LIBOR plus 1.75% and a commitment fee of 0.225% depending on our leverage ratio. The 2019 Credit Agreement has a maturity date of February 24, 2023. As of February 25, 2019, there was $160.0 million outstanding under the 2019 Credit Agreement.
We have four separate series (Series A through D) of preferred stock outstanding. Two of these series (Series B and C) were issued in offerings using depositary shares. Dividends on the Series A, B and C preferred stock are payable on the liquidation preference amount, on a non-cumulative basis, when, as and if declared by the Company’s Board of Directors, quarterly in arrears on the 15th day of January, April, July and October of each year. Dividends on the Series D preferred stock are payable on the liquidation preference amount, on a non-cumulative basis, when, as and if declared by the Company’s Board of Directors, semi-annually in arrears on the 15th day of January and July of each year, commencing on January 15, 2019. On or after July 15, 2023 (or in the event of a fundamental change of us, at any time), the Series D preferred stock may be converted at the holder’s option into shares of our common stock.
A summary description of the terms of these series of preferred stock is presented in the table below:
(1) Dividend rate is fixed at 7.00% prior to July 15, 2023 and floating at six-month LIBOR plus 5.4941% thereafter.
The following table sets forth certain of our contractual obligations as of December 31, 2018:
The loss and LAE payments due by period in the table above are based upon the loss and LAE estimates as of December 31, 2018, and actuarial estimates of expected payout patterns and are not contractual liabilities with finite maturities. Our contractual liability is to provide benefits under the policy. As a result, our calculation of loss and LAE payments due by period is subject to the same uncertainties associated with determining the level of loss and LAE generally and to the additional uncertainties arising from the difficulty of predicting when claims (including claims that have not yet been reported to us) will be paid. For a discussion of our loss and LAE estimate process, see Item 1, “Business - Loss Reserves.” Actual payments of loss and LAE by period will vary, perhaps materially, from the table above to the extent that current estimates of loss and LAE vary from actual ultimate claims amounts and as a result of variations between expected and actual payout patterns. See Item 1A, “Risk Factors - Risks Relating to Our Business - If we are unable to establish and maintain accurate loss reserves, our business, financial condition and results of operations may be materially adversely affected” for a discussion of the uncertainties associated with estimating loss and LAE.
Pro forma interest related to our debt by period as of December 31, 2018 was as follows: $41.9 million - less than 1 year, $85.9 million - 1 - 3 years, $80.0 million - 3 - 5 years and $310.1 million - more than 5 years.