As of December 31, 2013, we leased 6,738 square feet of office space in Irving, Texas and the monthly rent for this space was $9,128.40 payable in equal monthly installments. Rent may be increased each December 31st, with a maximum increase equal to 95% of our pro rata share, based on occupancy, of any increase in the landlord’s operating costs. The cost of utilities is charged separately, prorated based on occupancy. In January 2014, the company executed a new lease agreement which increases the square footage of office space to approximately 9,450 square feet. In April 2014, the monthly rent for this space will increase to $11,597.00 per month. The lease for this office space expires on May 31, 2017.
As mentioned previously, the Company sells insurance policies only within Texas. As such, the health of the Texas economy and housing market has a direct impact on the Company’s business activity. The following selected statistics are key indicators that management monitors when evaluating the Company’s current financial condition and operating results:
These favorable economic indicators in addition to low severity convectional thunderstorms and other catastrophic events are all factors which aided in the positive results recorded by the Company for the year ended December 31, 2013.
Net income available to common stockholders was $994,584 for the year ended December 31, 2013. As of December 31, 2013 we had total assets of $73.2 million and stockholders’ equity of $8.3 million.
At the end of 2013, our market share of the approximately $7.2 billion Texas homeowners insurance market was estimated to be 0.66% by SNL Financial, making us the 20th largest Texas homeowners company in terms of Texas premium. Our current property insurance policy in force count of 60,873 represents annualized premiums of approximately $58.3 million.
The following table summarizes our results of operations for the year ended December 31, 2013 and 2012:
Net income for the year ended December 31, 2013 was positively impacted by improved underwriting results. Net income was $1,968,763 for the year ended December 31, 2013 as compared to net income of $1,102,996 for the year ended December 31, 2012. The primary factor in our improved results was the improvement in underwriting income, a direct result of reduced numbers and intensity of springtime convectional thunder storm activity in the geographical areas where the Company writes the majority of its business. During 2013, the Company sustained gross losses (losses prior to reinsurance recoveries) totaling $6.0 million from eight storms occurring in the calendar year. The same period in 2012, the Company incurred gross losses (losses prior to reinsurance recoveries) of $36.3 million in losses on seven storms occurring in the calendar year. Net of reinsurance recoveries, the Company’s loss experience resulted in a negative income impact of $601,000 for the year ended December 31, 2013.
Premiums Ceded for the year ended December 31, 2013 and 2012 were approximately $48.4 million and $42.2 million, respectively. Our premiums ceded represent amounts paid to reinsurers to cover losses under both our quota share and excess of loss reinsurance treaties. Premiums ceded were 90.95% and 89.45% of gross premiums earned during the year ended December 31, 2013 and 2012, respectively, primarily the result of our 90% quota share reinsurance program. We expect our reinsurance premiums applicable to the current fiscal year, as well as the reinsurance treaty year, to remain in excess of 90% of direct earned premium, trending slightly upward reflecting our increase in in-force premium.
Another important measurement of operational effectiveness of the Company is the margin between our fee income and acquisition, underwriting, and other operating expenses due to our reliance on quota share reinsurance, under which approximately 90% of our property insurance premium is ceded to reinsurers, the Company receives a ceding commission from reinsurers for the production of the business. This fee income, along with other policy related fees that the Company charges, are used to offset the underwriting and other operating expenses it incurs in the production of premium. For the year ended December 31, 2013 our acquisition and underwriting and other operating expenses were 97.69%, of policy related fee income, as compared to 100.44% for the year ended December 31, 2012.
Due to the impact our reinsurance costs have on net premiums earned from period to period, our management believes the combined loss and expense ratio measured to total earned revenues is more relevant in assessing overall performance. The combined loss and expense ratio to total earned revenue for the year ended December 31, 2013 was 86.82% compared to 95.86% for the year ended December 31, 2012.
Our insurance business is seasonal, as convectional thunderstorms producing tornadoes and hail typically occur during the period from March 1 through June 30 each year. With our reinsurance treaty year effective April 1 each year, any variation in the cost of our reinsurance, whether due to changes in reinsurance rates or changes in the total insured value of our policy base will occur and be reflected in our financial results beginning April 1 each year.
Net cash used by operating activities for the year ended December 31, 2013 was approximately $1.9 million. Significant factors in this movement consisted primarily of an increase in cash received from higher net written premiums, less cash used for paid claims and operating expenses, as well as increased disbursements related to the settlement of the Company’s reinsurance treaties. Net cash used in investing activities of $0.2 million was primarily due to purchases of short-term investments of $1.8 million, purchases of long-term investments of $2.0 million and the purchases of furniture, equipment, and software of $0.1 million offset by maturities of short-term investments of $1.5 million and maturities of long-term investments of $2.2 million. Net cash used in financing activities totaled $5,400 for repurchase of common stock.
As of December 31, 2013 and 2012, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K.
Assisting us in setting the case reserves, after first reviewing the elements of the claim and the coverage afforded under the policy, the Company uses a damage estimating software package called Xactimate, developed and owned by the industry leader, Insurance Service Office. The estimating software researches and reports on estimates of structural repair pricing and compares it to actual completed bids and market surveys. The research includes over 40,000 providers of materials, equipment and labor and over 80,000 surveys each year.
Virtually all auto claims are reported within 3 months, and most within 30 days. HAIC has had negligible liability losses experience since beginning to write private passenger automobile insurance (monthly average liability loss under $3,000). As such, virtually all claims reported are for physical damage. Inasmuch as auto physical damage claims typically develops very quickly, an IBNR calculation for this line of business using traditional factors produces exceptionally low results and does not provide a reasonable amount of IBNR for the most recent month and for accidents occurring during the last part of the month. Therefore, an alternative approach was taken.
Similar data is used to determine automobile IBNR as is used to do catastrophe events so that historically, reported incurred losses are looked at based on the number of days from the incident. For this analysis, all auto claims, cat and non-cat, are included. Catastrophe claims for auto coverages are minimal. In addition, total loss development is determined using traditional loss triangles. Our factors are developed so that the most recent months incurred is split into 3 parts: 1st half of the month, days 16-25, and the last 5 days of the month. Factors are calculated for each of these periods, and the most recent month’s incurred losses are split proportionally across the month. In this way, the vast majority of IBNR losses come from the last week of the month, where one would expect them, given the very short reporting period for auto claims.
The liability for losses and LAE represents estimates of the ultimate unpaid cost of all losses incurred, including losses for claims that have not yet been reported to our insurance company. The amount of loss reserves for reported claims is based primarily upon a case-by-case evaluation of the kind of loss involved, knowledge of the circumstances surrounding each claim and the insurance policy provisions relating to the type of loss. The amounts of loss reserves for unreported claims and LAE are determined using historical information by line of insurance as adjusted to current conditions. Inflation is ordinarily implicitly provided for in the reserving function through analysis of costs, trends and reviews of results of historical reserving estimates over multiple years.
Reserves are closely monitored and are recalculated periodically using the most recent information on reported claims and a variety of actuarial techniques. Specifically, management continuously reviews existing reserves, making changes to existing case reserves as indicated. As we develop historical data regarding paid and incurred losses, we use this data to develop expected ultimate loss and loss adjustment expenses which we use to establish IBNR reserves. In connection with the determination of IBNR reserves, we will also consider other specific factors such as recent weather-related losses, trends in historical paid losses, and legal and judicial trends regarding liability.
When a claim is reported to us, our claims personnel establish a "case reserve" for the estimated amount of the ultimate payment. This estimate reflects HAIC’s historical loss experience as it relates to the type of loss, informed judgment based upon general insurance reserving practices and on the experience and knowledge of the estimator. The individual estimating the reserve considers the nature and value of the specific claim, the severity of injury or damage, location, and the policy provisions relating to the type of loss. Case reserves are adjusted by us as more information becomes available. It is our policy to settle each claim as expeditiously as possible.
We maintain IBNR reserves to provide for already incurred claims that have not yet been reported as well as developments on reported claims. The IBNR reserve is determined by estimating our insurance company's ultimate net liability for both reported and IBNR claims and then subtracting the case reserves and payments made to date for reported claims.
Deferred policy acquisitions costs (“DAC”) consist of commissions, premium taxes and policy underwriting and production expenses which are incurred through and vary directly with, the level of production of new and renewal insurance business and are amortized over the terms of the policies they relate to. The method used in calculating DAC limits the amount of the deferred cost to their estimated realizable value, which gives effect to allocating their expense along with other period costs associated with the insurance business, in relation to the amount of gross premium earned on policies to which they relate and investment income. DAC is reviewed to determine if it is recoverable from future income, including investment income. The amount of DAC considered recoverable could be reduced in the near term if estimates of future premium income from their related lines of insurance are revised.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Homeowners of America Holding Corporation as of December 31, 2013 and 2012, and the consolidated results of their operations and their cash flows for each of the two years in the period ended December, 2013, in conformity with accounting principles generally accepted in the United States of America.
Homeowners of America Holding Corporation (“HAHC”) is an insurance holding company established to hold insurance entities for the purpose of marketing homeowners insurance products on a national basis. HAHC owns 100% of Homeowners of America Insurance Company (“HAIC”). HAIC is domiciled in Texas, licensed in multiple states and is authorized to write various forms of homeowners and auto insurance. All coverage is concentrated in Texas. HAHC also owns 100% of Homeowners of America MGA, Inc. (“MGA”), a Texas Corporation, formed as a captive managing general agency to produce business for HAIC. HAHC, along with its subsidiaries HAIC and MGA, are collectively referred to as “the Company”.
General and other accrued expenses payable as of December 31, 2013 include $1.2 million of checks issued in excess of cash book balances, not yet presented for payment.
The Company’s investments are comprised of short-term, restricted, and long-term investments. Restricted investments and long-term investments are described below. Short-term investments include certificates of deposit with original maturities greater than three months and maturities of one year or less. Due to the short-term nature of these investments, significant changes in prevailing interest rates and economic conditions should not adversely affect the timing and amount of cash flows on such investments or their related values. Accordingly, certificates of deposit are carried at cost, which approximates fair value.
The Company has pledged to the Texas Department of Insurance $1 million for the purpose of meeting state regulatory requirements. Restricted assets are shown separately in the accompanying consolidated balance sheets as “Restricted cash and investments”. Although the Company, with the approval of the Texas Department of Insurance, may exchange the investments with other funds or investments, management intends to hold the portion of these restricted investments in certificates of deposit to their maturity. As such, these restricted certificates of deposit are carried at cost which approximates fair value. Interest earned on these investments inures to the benefit of the Company.
The Company’s investments also include certificates of deposit that mature more than one year after the balance sheet date and are reflected on the consolidated balance sheets as Long-term investments. Based on management’s intent to hold to maturity, this investment is carried at cost. Cost approximates fair value based on the rates currently offered for deposits of similar remaining maturities.
The Company’s investments in certificates of deposits and money market accounts do not qualify as securities as defined in the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 320, Investment - Debt and Equity Securities. Accordingly, the fair value disclosures required by FASB ASC 820, Fair Value Measurements and Disclosures are not provided. Where applicable, the Company assesses investments of an issuer currently carrying a net unrealized loss. If in management’s judgment, the decline in value is other than temporary, the cost of the investment is written down to fair value with a corresponding charge to earnings. Factors considered in determining whether impairment exists include financial condition, business prospects and creditworthiness of the issuer, the length of time and magnitude that the asset value has been less than cost, and the ability and intent to hold such investments until the fair value recovers.
FASB ASC 220 - Comprehensive Income, requires that recognized revenues, expenses, gains and losses be included in net income (loss). Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the consolidated balance sheet, these items, along with net income (loss), are components of comprehensive income. The Company characterizes their fixed income portfolio as available-for-sale securities, with appropriate adjustments to other comprehensive income. There were no qualifying items reported in comprehensive income for the years ended December 31, 2013 or 2012.
Software installation and development is stated at cost, net of accumulated amortization. Amortization is calculated on a straight-line basis method over three years.
Long-lived assets, such as property, equipment and software, are reviewed for impairment whenever business events or circumstances could lead to or indicate that the value of the asset may not be recoverable. The assessment of possible impairment is based on whether the carrying amount of the assets exceeds its fair value. The Company uses estimates of undiscounted future cash flows in determining the recoverability of long-lived assets. As of December 31, 2013 and 2012, no impairment has been recorded.
Deferred ceding commission as of December 31, 2012 consists of the expense allowance afforded by reinsurers on premium subject to quota share reinsurance treaties, which remain uncollected as of the balance sheet date. Due to a change in the terms of the Company’s property reinsurance treaty effective April 1, 2013, where ceded premium is remitted on a written basis rather than on a collected basis, the balance of uncollected ceding commission for property quota share reinsurance is zero at December 31, 2013.
The Company recognizes uncertain tax positions in the consolidated financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions are initially and subsequently measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the tax authority assuming full knowledge of the position and relevant facts. The Company believes that it has appropriate support for the income tax positions taken and to be taken on its tax returns, and that its accruals for tax liabilities are adequate for all open tax years based on an assessment of many factors including experience and interpretations of tax laws applied to the facts of each matter. At December 31, 2013, the Company’s tax years from 2010 through 2013 remain subject to examination.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The Company’s primary areas of estimate are for liabilities for unpaid losses and loss adjustment expenses, deferred policy acquisition costs, deferred tax asset valuation, and reinsurance. Actual results could differ significantly from those estimates.
The Company accounts for convertible notes payable under FASB ASC Topic 470-20 - Debt with Conversion and Other Options, which requires issuers to assess whether or not an embedded conversion feature is required to be separately accounted for as a derivative liability for liability and equity components and if the conversion feature is beneficial to the holder. See Note 10 on Convertible Notes Payable for additional disclosure.
The Company accounts for stock-based compensation under the fair value recognition provisions of FASB ASC Topic 718 - Compensation - Stock Compensation, which requires the measurement and recognition of compensation for all stock-based awards made to employees and directors including stock options and restricted stock issuances based on estimated fair values. In accordance with FASB ASC Topic 718, the Company recognizes stock-based compensation, if any, in the consolidated statements of operations on a straight line basis over the vesting period of the stock award.
For the year ended December 31, 2012, the net income attributable to common stockholders was decreased for cumulative dividends on preferred stock during the period of $1,288,750.
Diluted earnings (loss) per share of common stock is computed by dividing net income or loss attributable to common stockholders, adjusted for the effect of potentially dilutive securities, by the weighted-average number of shares of common stock outstanding during the period increased to include the number of additional shares of common stock that would have been outstanding if the potentially dilutive securities had been issued. Potentially dilutive securities include convertible notes payable, outstanding convertible preferred stock and stock options.
For the year ended December 31, 2013, all of the Company’s dilutive securities were included in the computation of diluted earnings per share as dilutive. The total number of dilutive shares of common stock that were included totaled 10,856,593.
For the year ended December 31, 2012, all of the Company’s potentially dilutive securities were excluded from the computation of diluted earnings per share as they were anti-dilutive. The total number of potentially dilutive shares of common stock that were excluded totaled 13,118,125.
Accounting Standards Update No. 2013-02. In February 2013, the FASB issued Accounting Standards Update No. 2013-02 (“ASU 2013-02”), Comprehensive Income (Topic 220), Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income. ASU 2013-02 does not change the current requirements for reporting net income or other comprehensive income in the financial statements. However, the amendments require an entity to provide information about the amounts reclassified out of accumulated other comprehensive by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required that provide additional detail about those amounts. ASU 2013-02 is effective prospectively for public entities for reporting periods beginning after December 15, 2012. Early adoption is permitted. The adoption of this guidance is not expected to have a material effect on the Company’s consolidated financial statements.
Accounting Standards Update No. 2013-01. In January 2013, the FASB issued Accounting Standards Update No. 2013-01 (“ASU 2013-01”), Balance Sheet (Topic 210), Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities. ASU 2013-01 clarifies that the scope of Update 2011-11 applies to derivatives accounted for in accordance with Topic 815, Derivatives and Hedging, including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with Section 210-20-45 or Section 815-10-45 or subject to an enforceable master netting arrangement or similar agreement. ASU 2013-01 is effective for fiscal years beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the required disclosures retrospectively for all comparative periods presented. The adoption of this guidance is not expected to have a material effect on the Company’s consolidated financial statements.
MGA commenced operations September 1, 2010. As a captive insurance agency formed to service HAIC, MGA has the authority to receive and accept proposals for insurance, charge and collect premiums, maintain underwriting guidelines, prepare rate filings, appoint agents and create marketing materials and advertising. As compensation for these services, MGA retains the policy fees charged on each policy ranging from $50 to $75, as well as installment and delinquent collection fees. The policy fees and other miscellaneous charges were previously a component of HAIC operations.
In December 2012, HAHC entered into a Convertible Promissory Note with Inter-Atlantic and Phoenix Associates, Inc., (a company controlled by a shareholder and former director). See Note 10 Convertible Notes Payable for additional disclosure.
There were no realized or unrealized gains or losses recognized for the periods due to the short term nature of the investments held. The intent is to hold to maturity certificates of deposit carried at amortized cost.
The following table provides the Company’s investment holdings by type of financial instruments that were used to estimate the fair value disclosures for financial instruments:
The Company’s financial assets carried at fair value have been classified, for disclosure purposes, based on the hierarchy established within FASB ASC 820-10 - Fair Value Measurements and Disclosures. When market prices are not available, fair value is generally estimated utilizing valuation techniques that vary by asset class and incorporate available trade, bid and other market information, when available. The acceptable valuation techniques include (a) market approach, which uses prices or relevant information derived from market transactions for identical or comparable assets or liabilities, (b) the Income Approach, which converts future amounts such as cash flows or earnings to a single present value amount based on current market expectations about those future amounts, and (c) the Cost Approach, which is based on the amount that currently would be required to replace the service capacity of an asset. In certain circumstances, these valuation techniques may involve some level of management estimation and judgment which becomes significant with increasingly complex instruments or pricing models. Where appropriate, adjustments are included to reflect the risk premium inherent in a particular methodology, model or input used.
· Level 1 - unadjusted quoted prices in active markets for identical assets or liabilities. These inputs are considered to be the most reliable evidence of fair value.
· Level 3 - termed unobservable inputs which are utilized in situations where there is little or no market activity for the asset or liability at the measurement date. The approach typically involves a significant subjective management judgment toward the pricing of the security.
Property, equipment, and software net consist of the following as of December 31, 2013 and 2012, respectively:
Changes in deferred ceding commissions for the years ended December 31, 2013 and 2012 are as follows:
The following table provides the reconciliation of the beginning and ending reserve balances for losses and LAE, gross of reinsurance for 2013 and 2012:
As a result of additional information on claims occurring in prior years becoming available to management, changes in estimates of provisions of claims and claim adjustment expenses were made resulting in an increase of $244,000 and $160,000 for the years ended December 31, 2013 and 2012, respectively.
On December 26, 2012, the Company entered into Convertible Promissory Note agreements with Inter-Atlantic Fund, L.P. and Phoenix Associates, Inc. (a company controlled by a shareholder and former director) in the amounts of $950,000 and $50,000, respectively, with an interest rate equal to 10% per annum (accelerating to 12.5% per annum in the event of default) which are due and payable on December 26, 2013. At any date, the holders of the majority interest of these notes has the right to convert all or a portion of the notes, plus accrued interest, into that number of shares of the Company’s Series A convertible preferred stock, identical in all respects to the existing Series A preferred stock issued in November 2005, equal to a ratio of 1 share per $1.10 of the note’s principal plus accrued interest plus, the amount of cumulative unpaid Series A preferred stock dividends the note holders would have received had the notes been outstanding since 2005.
On August 31, 2013, Inter-Atlantic Fund, L.P. elected to convert all of its $950,000 Convertible Promissory Note and accrued interest in accordance with the terms of the Convertible Promissory Note into 922,461 shares of Series A preferred stock.
As more fully described in Note 11, these shares are subject to the 2.5:1 forward stock split, which took place on August 31, 2013. As a result of the forward stock split, the 49,995 shares of Series A preferred stock noted above were converted into 124,988 common shares.
On July 24, 2013, the Delaware Secretary of State approved an amendment to the Amended and Restated Certificate of Incorporation increasing the authorized preferred stock to 20,500,000 shares.
There were no common stock warrants issued during the years ended December 31, 2013 and 2012.
As of December 31, 2012, the Company had 10,000,000 shares authorized and 900,000 shares issued and outstanding of $0.0001 par value common stock. Holders of common stock are entitled to one (1) vote for each share of common stock held at all meetings of stockholders.
On August 31, 2013, the Company entered into a Stock Purchase Agreement with Mr. Spencer Tucker (director of the Company and president and chief operating officer of HAIC) and Mr. Richard Backus (former secretary of HAIC) pursuant to which the Company purchased 480,000 and 60,000 shares of the Company’s common stock from Mr. Tucker and Mr. Backus respectively, for an aggregate consideration of $5,400.
As discussed in the Preferred Stock section of this footnote above, on August 31, 2013, in accordance with Article Fourth, Section C, Subsection 4 of the Company’s Amended and Restated Certificate of Incorporation the Series A and Series B preferred stockholders elected to convert 100% of their shares into common stock on a 1:1 basis; therefore as of September 30, 2013 there were no shares of Series A or Series B preferred stock outstanding. Further, in accordance with the Company’s Amended and Restated Certificate of Incorporation Article Fourth, Section C, Subsection 4(c) (iii) & (iv), all shares which shall have been surrendered for conversion shall no longer be deemed to be outstanding and all rights with respect to such shares, including the rights, if any, to receive notices and to vote, and to receive payment of any dividends occurred or declared but unpaid cease and terminate at the time of conversion, except only the right of the holders thereof to receive common stock in exchange therefor. Upon such conversion, no adjustment to the applicable conversion price shall be made for any accrued or declared but unpaid dividends on the series of preferred stock surrendered for conversion or the common stock delivered upon conversion.
As of December 31, 2013, the Company has 40,000,000 shares authorized and 17,181,140 shares issued and 15,831,140 shares outstanding of $0.0001 par value common stock (giving effect to the forward stock split discussed below). Holders of common stock are entitled to one (1) vote for each share of common stock held at all meetings of stockholders.
In accordance with the terms of the Convertible Promissory Note dated, December 26, 2012, to the extent the existing Series A convertible preferred stock is no longer outstanding at the time of conversion, the notes shall be convertible into stock or other consideration received for the existing Series A convertible preferred stock. Therefore, the Convertible Promissory Note converted on December 26, 2013 to Series A preferred shares are converted to common shares which then are adjusted for the forward stock split.
The Company’s 2005 Management Incentive Plan (the “2005 Plan”) provides for granting of stock options to enable the Company to obtain and retain the services of selected persons, both employees and directors, considered to be essential to the long-range success of the Company. Under the 2005 Plan, options may be granted to purchase a total not to exceed 789,475 shares in the aggregate (as adjusted for the 2.5:1 forward split), made up of original issue shares, treasury share or a combination of the two. Options have a life of 10 years and vest at a rate of 25% per year, beginning 12 months from their date of issue. At December 31, 2012, options to purchase 783,750 shares have been granted under the 2005 Plan.
The Company files a consolidated federal income tax return. Allocation of tax expense or refunds among the consolidated group is based on separate return calculations.
As of December 31, 2013 and 2012, it was determined that no valuation allowance against deferred tax assets was considered necessary.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some or all of the deferred tax assets will not be realized. Management considers the reversal of deferred tax liabilities and projected future taxable income in making this assessment. The results of operations during the years ended December 31, 2013 and 2012, continued growth in the Company’s insurance policy and premium base with a wider demographic and geographic spread, as well as changes in the Company’s reinsurance and catastrophe coverage were also considered important factors in assessing the realizability of deferred tax assets.
The total income tax provision (benefit) incurred is different from that which would be obtained by applying the statutory federal income tax rate to income before income taxes. The significant items causing this difference for 2013 and 2012 are as follows:
For the 12 month period commencing April 1, 2013 and ending March 31, 2014, the Company reinsured with various third party reinsurers under residential quota share reinsurance treaties, 90% of its risk. The reinsurers’ liability under the quota share arrangement beginning in respect to any one loss occurrence shall not exceed $80,000,000. Property catastrophe treaties, which went into effect on the same day and have the same term as the quota share treaties, develop over four layers and cover a gross loss of $76,000,000 excess of $4,000,000 per occurrence. The Company’s net retention is $400,000 per occurrence.
The Company also purchases reinsurance covering non-weather losses (two occurrences) in excess of a gross loss of $500,000 per occurrence for all coverage lines (a net loss of $50,000). This coverage which was enforced during 2013 and 2012 has been obtained principally to protect the Company in the event of a large fire loss.
Effective June 1, 2011 through May 31, 2012, the Company’s private passenger auto reinsurance program reinsures 50% of physical damage and liability losses emanating from private passenger automobile policies written by the Company. This coverage was extended through July 31, 2012 in respect to policies written during the term of the contract. With effect from August 1, 2012, the Company stopped writing new policies. Per the terms of the reinsurance contract the reinsurance coverage remains in force on policies the Company is required to issue, renew or keep in force by any state regulator until the first time the Company can lawfully cancel or non-renew such policies. The maximum coverage period for subject policies is deemed to be 12 months, plus odd time, not to exceed 18 months. The Company also purchases excess of loss insurance on its private passenger automobile program, covering 50% of losses from physical damage and liability claim in excess of $40,000. This coverage reinsurance program has the same run-off provisions.
The effects of reinsurance on premiums written and earned were as follows, for the years ended December 31, 2013 and December 31, 2012:
The Company is the defendant in routine litigation involving matters that are incidental to the claims aspect of the Company’s business for which estimated losses are included in unpaid loss and loss adjustment expense reserves in the Company’s consolidated financial statements. It is management’s opinion that these lawsuits are not material individually or in the aggregate to the Company’s financial position, results of operations, or cash flow.
As of December 31, 2013, HAIC’s total statutory surplus was $8,963,573 (capital stock of $2,500,000 and surplus of $6,463,573).
On March 28, 2014, we concluded that the Consolidated Balance Sheets and Consolidated Statements of Cash Flows for the year to date period ended March 31, 2013, including comparatively presented periods, that we previously included in our Form S-1/A filed on August 9, 2013 and for the year to date period ended June 30, 2013 and September 30, 2013, including comparatively presented periods, that we previously included in our quarterly reports on Forms 10-Q filed in 2013 should be restated. These restatements resulted in money market mutual fund accounts held at financial institutions which were previously classified as short-term investments to be now classified as cash and cash equivalents. In addition, checks issued in excess of cash book balances, not yet presented for payment, which were previously classified as cash and cash equivalents are now classified as general and other accrued expenses payable.
On January 31, 2014, the Company executed a new lease agreement to expand its corporate office approximately 2,802 feet, effective April 1, 2014 and to extend the expiration date to May 31, 2017. Base rent will increase April 1, 2014 to $11,597 per month through May 31, 2016 and will increase to $12,720 per month through May 31, 2017.
On March 3, 2014, Inter-Atlantic Fund, L.P., a beneficial owner of more than 5% of the outstanding shares of common stock, distributed 11,512,301 shares, $.0001 par value per share, to the limited partners of Inter-Atlantic Fund, L.P. in accordance with Inter-Atlantic Fund, L.P.’s partnership agreement.