We invest funds in the participant loss layer for several of the ART programs. We receive investment income and generate realized gains or losses, and incur an equal expense on the amounts owed to ART participants. “Expense on amounts withheld” represents both investment income and realized gains or losses that we remit back to ART participants. The related investment income and realized gains or losses are included in our “Net investment income” and "Net realized gains on investments" lines, respectively, on our Consolidated Statements of Income.
Book value per common share is computed using only unrestricted outstanding common shares. As of December 31, 2014 and 2013 total unrestricted common shares were 19,793,000 and 19,661,000, respectively.
The following discussion and analysis of our historical consolidated financial statements should be read in conjunction with our audited consolidated financial statements and the related notes included in this Form 10-K.
We are a holding company with operations being conducted by our subsidiaries.
We write commercial insurance for various sizes of transportation fleets. Because of the number of smaller fleets nationwide, we have more opportunities to write smaller risks than larger ones. When general economic conditions improve, entrepreneurs are encouraged to start new transportation companies, which typically commence operations as a smaller risk and a potential traditional insurance customer for us. During periods of economic downturn, smaller risks are more prone to failure due to a decrease in leisure travel and consolidation in the industry. An increase in the number of larger risks results in more prospective ART insurance customers. We generally do not believe that smaller fleets that generate annual premiums of less than $75 thousand are large enough to retain the risks associated with participation in one of the ART programs we currently offer.
The factors that impact our growth rate are consistent across all products. However, the trends impacting each of these factors may vary for individual products. Those factors are as follows:
However, the industry's commercial auto liability line of business continued to have unfavorable results compared to the P/C industry as a whole, operating at increased levels of loss frequency and severity as well as decelerating increases in renewal rates. These loss trends have been due in part to increased medical care costs, HIPAA regulations, fraudulent activity, litigation costs, a shortage of qualified drivers as well as an increase in delays in reporting losses by injured third parties. Overall, operating results for the P/C insurance industry are expected to be profitable despite a reduced level of underwriting income and pressure from low investment yields. While the industry is experiencing lower realized capital gains, net investment income increased slightly due to a larger invested asset base. The commercial auto liability line of business will continue to face several unfavorable trends in the coming year such as, but not limited to, continued competitive market conditions, a moderation in price increases on renewal business, loss ratios that are expected to remain elevated due to increased frequency and severity, unfavorable development on prior year loss and LAE reserves and a continued low interest rate environment.
Since our inception in 1989 we have placed a consistent emphasis on underwriting profit. In 2013 and 2014 our results did not meet our expectations and were impacted by commercial auto liability industry trends. Our five-year average GAAP combined ratio of 98.7% has been consistently better than or in line with industry results and we believe the following factors contribute to our performance:
Our pricing model, which is continually monitored and adjusted based on specific market conditions, and bottom line orientation, have resulted in disciplined and consistent risk assessment and pricing adequacy of new and renewal business since emerging from the prolonged period of soft market conditions.
obtain independent data for vehicle repair inflation, vehicle replacement parts costs, used vehicle prices, fuel costs and medical care costs and adjust our pricing routines to more accurately project the future costs associated with insurance claims. We would expect a negative impact on our future results if we fail to properly account for and project for these inflationary trends. Increased litigation of claims may also negatively impact our profitability.
Our net income from operations for 2014 was $8.0 million ($0.41 per share diluted) compared to $13.3 million ($0.67 per share diluted) in 2013. The primary driver for this year-over-year decrease in net income relates to unfavorable development on prior years' loss reserves as discussed above.
Gross premiums written includes both direct premium and assumed premium. During 2014, our gross premiums written increased $57.0 million, or 9.0%, compared to 2013. Each of our components, except specialty personal lines, experienced growth in 2014 as compared to 2013, with a significant portion of such growth being related to rate increases on renewed business which averaged approximately 7%. Gross premiums written in our ART component increased $47.8 million, or 14.7%, during 2014 compared to 2013 and was primarily driven by the addition of new customers as well as rate and exposure increases in several of our existing group and national account ART products. Gross premiums written in our transportation component increased $17.1 million, or 7.5%, attributable to rate increases as well as new business from recently introduced programs, including our expanded limits to trucking customers, waste operations, traditional crane and heavy haul, traditional ambulance, and home delivery insurance products. Partially offsetting this growth in our transportation component was a decrease in our traditional trucking insurance product as several unprofitable accounts were priced away or non-renewed during the year. Gross premiums written in our specialty personal lines component decreased $12.1 million, or 25.4%, during 2014 as compared to the same period in 2013 as a result of our decision to stop selling our commercial vehicle product during the third quarter of 2013. The other component, which is comprised of premium from assigned risk policies that we receive from involuntary state insurance plans from the states in which our insurance company subsidiaries operate and over which we have no control, increased $3.0 million, or 30.6%, compared to 2013.
As part of our ART programs, we analyze, on a quarterly basis, members’ loss performance on a policy year basis to determine if there would be an assessment premium (loss results are unfavorable to expectations) or if there would be a return of premium (loss results are favorable to expectations) to participants. Assessment premium and return of premium are recorded as adjustments to premiums written (assessments increase premiums written; returns of premium reduce premiums written). For the years ended 2014 and 2013, we recorded net premium assessments of $12.1 million and $12.8 million, respectively.
Underwriting profitability, as opposed to overall profitability or net earnings, is measured by the combined ratio. The combined ratio is the sum of the loss and LAE ratio and the underwriting expense ratio. A combined ratio under 100% is indicative of a pre-tax underwriting profit.
Our underwriting approach is to price our products to achieve an underwriting profit even if we forgo volume as a result. We continue to see overall rate level increases on renewal business, which have averaged approximately 7% in both 2014 and 2013. In 2014, several of our products achieved double digit rate level increases and we are applying the same pricing criteria to our new business opportunities. We believe that the current rate level increases we are obtaining on renewal business, along with improved pricing on new business, are at levels that consider industry loss cost trends.
prior year claim development for seven consecutive quarters through June 30, 2014. Though such development appeared to be subsiding in the first quarter of 2014, as compared to the previous three quarters, during the 2014 second quarter actual incurred claims developed higher than expected by approximately $8.1 million, primarily related to accident years 2010, 2011 and 2012 for the commercial auto coverages. In consideration of the continued adverse prior year claims development, we engaged a leading independent global actuarial firm to conduct a review of our loss and LAE reserves. We used this additional actuarial data as well as various data inputs and other factors including, but not limited to, claims processing procedures, our historic loss experience and that of the industry, and loss development factors as well as actuarial analysis as routinely provided by Great American when establishing our best estimate for loss reserves for the second quarter of 2014. As a result of our review and analysis of the various data points discussed above we increased our loss and LAE reserves related to prior periods by $20.0 million in the second quarter of 2014.
2013 compared to 2012. Net investment income decreased $1.6 million, or 4.4%, to $33.4 million in 2013 compared to 2012 as anticipated given the continued low yields available for fixed maturity investments. A rise in interest rates and increases in invested assets during the second half of 2013 helped mitigate the decrease.
2013 compared to 2012. In 2013, we had pre-tax net realized gains of $6.5 million compared to $6.2 million for 2012. The pre-tax net realized gains for the year ended December 31, 2013 were primarily generated from net realized gains from the sales or redemptions of securities of $5.2 million, as well as net gains associated with other invested assets of $1.5 million. Offsetting these gains were other-than-temporary impairment charges of $0.2 million. The pre-tax net realized gains for the year ended December 31, 2012 were primarily generated from net realized gains from the sales or redemptions of securities of $6.6 million, as well as net gains associated with other invested assets of $0.5 million. Offsetting these gains were other-than-temporary impairment charges of $0.9 million.
2014 compared to 2013. We invest funds in the participant loss layer for several of our ART programs. We earn investment income and generate realized gains or losses, and incur an equal expense on the amounts owed to ART participants. “Expense on amounts withheld” represents both investment income and realized gains or losses that the Company remits back to ART participants. The related investment income and realized gains or losses are included in the Company’s “Net investment income” and “Net realized
gains on investments” lines, respectively, on its Consolidated Statements of Income. For the year ended December 31, 2014, the expense on amounts withheld increased $1.4 million, or 26.8%, compared to the same period in 2013, primarily due to growth experienced in our ART programs participant loss layer.
2014 compared to 2013. For the year ended December 31, 2014, interest expense decreased $0.5 million compared to the same period in 2013, primarily due to a decrease in the interest accrued related to contractual amounts payable to UniGroup, Vanliner's former owner, under the balance sheet guaranty.
At December 31, 2014, our investment portfolio contained $974.7 million in fixed maturity securities and $85.2 million in equity securities, all carried at fair value, with unrealized gains and losses reported as a separate component of shareholders’ equity and $46.8 million in other invested assets, which are limited partnership investments accounted for in accordance with the equity method. At December 31, 2014, we had pre-tax net unrealized gains of $28.8 million on fixed maturities and $8.9 million on equity securities. Our investment portfolio allocation is based on diversification among primarily high quality fixed maturity investments, guidelines in our investment policy and market opportunities.
Summary information for securities with unrealized gains or losses at December 31, 2014 is shown in the following table. Approximately $7.2 million of fixed maturities and $3.7 million of equity securities had no unrealized gains or losses at December 31, 2014.
The table below sets forth the scheduled maturities of available for sale fixed maturity securities at December 31, 2014, based on their fair values. Other debt obligations, which are primarily comprised of asset-backed securities other than those related to mortgages, are categorized based on their average maturity. Actual maturities may differ from contractual maturities because certain securities may be called or prepaid by the issuers.
Capital Ratios. The National Association of Insurance Commissioners’ model law for risk-based capital (“RBC”) provides formulas to determine the amount of capital and surplus that an insurance company needs to ensure that it has an acceptable
expectation of not becoming financially impaired. At December 31, 2014 and 2013, the capital and surplus of all our insurance companies substantially exceeded the RBC requirements.
Limited partnership agreements have expiration dates between two and four years whereby the entire amounts or a portion thereof could be required to be funded at any time prior to the expiration dates. The commitment amounts are presented using the expiration dates of the agreements.
For purposes of computing the recorded loss and LAE reserves, management utilizes various data inputs as noted below, including analysis that is derived from a review of quarterly results performed by actuaries employed by Great American. In addition, on an annual basis, actuaries from Great American provide a Statement of Actuarial Opinion, required annually in accordance with state insurance regulations, on the statutory reserves recorded by National Interstate Insurance Company (“NIIC”), Vanliner Insurance Company (“VIC”), National Interstate Insurance Company of Hawaii, Inc. (“NIIC-HI”) and Triumphe Casualty Company (“TCC”). The actuarial analysis of NIIC’s, VIC’s, NIIC-HI’s and TCC’s net reserves as of December 31, 2014 and 2013 reflected point estimates that were within 1% of management’s recorded net reserves as of such dates. Using this actuarial data along with its other data inputs, management concluded that the recorded reserves appropriately reflect management’s best estimates of the liability as of each year end.
Supplementary statistical information is also reviewed by the actuaries to determine which methods are most appropriate and whether adjustments are needed to particular methods. This information includes:
When establishing and reviewing reserves, we analyze historic data and estimate the impact of various loss development factors, such as our historic loss experience and that of the industry, trends in claims frequency and severity, our mix of business, our claims processing procedures, legislative enactments, judicial decisions, legal developments in imposition of damages and changes and trends in general economic conditions, including the effects of inflation. As of December 31, 2014, management has not made any key assumptions that are inconsistent with historical loss reserve development patterns. A change in any of these aforementioned factors from the assumptions implicit in our estimate can cause our actual loss experience to be better or worse than our reserves and the difference can be material. There is no precise method, however, for evaluating the impact of any specific factor on the adequacy of reserves. Currently established reserves may not prove adequate in light of subsequent actual occurrences. To the extent that reserves are inadequate and are increased or “strengthened,” the amount of such increase is treated as a charge to income in the period that the deficiency is recognized. To the extent that reserves are redundant and are released, the amount of the release is a benefit to income in the period that redundancy is recognized.
The changes we have recorded in our reserves in the past three years illustrate the potential for revisions inherent in estimating reserves. In 2014, we experienced unfavorable development of $30.6 million (4.3% of total net reserves) from claims incurred prior to 2014. In 2013, we experienced unfavorable development of $23.1 million (3.6% of total net reserves) from claims incurred prior to 2013. In 2012, we experienced unfavorable development of $3.3 million (0.5% of total net reserves) from claims incurred prior to 2012. We did not significantly change our claims settlement process in any of these years. The development reflected settlements that differed from the established case reserves, changes in the case reserves based on new information for that specific claim or the differences in the timing of actual settlements compared to the payout patterns assumed in our accident year IBNR reductions. The types of coverages we offer and risk levels we retain have a direct influence on the development of claims. Specifically, short duration claims and lower risk retention levels generally are more predictable and normally have less development. Future favorable or unfavorable development of reserves from past development experience should not be assumed or estimated. The reserves reported in the financial statements are our best estimate at each date.
Following is a discussion of certain critical variables affecting the estimation of loss reserves of the more significant lines of business. Many other variables may also impact ultimate claim costs.
The judgments and uncertainties surrounding management’s reserve estimation process and the potential for reasonably possible variability in management’s most recent reserve estimates may also be viewed by looking at how recent historical estimates of reserves for all lines of business have developed. If our December 31, 2014, reserves (net of reinsurance) developed at the same rate as the average development of the most recent five years, the effect on net earnings would be a decrease of $5.7 million.
likely than not that it will be required to sell the security before recovery, an impairment charge is required to reduce the amortized cost of that security to fair value. Additional disclosures required by this guidance are contained in Note 4 - “Investments.”
Management has evaluated the effectiveness of the Company’s internal control over financial reporting as of December 31, 2014, based on the control criteria established in a report entitled Internal Control - Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Based on such evaluation, we have concluded that the Company’s internal control over financial reporting is effective as of December 31, 2014.
In our opinion, National Interstate Corporation and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on the COSO criteria.
The Company is a 51.4% owned subsidiary of Great American Insurance Company (“Great American”), a wholly-owned subsidiary of American Financial Group, Inc. (“AFG”).
The accompanying consolidated financial statements of the Company and its subsidiaries have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”), which differ in some respects from statutory accounting principles (“SAP”) permitted by state regulatory agencies (see Note 14).
The Company accounts for the contingent consideration associated with the contractual obligations of the 2010 acquisition of Vanliner in accordance with ASC 805, Business Combinations. As part of the Purchase Agreement (the “Agreement”), UniGroup, Inc. (“UniGroup”) agreed to provide NIIC with comprehensive financial guarantees, including a four and a half year balance sheet guaranty effective through December 31, 2014, whereby both favorable and unfavorable developments related to specified line items on the closing balance sheet, as defined in sections 2.06 and 2.07 of the Agreement, inure to UniGroup. The final settlement related to the balance sheet guaranty is expected to occur during 2015 after which, any favorable or unfavorable developments related to these specific line items will then inure to the Company. The Company determines the fair value of the contingent consideration on a quarterly basis based on the present value of expected cash flows associated with the balance sheet line items contractually guaranteed by UniGroup.
In accordance with accounting guidance for other-than-temporary impairments, if management can assert that it does not intend to sell an impaired fixed maturity security and it is not more likely than not that it will be required to sell the security before recovery of its amortized cost basis, then an entity may separate the other-than-temporary impairment into two components: 1) the amount related to credit losses (recorded in earnings) and 2) the amount related to all other factors (recorded in other comprehensive income (loss)). The credit related portion of an other-than-temporary impairment is measured by comparing a security’s amortized cost to the present value of its current expected cash flows discounted at its effective yield prior to the impairment charge. If management intends to sell an impaired security, or it is more likely than not that it will be required to sell the security before recovery, an impairment charge recorded in earnings is required to reduce the amortized cost of that security to fair value. Additional disclosures required by this guidance are contained in Note 4 - “Investments.”
Policy acquisition costs, principally commissions, premium taxes and assessments, directly related to the production of new business, are deferred and amortized over the period in which the related premiums are earned. Policy acquisition costs are limited based upon recoverability without any consideration for anticipated investment income and are charged to operations ratably over the terms of the related policies. The Company accelerates the amortization of these costs for premium deficiencies. The amount of deferred policy acquisition costs amortized during the years ended December 31, 2014, 2013 and 2012 were $85.0 million, $82.2 million and $79.4 million, respectively. There were no premium deficiencies for the years ended December 31, 2014, 2013 or 2012.
Property and equipment are reported at cost, less accumulated depreciation and amortization, and include capitalized software developed or acquired for internal use. Property and equipment are depreciated or amortized over the estimated useful lives on a straight-line basis. The useful lives range from three to five years for computer equipment; 20 to 40 years for buildings and improvements; three years for capitalized software; and five to seven years for all other property and equipment. Upon sale or retirement, the cost of the asset and related accumulated depreciation are eliminated from their respective accounts and the resulting gain or loss is included in operations. Repairs and maintenance are charged to operations when incurred. The Company recorded depreciation expense of $5.2 million, $5.1 million and $4.8 million for the years ended December 31, 2014, 2013 and 2012, respectively.
Comprehensive income is defined as all changes in shareholders' equity except those arising from transactions with shareholders. It includes the Company’s net income and other comprehensive income, which consists entirely of changes in net unrealized gains or losses (net of income taxes) on the Company’s available-for-sale securities. The details of comprehensive income are reported in the Consolidated Statements of Comprehensive Income.
The Company grants stock options and other stock awards to officers under its Long Term Incentive Plan (“LTIP”). The LTIP and stock-based compensation are more fully described in Note 7 - “Shareholders’ Equity and Stock-Based Compensation.” Compensation expense is recognized for stock options and restricted stock awards issued on a straight-line basis over their vesting periods based on the fair value of these awards at the date of grant. The Company uses the Black-Scholes pricing model to measure the fair value of employee stock options, while the market price of the Company's common stock on December 31 is used for restricted stock awards.
Pricing services use a variety of observable inputs to estimate the fair value of fixed maturities that do not trade on a daily basis. These inputs include, but are not limited to, recent reported trades, benchmark yields, issuer spreads, bids or offers, reference data and measures of volatility. Included in the pricing of mortgage-backed securities are estimates of the rate of future prepayments and defaults of principal over the remaining life of the underlying collateral. Inputs from brokers and independent financial institutions include, but are not limited to, yields or spreads of comparable investments which have recent trading activity, credit quality, duration, credit enhancements, collateral value and estimated cash flows based on inputs including delinquency rates,
The Company uses the end of the reporting period as its policy for determining transfers into and out of each level. During the year ended December 31, 2014 the Company transferred seven nonredeemable preferred stocks, with an aggregate value of $6.1 million, from Level 2 to Level 1 due to increases in trading activity. Conversely, during the same period, the Company transferred seven nonredeemable preferred stocks, with an aggregate value of $5.9 million, from Level 1 to Level 2 due to decreases in trading activity.
At December 31, 2014 the Company had 17 securities with a fair value of $18.5 million that are included in Level 3, which represented 1.7% of its total investments reported at fair value. The significant unobservable inputs used by the brokers and pricing services in establishing fair values of the Company’s Level 3 securities are primarily spreads to U.S. Treasury rates and discounts to comparable securities. The specifics of such spreads and discounts were not made available to the Company. Significant increases (decreases) on spreads to U.S. Treasury rates and discount spreads to comparable securities would result in lower (higher) fair value measurements. Generally, a change in the assumption used for determining a spread is accompanied by market factors that warrant an adjustment for the credit risk and liquidity premium of the security. As the total fair value of Level 3 securities is approximately 5% of the Company’s shareholders’ equity at December 31, 2014, any change in unobservable inputs would not have a material impact on the Company’s financial position.
The table above excludes other invested assets of $46.8 million and $40.4 million at December 31, 2014 and 2013, respectively. Other invested assets include investments in limited partnerships which are accounted for under the equity method. Equity method investments are not reported at fair value.
State and local government obligations represented approximately 35.0% of the Company’s fixed maturity portfolio at December 31, 2014, with approximately $285.3 million, or 83.5%, of the Company’s state and local government obligations held in special revenue obligations, and the remaining amount held in general obligations. The Company’s state and local government obligations portfolio is high quality, as 98.8% of such securities were rated investment grade (as determined by nationally recognized agencies) at December 31, 2014. The Company had no state and local government obligations for any state, municipality or political subdivision that comprised 10% or more of the total amortized cost or fair value of such obligations at December 31, 2014.
The non-credit portion of other-than-temporary impairment charges is included in other comprehensive income. Cumulative non-credit charges taken for securities still owned at December 31, 2014 and 2013 were $3.3 million and $3.5 million, respectively.
The amortized cost and fair value of fixed maturities at December 31, 2014, by contractual maturity, are shown below. Other debt obligations, which are primarily comprised of asset-backed securities other than mortgage-backed securities are categorized based on their average maturity. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. The average life of mortgage-backed securities is 3.9 years in the Company’s investment portfolio.
Pre-tax net realized gains provided in the table above were primarily generated from net realized gains associated with the sales or redemptions of securities of $5.4 million, $5.2 million, and $6.6 million for the years ended December 31, 2014, 2013 and 2012, respectively. The gains on equity and fixed maturity securities were primarily due to favorable market conditions that increased the value of the securities over book value. In addition, other invested assets generated net gains of $3.3 million, $1.5 million and $0.5 million for the years ended December 31, 2014, 2013 and 2012, respectively. Offsetting these gains were other-than-temporary impairment charges of $2.0 million, $0.2 million and $0.9 million for the same periods ended, respectively, primarily related to several equity securities due to uncertainty surrounding the timing and extent of recovery.
The gross unrealized losses on the Company’s fixed maturities and equity securities portfolios decreased from $10.5 million at December 31, 2013 to $5.1 million at December 31, 2014. The improvement in gross unrealized losses was driven primarily by the improved credit spreads on state and local government obligations and a decrease in interest rates during 2014. The $3.4 million in gross unrealized losses at December 31, 2014 on fixed maturity securities was primarily on holdings in residential mortgage-backed securities and corporate obligations, and to a lesser extent, other debt obligations. Investment grade securities represented 87.1% of all fixed maturity securities with unrealized losses. The gross unrealized losses on equity securities consist of $1.5 million of common stocks that have been in an unrealized loss position for less than twelve months as well as $0.2 million of investment grade nonredeemable preferred stocks, all of which are considered to be temporary.
At December 31, 2014, residential mortgage-backed securities, with gross unrealized losses of $1.2 million, had 19 securities that were in an unrealized loss position of $0.1 million for less than 12 months and 34 securities with gross unrealized losses of $1.1 million for 12 months or more. Based on historical payment data and analysis of expected future cash flows of the underlying collateral, independent credit ratings and other facts and analysis, including management’s current intent and ability to hold these securities for a period of time sufficient to allow for anticipated recovery, management believes that, based upon information currently available, the Company will recover its cost basis in all these securities and no additional charges for other-than-temporary impairments will be required.
At December 31, 2014, corporate obligations, with gross unrealized losses of $1.3 million, had 33 securities that were in an unrealized loss position of $1.0 million for less than 12 months and 7 securities with gross unrealized losses of $0.3 million for 12 months or more. Investment grade securities represented 71.8% of all corporate obligations with unrealized losses. Other debt obligations, with gross unrealized losses of $0.5 million, had 54 securities that were in an unrealized loss position for less than 12 months and 13 securities with unrealized losses for 12 months or more. All of these other debt obligations are investment grade securities.
Management concluded that no additional charges for other-than-temporary impairment were required on the fixed maturity and equity holdings at December 31, 2014 based on several factors, including the Company’s ability and current intent to hold these investments for a period of time sufficient to allow for anticipated recovery of its amortized cost, the length of time and the extent to which fair value has been below cost, analysis of company-specific financial data and the outlook for industry sectors and credit ratings. The Company believes these unrealized losses are primarily due to temporary market and sector-related factors and does not consider these securities to be other-than-temporarily impaired. If the Company’s strategy was to change or these securities were determined to be other-than-temporarily impaired, the Company would recognize a write-down in accordance with its stated policy.
Interest paid on long-term debt during the years ended December 31, 2014, 2013 and 2012 was $0.1 million, $0.2 million and $0.5 million, respectively.
Federal income taxes paid, net of refunds, for 2014, 2013 and 2012 were $2.5 million, $16.2 million and $15.1 million, respectively. At December 31, 2014, the Company had an income tax recoverable of $0.9 million. The Company had income taxes payable of $1.1 million at December 31, 2013.
The Company had no liability recorded for unrecognized tax benefits at December 31, 2014 and 2013. In addition, the Company has not accrued for interest and penalties related to unrecognized tax benefits. However, if interest and penalties would need to be accrued related to unrecognized tax benefits, such amounts would be recognized as a component of the provision for federal income taxes.
The Company recognized stock-based compensation expense, inclusive of options forfeited, of $0.6 million for both the years ended December 31, 2014 and 2013, and $0.7 million for the year ended December 31, 2012. The 2014 expense includes $0.5 million for restricted stock awards while the 2013 and 2012 expense included $0.4 million and $0.3 million, respectively. Related income tax benefits were approximately $0.2 million for the years ended December 31, 2014 and 2013 and $0.1 million for the year ended December 31, 2012. At December 31, 2014, there was $0.5 million and $1.0 million of unrecognized compensation expense related to nonvested stock options and restricted stock awards, respectively. These amounts are expected to be recognized over a weighted average of 2.4 and 1.9 years, respectively. The Company has included stock-based compensation expense with the “Other operating and general expenses” line item in the Consolidated Statements of Income.
There were no options granted in 2014 and 2013. The Company uses the Black-Scholes option pricing model to calculate the fair value of its option grants. Due to a lack of historical data, the Company uses the Securities and Exchange Commission’s (the “SEC”) simplified method of calculating expected term for all grants made in 2012. The fair value of options granted was computed using the following weighted-average assumptions as of grant date:
Employees of the Company may participate in the National Interstate Savings and Profit Sharing Plan (the “Savings Plan”). Contributions to the profit sharing portion of the Savings Plan are made at the discretion of the Company and are based on a percentage of employees’ earnings after their eligibility date. Company contributions vest after three years of service. Profit sharing expense was $1.0 million for each of the years ended December 31, 2014 and 2013 and $0.9 million for the year ended December 31, 2012.
The Savings Plan also provides for tax-deferred contributions by employees. Participants may elect to have their funds (savings contributions and allocated profit sharing distributions) invested in their choice of a variety of investment vehicles offered by an unaffiliated investment manager. The Savings Plan does not provide for employer matching of participant contributions. The Company does not provide other postretirement and postemployment benefits. Participants in the Plan can choose to invest in the Company’s common shares as an investment option.
The Company’s principal insurance subsidiary, NIIC, is involved in both the cession and assumption of reinsurance. NIIC is a party to a reinsurance agreement, and NIIA, a wholly-owned subsidiary of the Company, is a party to an underwriting management agreement with Great American. As of December 31, 2014, Great American owned 51.4% of the outstanding shares of the Company. The reinsurance agreement calls for the assumption by NIIC of all of the risk on Great American’s net premiums written for public transportation and recreational vehicle risks underwritten pursuant to the reinsurance agreement. NIIA provides administrative services to Great American in connection with Great American’s underwriting of these risks. The Company also cedes premium through reinsurance agreements with Great American to reduce exposure in certain of its property and casualty insurance programs.
The tables below summarizes the reinsurance balance and activity with Great American:
During 2013, California, North Carolina, Ohio, Tennessee, and Wisconsin recreational vehicle risks previously written through Great American were transitioned to TCC, resulting in a decline in assumed premiums written and earned from Great American.
Great American or its parent, AFG, perform, and have for many years performed, certain services for the Company without charge including, without limitation, actuarial services and on a consultative basis, as needed, internal audit, legal, accounting and other
In addition, NIIC, NIIC-HI and VIC are parties to reinsurance agreements with Validus Reinsurance, Ltd. (“Validus”), whereby Validus participates on the Company’s Hawaii property quota share and workers’ compensation excess of loss reinsurance treaties which expired on May 31, 2014, and July 31, 2014, respectively. The Company's Chairman of the Board is also on the Board of Directors of Validus Holdings, Ltd., the parent of Validus. During the year ended December 31, 2014, the Company’s ceded premiums written and ceding commissions associated with Validus’ participation on these treaties were $0.3 million and $0.1 million, respectively. These treaties were negotiated at arm’s length through an independent reinsurance broker in the ordinary course of business as part of the Company’s customary reinsurance evaluation and placement process.
The Company cedes premiums through reinsurance agreements with reinsurers to reduce exposure in certain of its property-casualty insurance programs. Ceded losses and loss adjustment expense recoveries recorded for the years ended December 31, 2014, 2013 and 2012 were $60.8 million, $66.6 million and $58.0 million, respectively. The Company remains primarily liable as the direct insurer on all risks reinsured and a contingent liability exists to the extent that the reinsurance companies are unable to meet their obligations for losses assumed. To minimize its exposure to significant losses from reinsurer insolvencies, the Company seeks to do business with only reinsurers rated “Excellent” or better by A.M. Best Company and regularly evaluates the financial condition of its reinsurers.
The following table summarizes the activity and balances related to ART programs:
NIIC, VIC, NIIC-HI and TCC are subject to insurance regulations that limit the payment of dividends without the prior approval of their respective insurance regulators. Without prior regulatory approval, the maximum amount of dividend that may be paid in 2015 by NIIC to the Company based on the greater of 10% of prior year surplus or net income is $28.5 million. VIC’s maximum distribution to NIIC based on the greater of 10% of prior year surplus or net income, excluding realized gains, is $12.7 million. NIIC-HI’s and TCC’s maximum distribution to NIIC based on the greater of 10% of prior year surplus or net income is $1.2 million and $1.8 million, respectively.
The Company has investments in limited partnerships which are included in the “Other invested assets” line on the Consolidated Balance Sheets. Relative to such limited partnerships the Company has contractual agreements to invest up to an additional $11.3 million. These limited partnership contractual agreements have expiration dates between two and four years whereby the entire amounts or a portion thereof could be required to be funded at any time prior to the expiration dates.
The following are quarterly results of operations for the years ended December 31, 2014 and 2013:
During the second quarter of 2014, the Company experienced an increase in adverse prior year development. During the second quarter of 2013, the Company experienced uncharacteristically high claims severity as well as unfavorable development from prior years.