The CPI premiums written presented in this document reflect the effects of the allowance for policy cancellations, including any adjustments related to re-estimation of the allowance. As such, the CPI premiums written are those that we expect to earn, which we refer to as “stick premiums,” while those that are expected to cancel are included in the allowance for policy cancellations.
Upon the completion of the private placement in 2014, our parent company’s status as a Subchapter S corporation terminated and our consolidated income became fully subject to U.S. federal income taxes. This adjustment represents estimated income taxes as if the Company had been treated as a C Corporation for each period presented. The estimated tax was calculated assuming the Company’s blended statutory federal and state income tax rates of 37.5%, 38.1%, 37.2% and 35.7% for the years ended December 31, 2014, 2013, 2012 and 2011, respectively.
Prior to the completion of the private placement in June 2014, we made special compensation payments to our co-founders in recognition of their service to our Company. We refer to these payments as “founder special compensation.” Following the completion of the private placement in 2014, we ceased paying founder special compensation.
In connection with the 2014 amendment to the alliance agreement with CUNA Mutual, we paid CUNA Mutual $17.8 million. As a result, we recorded contract modification expense of $17.8 million, or $11.1 million net of tax benefit.
experience based on the policy terms is higher than expected or due to litigation, regulatory or other extra-contractual liabilities. SNIC, NSIC, and USIC remain liable for unearned premiums and unpaid losses and loss adjustment expenses with respect to reinsurance ceded should the reinsurer be unable to meet its obligations. Management considers the possibility of a reinsurer becoming unable to meet its obligations as remote due to the reinsurers’ financial stability, A.M. Best Company rating, size, security funds available, and other factors as appropriate.
We are a leading specialty provider of property and casualty insurance operating in two niche markets across the United States. In our Program Services segment, we leverage our “A” (Excellent) A.M. Best rating, expansive licenses and reputation to provide access to the U.S. property and casualty insurance market in exchange for ceding fees. In our Lender Services segment, we specialize in providing collateral protection insurance (“CPI”), which insures personal automobiles and other vehicles held as collateral for loans made by credit unions, banks and specialty finance companies.
exchange for ceding fees. We reinsure substantially all of the underwriting and operating risks in connection with our fronting arrangements to our capacity providers. As such, this segment generates very large gross premiums with no net premiums (except for the run-off of the retained business as described below). In many cases, we hold significant collateral to secure the associated reinsurance recoverables. Furthermore, since the funds related to settling balances (premiums, commissions and losses) between the GAs and the reinsurers do not flow through the Company, no receivables or payables are reflected in the Company’s financial statements for these amounts. In exchange for providing our insurance capacity, licensing and rating to our GA and insurer clients, we receive ceding fees averaging in excess of 5% of gross written premiums.
On October 12, 2015, the Company announced a share repurchase program authorizing the repurchase of up to $50 million in shares of the Company's common stock through December 31, 2016. Repurchases are made in accordance with the guidelines specified under Rule 10b-18 and may be made under Rule 10b5-1, under the Securities Exchange Act of 1934. During the year ended December 31, 2015, the Company purchased 1,788,640 shares of its common stock at an aggregate purchase price including commissions of $17.3 million. The excess cost of the repurchased shares over par value was charged to retained earnings.
On November, 12, 2015, the Company announced the extension of the agreement with Nephila Capital, Ltd. (“Nephila”) that it entered into in 2014. Nephila is an institutional risk investor that specializes in catastrophe insurance risk. In exchange for the continued exclusive right to produce catastrophe exposed property insurance via State National, Nephila has agreed to pay State National contractual minimum ceding fees through 2019.
The minimum ceding fees are subject to State National maintaining its “A” A.M. Best rating and potential reductions to the extent that State National is unable to provide production year capacity or is otherwise constrained from writing premium. Also, under certain circumstances, Nephila may terminate the exclusivity, which would reduce the contractual minimum ceding fees to a total of $32.5 million for 2016 through 2019. In the event of such a termination, State National would have the ability to write the catastrophe exposed property business for other capacity providers.
We believe that the increased role of capital market alternatives to reinsurance, including the capitalization of hedge fund-backed reinsurers and the availability of capital in the non-U.S. reinsurance market, is driving demand for our Program Services, as these firms typically do not have direct access to the U.S. insurance market. This increased demand is contributing to an increase in new programs sold.
In addition, downgrades of insurance companies may create increased demand for our fronting capacities. For example, we currently have a large active program with certain subsidiaries of Meadowbrook Insurance Group, Inc. (“MIG”), including Century Surety Company, Star Insurance Company and Savers Property & Casualty Insurance Company. This A.M. Best rating-sensitive book of business came to us in August of 2013 after A.M. Best downgraded the rating of the MIG insurance subsidiaries from “A-” to “B++”. Ceding fees earned were approximately $14.9 million, $14.3 million and $3.5 million as of December, 31, 2015, 2014 and 2013, respectively. On July 7, 2015, Meadowbrook announced the completion of the acquisition of Meadowbrook by Fosun International Limited. It is unknown if Meadowbrook will seek to terminate our fronting arrangement.
Alliance with CUNA Mutual. The Company’s alliance with CUNA Mutual that began in 2009 provides us access to a wider array of clients and added significant additional scale to our CPI business. For the years ended December 31, 2015, 2014 and 2013, we have generated net premiums earned of $59.5 million, $40.7 million and $30.3 million, respectively, through the alliance with CUNA Mutual. Prior to July 1, 2014, this business was subject to a 50% quota share agreement with CUNA Mutual. In May 2014, we amended the alliance agreement to increase our retention of the business subject to the alliance to 70% from 50% for business written on or after July 1, 2014, and in exchange have made payments to CUNA Mutual totaling $17.8 million. The Company’s net premiums earned increased $15.8 million and $5.4 million related to the amendment of the alliance agreement for the years ended December 31, 2015 and 2014, respectively. In addition, the term of the alliance has been extended at least through July 31, 2018.
Run-off of the Retained Business. In the past, the Company has participated to a limited extent on a quota share basis in certain programs in the Program Services segment. From 2007 until 2011, California had required USIC to retain 10% of the risks written. After this requirement was lifted in early 2012, the Company reinsured to inception the retained business under most of the active contracts, but others continue to run-off. The Company has no active retained contracts and has no present intention of participating in future contracts. We refer to this business as “the run-off of the retained business.” As of December 31, 2015, we had net reserves of $4.0 million related to this business.
provision or liability for federal or state income tax for our parent company and pass-through subsidiaries has been included in our consolidated financial statements. The tax provision, assets and liabilities that are reflected in our consolidated financial statements for periods prior to the completion of the private placement represent those for our insurance subsidiaries, SNIC, NSIC, and USIC, and their intermediate holding company, State National Intermediate Holdings, Inc. (“SNIH”), as those entities were “C” Corporations. Despite the Subchapter S corporation status, the impact of taxes on our parent company are included in the financial statements in that our shareholders were provided with the cash to pay the taxes that passed through to the shareholders. Prior to the completion of the private placement, we made periodic cash distributions to our shareholders that have included amounts necessary for them to pay their estimated personal U.S. federal income tax liabilities relating to the items of our income, gain, deductions and losses that pass through to them. Upon the completion of the private placement, our parent company’s status as a Subchapter S corporation terminated and our parent company became a “C” Corporation for U.S. tax purposes and became subject to a combined federal and state corporate income tax rate between approximately 35% and 38%. We invest a portion of our investment portfolio in tax-exempt municipal securities, which investment may have the effect of lowering our effective tax rate.
Seasonality of Our Business. Our Lender Services segment typically experiences seasonal fluctuations in written premium. The fourth quarter tends to generate the greatest amount of written premium, whereas the first quarter of the year tends to generate the least. We believe this trend follows loan delinquency patterns for the industry. We generally do not experience seasonality in our Program Services segment.
At the end of each quarter during the program contract year, we adjust the capacity fee based upon the re-estimated or actual amount of gross premiums that we expect will be written or that were written for that program for the full contract year. If the estimated annual gross written premiums fall below the minimum contract level in a given period, capacity fees associated with the estimated premium shortfall for that period are earned in that period. If the estimated annual gross written premiums equal or exceed the required minimum level for a given period, no capacity fees are recognized for that period, and the premium related fees are earned as the associated gross written premium is earned. In connection with our re-estimation process, if in a subsequent period we increase our estimate of the amount of gross premiums that we expect will be written under a program for the full contract year, we will reverse a portion of the capacity fees earned in a prior period. Conversely, to the extent that we decrease our estimate of gross premiums, we will recognize capacity fees associated with the additional shortfall in the current period.
Commissions. Commission expenses are primarily related to our Lender Services segment. A significant portion of these amounts are paid to financial institutions as a means to reimburse the financial institution for costs associated with operating a CPI program. These commissions are partially offset by a 21% ceding commission received under our quota reinsurance agreement with CUNA Mutual and the reimbursement we received from CUNA Mutual for a proportional share of direct commissions and other reimbursable expenses paid to accounts. The ceding commission compensates us for expenses, such as underwriting and policy acquisition expenses, that we incur in connection with the writing of the ceded business.
Stock-based compensation expense. Compensation expense for stock-based payments is recognized based on the measurement-date fair value for awards that will settle in shares. Compensation expense for awards that are settled in equity are recognized on a straight line pro rata basis over the vesting period. Stock-based compensation expense was approximately $4.1 million and $2.0 million for the years ended December 31, 2015 and December 31, 2014, respectively. Upon completion of the private placement in 2014, the Company made grants of non-qualified stock options to certain officers to purchase an aggregate of 2,783,873 shares of our common stock. In addition to the grants of non-qualified stock options, the Company made grants of 12,000 shares of restricted stock to our non-employee directors and 38,500 shares of stock to our employees. These non-qualified stock options and restricted stock grants are classified as equity based awards and will be recognized on a straight-line basis over the vesting period of 3 years and 1 year, respectively. The stock grants made to employees were expensed at their fair value and had no vesting or performance requirements. On March 30, 2015, the Company made grants of 230,060 shares of restricted stock to certain officers. These restricted stock grants are classified as equity-based awards and will be recognized based on achievement of performance objectives over one, two and three year performance periods. On June 25, 2015, the Company granted 11,028 shares of restricted stock to our non-employee directors. These restricted stock grants are classified as equity awards and will be recognized on a straight-line basis over a 1 year vesting period.
Adjusted pre-tax income. Adjusted pre-tax income is considered a non-GAAP financial measure because it reflects adjustments to pre-tax income, which is the most directly comparable measure calculated in accordance with GAAP, for the amount of founder special compensation and the non-recurring offering-related expenses and contract modification expense related to the amendment to our alliance with CUNA Mutual, as applicable. The Company’s management (“Management”) believes this measure is helpful to investors because it provides comparability in evaluating core financial performance between periods. Management uses adjusted pre-tax income to evaluate core financial performance against historical results without the effect of these items.
Adjusted net income. Adjusted net income is considered a non-GAAP financial measure because it reflects adjustments to net income, which is the most directly comparable measure calculated in accordance with GAAP for the pro forma provision for income taxes as if the Company had been treated as a C Corporation for each period presented and the exclusion (net of tax benefit) of the increase in the Company’s deferred tax asset as a result of the conversion to the C Corporation status, for the amount of founder special compensation and the non-recurring offering-related expenses and contract modification expense related to the amendment to our alliance with CUNA Mutual, as applicable. Management believes this measure is helpful to investors because it provides comparability in evaluating core financial performance between periods. Management uses adjusted net income to evaluate core financial performance against historical results without the effect of these items.
Gross leverage. Gross leverage for the Company is the ratio of gross written premiums and gross liabilities to surplus. A significant portion of our capital is used to support the gross premiums and insurance liabilities in our Program Services segment. Because we retain virtually no risk other than the credit risk of the capacity providers, and we maintain strict credit underwriting standards, broad indemnification agreements and collateral requirements, we are able to maintain significant ceded reinsurance business on a relatively small amount of capital compared to our peers. For the year ended December 31, 2015, our gross leverage ratio was 14 to 1. Our objective is to produce a total company gross leverage ratio of between 13 to 1 and 15 to 1.
Net loss ratio. The net loss ratio is a measure of the underwriting profitability of our Lender Services segment. Expressed as a percentage, this is the ratio of net loss and LAE incurred to net premiums earned. For the years ended December 31, 2015, 2014 and 2013, our net loss ratio was 45.5%, 42.0% and 37.3%, respectively.
Net expense ratio. The net expense ratio is a component of our operational efficiency in administering our Lender Services segment. Expressed as a percentage, this is the ratio of net expenses (commissions, taxes, licenses, and fees and general and administrative) to net premiums earned. Our expense ratio is higher than that for most traditional insurance products due to the labor and systems intensive processes involved in monitoring the insurance statuses for the loan portfolios of our Lender Services clients. For the years ended December 31, 2015, 2014 and 2013, our net expense ratio was 41.0%, 47.3% and 47.8%, respectively.
Return on equity. One of the key financial measures that we use to evaluate our operating performance is return on equity. We calculate return on equity by dividing net income by the average GAAP equity. Our return on equity at December 31, 2015 was 17.7%. Our overall financial objective is to produce a return on equity of at least 15% over the long-term.
Financial leverage ratios. Our financial leverage ratio at December 31, 2015 was 16.9%, as compared to 18.5% at December 31, 2014. Our objective is to maintain a financial leverage ratio in the range of 20% to 40% over the long-term.
Our consolidated financial statements include amounts that, either by their nature or due to the requirements of generally accepted accounting principles in the U.S. (“GAAP”), are determined using estimates and assumptions. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances. While we believe that the amounts included in our consolidated financial statements reflect our best judgment, actual amounts could ultimately materially differ from those currently presented. We believe the items that require the most subjective and complex estimates are: unpaid losses and loss adjustment expense reserves, allowance for policy cancellations, unearned premium reserve, reinsurance recoverable, valuation of our investment portfolio, assessment of other-than-temporary impairments (“OTTI”), and minimum ceding fees.
We believe our accounting policies for these items are of critical importance to our consolidated financial statements. The following discussion provides more information regarding the estimates and assumptions required to arrive at these amounts. For a complete summary of our significant accounting policies, see the notes to the consolidated financial statements.
In establishing these estimates, we make various assumptions regarding a number of factors, including frequency and severity of claims, the length of time needed to achieve ultimate settlement of claims, inflation of medical costs, insurance policy coverage interpretations, jury determinations and legislative changes. Due to the inherent uncertainty associated with these estimates, and the cost of incurred but unreported claims, our actual liabilities may be different from our original estimates. On a quarterly basis, we review our reserves for losses and LAE to determine whether further adjustments are required. Any resulting adjustments are included in the current period’s results. Additional
An allowance for policy cancellations is provided for the estimated amount of return premiums and policy fees, net of commission expense and premium taxes that will be incurred on expected future policy cancellations associated with the Company’s business. Premiums and cancellation data are accumulated by accounting month (month in which the premium was written/collected), lending institution and at the corporate level. The estimation methodology utilizes actual cancellation rates (premium refunds divided by premiums written by accounting month) to determine expected future cancellations for that accounting month. The balance for each accounting month decreases each subsequent month as actual refunds emerge.
Unearned premium reserves represent the portion of premiums written applicable to the unexpired terms of the policies. The Lender Services segment calculates this reserve after adjusting for anticipated policy cancellations.
The recoverable for ceded unpaid losses and LAE includes an estimate for claims reported and an additional liability for claims incurred but not reported, based on the Company’s historical loss experience. While management believes the amounts included in the consolidated financial statements are adequate, such estimates may be more or less than the amount ultimately paid when the claims are settled. These estimates are reviewed and adjusted on a continuing basis, as necessary, as experience develops or as new information becomes known and such adjustments are included in current operations. The recoverable for ceded premium reserves represent the portion of premiums written applicable to the unexpired terms of the policies. The Lender Services segment calculates this reserve after adjusting for anticipated policy cancellations.
Investments are considered available-for-sale and are carried at fair value. The Company measures the fair value of the investments based upon quoted market prices from an independent pricing service and its third-party investment managers, using observable market information. The cost of securities sold is based on the specific identification method. Unrealized gains and losses associated with the available-for-sale portfolio, as a result of temporary changes in fair value during the period such investments are held, are reflected net of income taxes and reported in other comprehensive income as a separate component of shareholders’ equity. Unrealized losses associated with the available-for-sale portfolio that are deemed to be other-than-temporary are charged to income in the period in which the other-than-temporary impairment is determined. Debt security premiums and discounts are amortized into earnings using the effective-interest method.
As a result of the Company’s conversion to a C Corporation, the deferred tax asset increased by approximately $14.3 million primarily due to the effects of eliminating deferred tax balances on the insurance subsidiaries related to intercompany transactions. This excludes the tax effect related to contract modification expense of $6.7 million.
Founder special compensation, offering-related expenses, and contract modification expense are shown net of the estimated tax benefit for each period presented. The estimated tax was calculated assuming the Company’s blended statutory federal and state income tax rates of 37.5% and 38.1% for the periods ended December 31, 2014 and 2013, respectively.
Consolidated Results of Operations for the Year Ended December 31, 2015 compared to the Year Ended December 31, 2014
Ceding fees. Ceding fees increased by $22.3 million, or 48.6%, from $45.7 million for the year ended December 31, 2014 to $68.0 million for the year ended December 31, 2015, due to an increase in Program gross earned premium and capacity fees. Program Services gross earned premiums increased from $815.2 million for the year ended December 31, 2014 to $1.0 billion for the year ended December 31, 2015 resulting in an increase in premium related ceding fees of $11.1 million. Capacity fees increased $11.2 million for the year ended December 31, 2015 compared to the year ended December 31, 2014.
Losses and loss adjustment expenses. Losses and LAE increased by $15.0 million, or 36.6%, from $40.8 million for the year ended December 31, 2014 to $55.8 million for the year ended December 31, 2015, which is partly the result of increased exposure due to higher earned premiums and an increase in claim frequency and severity. A strengthening economy, an aging automobile fleet, and easier access to credit have contributed to an increase in vehicle sales, resulting in higher loan balances which are the bases upon which we pay claims.
Founder special compensation. We ceased paying founder special compensation following the completion of the private placement in June 2014.
Current tax expense (benefit). Current tax expense increased by $14.2 million, from $11.5 million for the year ended December 31, 2014 to $25.7 million for the year ended December 31, 2015, primarily due to the conversion of the Company’s tax status from a Subchapter S Corporation to a C Corporation on June 25, 2014.
Deferred tax expense (benefit). Deferred tax benefit decreased $20.4 million, from $21.2 million for the year ended December 31, 2014 to $0.8 million for the year ended December 31, 2015, primarily due to the conversion of the Company’s tax status from a Subchapter S Corporation to a C Corporation on June 25, 2014.
Premiums earned. Premiums earned increased by $12.3 million, or 14.5%, from $84.4 million for the year ended December 31, 2013 to $96.7 million for the year ended December 31, 2014. This increase was primarily due to an $11.8 million increase in Lender Services premiums earned. Contributing to this increase is growth in the loan portfolio of existing accounts driven primarily by rising automobile sales, higher average auto loan sizes and increasing credit availability, and growth relating to the increased retention of premium subject to the CUNA Mutual alliance.
General and administrative expense. General and administrative expense increased by $5.5 million or 10.2%, from $53.4 million for the year ended December 31, 2013 to $58.9 million for the year ended December 31, 2014, primarily due to an increase in personnel costs, including stock-based compensation expense incurred in 2014. The Company did not have stock-based compensation expense in 2013.
Current tax expense (benefit). Current tax expense increased by $6.7 million, from $4.8 million for the year ended December 31, 2013 to $11.5 million for the year ended December 31, 2014, primarily due to a $7.2 million tax impact of the conversion of the Company’s tax status to a C Corporation.
Losses and loss adjustment expenses. Losses and LAE incurred in the run-off of the retained business increased by $1.8 million from $0.2 million for the year ended December 31, 2014 to $2.0 million for the year ended December 31, 2015. The increase in losses and LAE for the year ended December 31, 2015, was primarily related to reserve strengthening on run-off programs.
General and administrative expense. General and administrative expense increased by $1.6 million, or 14.7%, from $10.8 million for the year ended December 31, 2014 to $12.4 million for the year ended December 31, 2015. The increase was primarily related to stock-based compensation and consulting fees.
Premiums earned. The Company had virtually no premiums earned in the Program Services segment for the period ending December 31, 2014 compared to negative $0.5 million for the period ending December 31, 2013, which is due to the run-off of retained business. We typically do not earn net premiums in this segment due to ceding 100% of the risk to reinsurers.
earned premium from $563.0 million for the year ended December 31, 2013 to $815.2 million for the year ended December 31, 2014 related to improvement from two sources. First, one significant program experienced growth in 2014. Second, another significant program was added in mid-2013 and generated a full year of earned premium in 2014.
Loss and loss adjustment expenses. Loss and LAE decreased by $0.3 million from $0.5 million for the year ended December 31, 2013 to $0.2 million for the year ended December 31, 2014 due to run-off of retained business.
Lender Services Segment Results of Operations for the Year Ended December 31, 2015 compared to the Year Ended December 31, 2014
Premiums earned. Premiums earned increased by $21.4 million, or 22.2%, from $96.7 million for the year ended December 31, 2014 to $118.1 million for the year ended December 31, 2015, $10.4 million of which is related to the amendment of the CUNA Mutual alliance agreement. Factors contributing to this increase in premiums earned are new sales and growth in the loan portfolios of existing accounts driven by rising automobile sales and higher average auto loan sizes.
Contract modification expense. Contract modification expense decreased by $17.8 million. In connection with the 2014 amendment to the alliance agreement with CUNA Mutual, we paid CUNA Mutual $17.8 million. As a result, we recorded non-recurring contract modification expense of $17.8 million for the period ended December 31, 2014.
Premiums earned. Premiums earned increased by $11.8 million, or 13.9%, from $84.9 million for the year ended December 31, 2013 to $96.7 million for the year ended December 31, 2014. Contributing to this increase is growth in the loan portfolio of existing accounts driven primarily by rising automobile sales, higher average auto loan sizes and increasing credit availability, and growth relating to the increased retention of premium subject to the CUNA Mutual alliance.
Commissions. Commissions increased by $1.9 million, from $2.0 million for the year ended December 31, 2013 to $3.9 million for the year ended December 31, 2014, primarily due to an increase in Lender Services premiums earned and a reduction to ceding commissions related to the amendment to the CUNA Mutual alliance.
Corporate Segment Results of Operations for the Year Ended December 31, 2015 compared to the Year Ended December 31, 2014
Other income. Other income decreased by $3.1 million, from $3.2 million for the year ended December 31, 2014 to $0.1 million for the year ended December 31, 2015. This decrease is primarily related to termination of a tenant lease in November 2014.
Realized net investment gains (losses). Realized net investment gains decreased by $0.5 million, or 25.7% from $1.8 million for the year ended December 31, 2013 to $1.3 million for the year ended December 31, 2014 primarily due to lower gains in 2014 on sales of bonds, primarily industrial and miscellaneous Bonds.
The amortized cost and fair value of available-for-sale debt securities held as of December 31, 2015, by contractual maturity, are shown in the table below. Actual maturities may differ from contractual maturities because some borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
There were 237 and 143 securities at December 31, 2015 and December 31, 2014, respectively, that account for the gross unrealized loss, none of which we deemed to be other-than-temporarily impaired. Management believes that the temporary impairments are primarily the result of interest rate fluctuations, current conditions in the capital markets, and the impact of those conditions on market liquidity and prices. The Company does not intend to sell the securities, and it
is not more likely than not that the Company will be required to sell these securities before recovery of their amortized cost. Management has the intent and ability to hold the equity securities in an unrealized loss position until the recovery of their fair value. Therefore, Management does not consider these investments to be other-than-temporarily impaired.
Net cash used in investing activities was $128 million for the year ended December 31, 2014, while net cash provided by investing activities was $15.8 million for the year ended December 31, 2013. The $128 million used in investing activities as of December 31, 2014 is primarily due to investing cash received from the private placement of the Company’s stock.
Net cash provided by financing activities was $73.7 million for the year ended December 31, 2014 compared to net cash used in financing activities of $15.3 million for the year ended December 31, 2013. In 2014, cash provided by financing activities increased due to the private placement of the Company’s stock, partially offset by the redemption of common shares of existing shareholders. The net increase related to this activity is approximately $97 million. The increase in dividends is primarily related to the first and second quarter payments, which were made in consideration of capital position, estimated capital needs and liquidity, and earnings as of December 31, 2013. In addition, the Company repurchased one of its subordinated debentures at auction for $6.8 million.
Accounts receivable from agents, net. During the year ended December 31, 2015, accounts receivable from agents increased $5.4 million from December 31, 2014, as a result of growth in Program Services business due to the addition of new programs and expansion of existing programs. This balance reflects ceding fees and premium taxes receivable from agents.
Reinsurance recoverables, unpaid losses and loss adjustment expenses and unearned premiums. As of December 31, 2015, we held $2.7 billion in collateral securing $1.5 billion in reinsurance recoverables. In addition, we had $384.3 million of unsecured reinsurance recoverables, of which $377.2 million related to the Program Services segment and $7.1 million related to our quota share reinsurance with CUNA Mutual, an A.M. Best “A” rated carrier. During the year ended December 31, 2015, reinsurance recoverables increased $255.1 million from December 31, 2014, which was primarily a result of the increase in gross premiums written for Program Services business due to the addition of new programs and expansion of existing programs and gross loss development for prior year claims. These factors also caused an increase in the corresponding unearned premiums and the unpaid losses and loss adjustment expenses of $105.3 million and $154.9 million, respectively.
Allowance for policy cancellations. As of December 31, 2015, the allowance for policy cancellations increased by $4.1 million from December 31, 2014, primarily due to the volume and timing of CPI premiums (gross of cancellations) written in 2015 compared to 2014. On a quarterly basis, we review our estimates for allowance for policy cancellations to determine whether further adjustments are appropriate. Any resulting adjustments are included in the current period’s operating results. The allowance for policy cancellations for the year ended December 31, 2015 and December 31, 2014 included upward revisions to prior year estimates of $0.6 million and $4.2 million, respectively. Because of the interplay between the allowance for policy cancellations and the related unearned premium reserve, changes in the allowance for policy cancellations are partially offset by related changes in the unearned premium reserve and amounts ceded to reinsurers. After taking into account the associated changes in unearned premium and amounts ceded to reinsurers, the net impact to the balance sheet and the corresponding reduction in net income from the revised estimates for the year ended December 31, 2015 and 2014 was approximately $0.2 million and $2.2 million, respectively.
The loss and LAE payments due by period in the table above are based upon the loss and LAE estimates as of December 31, 2015 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 estimation process, see “Business-Loss Reserves” in Item 1 of this report. 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 “Risk Factors-Risks Relating to Our Business-If we are unable to establish and maintain accurate loss reserves, our business, financial condition, results of operations and prospects may be materially and adversely affected.” for a discussion of the uncertainties associated with estimating loss and LAE in Item 1A of this report.