We lease office space in Birmingham, Michigan, where our principal executive office is located. We also lease offices in Southfield, Michigan; Jacksonville, Orlando and Miami, Florida; Somerset, Pennsylvania; and Brentwood, Tennessee. We believe that our facilities are adequate for our current needs and that suitable additional or substitute space will be available as needed.
In 2017, the Company recognized a $750,000 gain on the sale of the renewal rights of a portion of the low value dwelling book of business to another insurer. In 2016, as a result of the merger of ACIC into WPIC, the value of intangible assets recorded for insurance licenses on ACIC were written off resulting in a loss. In 2015, the Company recognized a gain as a result of the deconsolidation of an affiliate.
• Bornheutter-Ferguson method-This method is a combination of the loss ratio and loss development methods, where the loss development factor is given more weight as an accident year matures; and
Our actuaries estimate an IBNR reserve for our unallocated LAE not specifically identified to a particular claim, namely our internal claims department salaries and associated general overhead and administrative expenses associated with the adjustment and processing of claims. These estimates, which are referred to as unallocated loss adjustment expense ("ULAE") reserves, are based on internal cost studies and analyses reflecting the relationship of ULAE paid to actual paid and incurred losses. We select factors that are applied to case reserves and IBNR reserve estimates in order to estimate the amount of ULAE reserves applicable to estimated loss reserves at the balance sheet date.
Most or all of these factors are not directly or precisely quantifiable, particularly on a prospective basis, and are subject to a significant degree of variability over time. In addition, the establishment of loss and LAE reserves makes no provision for the broadening of coverage by legislative action or judicial interpretation or for the extraordinary future emergence of new types of losses not sufficiently represented in our historical experience or which cannot yet be quantified. As a result, an integral component of our loss and LAE reserving process is the use of informed subjective estimates and judgments about our ultimate exposure to losses and LAE. Accordingly, the ultimate liability may vary significantly from the current estimate. The effects of change in the estimated loss and LAE reserves are included in the results of operations in the period in which the estimate is revised.
We carry debt securities classified as available-for-sale at fair value, and unrealized gains and losses on such securities, net of any deferred taxes, are reported as a separate component of accumulated other comprehensive income. Our equity securities that do not result in consolidation and are not accounted for under the equity method are measured at fair value and any changes in fair value are recognized in net income. We carry other equity investments that do not have a readily determinable fair value. These equity investments are recorded at cost, less impairment and adjusted for observable price changes under the measurement alternative provided under GAAP. We review these investments for impairment during each reporting period. We do not have any securities classified as trading or held-to-maturity.
The fair values of debt and equity securities have been determined using fair value prices provided by our investment managers, who utilize internationally recognized independent pricing services. The prices provided by the independent pricing services are generally based on observable market data in active markets (e.g., broker quotes and prices observed for comparable securities).
The carrying value of our gross deferred tax asset for the NOL carryforwards is equal to the total NOL carryforward amount times the applicable federal and state tax rates, and was $10.7 million and $9.5 million as of December 31, 2018 and 2017, respectively. Total gross deferred tax assets were $15.4 million and $13.3 million as of December 31, 2018 and 2017. A
We use adjusted operating income and adjusted operating income per share, in conjunction with other financial measures, to assess our performance and to evaluate the results of our business. We believe these measures provide investors with valuable information relating to our ongoing performance that may be obscured by the effect of investment gains and
Adjusted operating loss, a non-GAAP measure, was $3.7 million, or $0.44 per share, for the year ended December 31, 2018, compared to an adjusted operating loss of $22.8 million, or $2.90 per share, for the year ended December 31, 2017.
In 2017, we entered into the ADC to protect against loss development of up to $17.5 million in excess of stated reserves as of June 30, 2017. The agreement provides up to $17.5 million of reinsurance for adverse net loss reserve development for accident years 2005 through 2016. The agreement attaches when net losses exceed $1.4 million of the $36.6 million carried reserves at June 30, 2017, and extends to $19.5 million in coverage up to $57.5 million (inclusive of a 10% co-participation).
Operating expenses consist primarily of employee compensation, information technology and occupancy costs, such as rent and utilities. Operating expenses as a percent of net earned premiums and other income was 18.5% and 18.6% for the years ended December 31, 2018 and 2017, respectively.
Net investment income increased by $608,000, or 22.3%, to $3.3 million for the year ended December 31, 2018, as compared to 2.7 million for the year ended December 31, 2017. This increase was mainly due to an increase in interest rates and average invested assets during 2018. Average invested assets as of December 31, 2018, were $148.9 million as compared to $143.1 million at December 31, 2017, an increase of $5.8 million, or 4.1%. As of December 31, 2018, the average invested asset balance was comprised of 86.3% debt securities, 6.9% equity securities and 6.8% short-term investments, compared to the December 31, 2017 mix of 87.3% debt securities, 5.0% equity securities and 7.9% short term investments.
The portfolio’s average quality was AA at December 31, 2018 and 2017. The portfolio produced a tax-equivalent book yield of 2.8% and 2.5% for the years ended December 31, 2018 and 2017, respectively. The duration-to-worst average of the debt securities portfolio was 3.1 years and 3.2 years at December 31, 2018 and 2017, respectively.
Interest expense was $2.6 million and $1.4 million for the years ended December 31, 2018 and 2017, respectively. Interest expense increased due to the increase in outstanding debt throughout the year. We issued $22.0 million of public senior unsecured notes (the "Notes") in the third quarter of 2018. We issued an additional $3.3 million of the Notes in the fourth quarter of 2018. Proceeds from the notes were used to pay down $19.5 million of the $30.0 million of subordinated notes that were issued in the third quarter of 2017. Interest expense includes the amortization of debt issuance costs relating to the new Notes which is $260,000 per annum over the 5-year life of the Notes. The interest expense relating to the amortization of debt issuance costs for the existing $10.5 million of the subordinated notes is $50,000 per annum over the 20-year life of the subordinated notes.
Gross written premiums remained flat for the year ended December 31, 2017, as compared to 2016. These results reflect our continued execution of our growth initiatives in the niche commercial insurance markets and our strategic change in the mix of business of our personal lines.
Commercial lines gross written premiums increased $3.9 million, or 4.4%, to $92.1 million for the year ended December 31, 2017, as compared to $88.2 million for the year ended December 31, 2016. This increase was seen across almost every commercial product line as a result of our continued strategic expansion efforts.
Net written premiums decreased $8.7 million, or 8.7%, to $91.2 million for the year ended December 31, 2017, as compared to $99.9 million for the year ended December 31, 2016. The decrease was primarily due to $7.2 million of ceded written premium recorded in the third quarter of 2017 relating to the ADC.
We measure the performance of our consolidated results, in part, based on our underwriting gain or loss. The following table provides the underwriting gain or loss for the years ended December 31, 2017 and 2016 (dollars in thousands):
Net investment income increased by $555,000, or 25.5%, to $2.7 million for the year ended December 31, 2017, as compared to $2.1 million for the year ended December 31, 2016. This increase was mainly due to the growth of the investment portfolio. Average invested assets as of December 31, 2017, were $143.1 million as compared to $123.1 million at December 31, 2016, an increase of $20.0 million, or 16.2%. As of December 31, 2017, the average invested asset balance was comprised of 87.3% debt securities, 5.0% equity securities and 7.9% short-term investments, compared to the December 31, 2016 mix of 89.4% debt securities, 3.6% equity securities and 7.0% short term investments.
In 2017, we recognized a $750,000 gain on the sale of the renewal rights of a portion of the low value dwelling book of business to another insurer. In 2016, as a result of the merger of ACIC into WPIC, the value of intangible assets recorded for insurance licenses on ACIC were written off resulting in a $400,000 loss.
On December 22, 2017, the U.S. federal government enacted H.R.1, “An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018” (the “Act”). The Act provides for significant changes to corporate taxation including the decrease of the corporate tax rate from 34% to 21%. We have completed an analysis of the impact of the Act and have followed the additional guidance provided by the Security and Exchange Commission's Staff Accounting Bulletin No. 118. We believe there are no material provisional balances as of December 31, 2017.
We accounted for the impacts of the Act by remeasuring our deferred tax assets and liabilities at the 21% enacted tax rate. The approximate impact of the change in tax rate was a decrease in net deferred tax assets (before valuation allowance) of $5.6 million with a corresponding deferred income tax expense of $5.6 million. The valuation allowance also decreased by $5.7 million with a corresponding deferred income tax benefit of $5.7 million. Accordingly, the net deferred income tax impact on the results of operations relating to the Act was a $63,000 deferred tax benefit in 2017. The Company’s net deferred tax assets for the year ended December 31, 2016, remain at the previously enacted tax rate.
For the year ended December 31, 2017, the Company reported $16,000 of current federal income tax benefit and $12,000 of current state income tax benefit. The Company also reported a deferred tax benefit of $419,000 which was largely the result of changes in the net deferred tax asset valuation allowance related to changes in unrealized gains. For the year ended December 31, 2016, the Company reported $0 of current federal income tax expense and $70,000 of current state income tax
At December 31, 2018, we had $19.7 million in cash and short-term investments. Our principal sources of funds, excluding capital raises, are insurance premiums, investment income, proceeds from maturity and sale of invested assets and installment fees. These funds are primarily used to pay claims, commissions, employee compensation, taxes and other operating expenses, and service debt.
We made no contributions to our Insurance Company Subsidiaries in 2018, and we contributed $20.9 million to our Insurance Company Subsidiaries in 2017, and $2.1 million in 2016, to increase their statutory surplus levels. We believe that the current statutory surplus levels and the funds available at the holding company level will provide the necessary statutory capital to support our premium volume growth over the next two years.
Cash provided by financing activities for the years ended December 31, 2017 and 2016, were $16.2 million and $4.4 million, respectively. The greater cash provided by financing activities in 2017 was due to a $5.0 million stock issuance in 2017, and the issuance of a $30.0 million subordinated debt offering, offset by issuance costs and the payment in full of the senior debt facility.
On June 21, 2018, the Company entered into a $10.0 million line of credit. The agreement has a maturity date of June 21, 2019 and bears interest at the London Interbank rate ("LIBOR") plus 2.75% per annum, payable monthly. The agreement includes several covenants, including but not limited to a minimum tangible net worth, a minimum fixed-charge coverage ratio, and minimum statutory risk-based capital levels. As of December 31, 2018, the Company has not drawn down on the line of credit and was in compliance with all of its debt financial covenants.
The following table is a summary of our contractual obligations and commitments as of December 31, 2018 (dollars in thousands):
At December 31, 2018, both of our Insurance Company Subsidiaries were in excess of any minimum threshold at which corrective action would be required.
Refer to list of Financial Statement Schedules (including the Report of Independent Registered Public Accounting Firm referenced therein) set forth in Item 15 of this Annual Report on Form 10-K and Note 18 ~ Quarterly Financial Data (Unaudited) of the Notes to the Consolidated Financial Statements.