You should read the following discussion in conjunction with our consolidated financial statements and related notes and information included elsewhere in this annual report on Form 10-K. You should review the “Risk Factors” section of this annual report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
Some of the information contained in this discussion and analysis or set forth elsewhere in this annual report on Form 10-K, including information with respect to our plans and strategy for our business and related financing includes forward-looking statements that involve risks and uncertainties.
We did, until recently, offer private passenger automobile policies to homeowners in Texas. Our last policy expired October, 2013. The Texas private passenger automobile program was terminated as we were unable to capture a sufficient portion of the market at pricing which we deemed adequate to cover our expenses and provide a margin for profits.
We have applied for licenses to write business in thirty states. To date, we have received certificates of authority from Louisiana, Missouri, Nebraska, Nevada, South Dakota, and Utah for approval to offer homeowners, dwelling fire and extended coverage, tenant and condominium owners policies. We plan to begin writing business in Arizona in the second quarter of 2014.
· Texas unemployment rate was 6.1% at December month end, as compared to the national U.S. rate of 6.7%.
· Single family building permits were up 15.0% year over year as of November month end, while home prices were up 7.9% for the same period.
Our principal revenues are earned premiums (which are reported net of reinsurance costs), ceding commissions and policy fees. We cede a substantial portion of our earned premium to reinsurers under a quota share program to mitigate high frequency risks as well as catastrophic events and under excess of loss contracts to mitigate losses from catastrophic events. Our principal expenses are claims from policyholders, policy acquisition expenses, and underwriting and other operating expenses. Our net income for the year ended December 31, 2013 was $1,968,763.
Effective with the new treaty, the Company began ceding to reinsurers on a premium written basis, rather than on premium collected basis as it had in the past. The impact of the procedural change can be seen within the Company’s consolidated balance sheets, as ceded deferred premium which was $2.38 million as of December 31, 2012, was $0 at December 31, 2013. This change in the way premium is remitted to reinsurers has no impact on the way coverage is provided by the reinsurance program.
Premium production for the year ended December 31, 2013 was $58 million, an increase of $6.7 million or 12.98% over the same period in 2012. The Company attributes this growth to the effects of an increased number of insured properties, increased pricing in selected markets and maintaining persistency on policies subject to renewal in its target markets.
Gross Premiums Earned for the year ended December 31, 2013 and 2012 were $53.2 million and $47.2 million, respectively. The $6.1 million increase or 12.83%, is primarily the result of increased property insurance premium, which increased $8.5 million or 17.33%. The increase in property insurance premium is partially offset by a reduction of $1.9 million in private passenger auto insurance written premium year over year. The Company has made the strategic decision to exit the private passenger auto insurance business, the last policy expired October 2013.
Net Premiums Earned for the year ended December 31, 2013 and 2012 were $4.8 million and $5.0 million, respectively, and reflect the gross premiums earned less the appropriate reinsurance costs as described above.
Ceding Commission, Reinsurance Profit Sharing and Other Fee Income for the year ended December 31, 2013 was $17.7 million compared to $15.5 million for the year ended December 31, 2012. The primary factors for this improvement include increased policy volume and improved underwriting results mentioned previously.
Net Premiums Written during the year ended December 31, 2013 was $6.3 million and remained relatively flat as compared to the same period in 2012. Net premiums written represent the premiums charged on policies issued during a fiscal period less any applicable quota share reinsurance costs.
The following is a reconciliation of our total net premiums written to net premiums earned for the year ended December 31, 2013 and 2012 (values in thousands):
Gross Investment Income while still remaining a comparatively minor contributor to total revenue increased approximately 131.66% for the year ended December 31, 2013 as compared to the year ended December 31, 2012. This is primarily the result of increased cash balances (higher premium production and lower claims) and a change to our investment strategy. Our investment strategy through December 31, 2012 included the holding of excess funds in non-interest bearing accounts which were fully insured by the FDIC. Beginning January 1, 2013, FDIC insurance coverage was reduced to deposits of $250,000 or less, therefore, we changed our investment strategy by investing excess funds in federally insured certificates of deposits and in money market funds backed by securities issued by the U.S. Government.
Our Losses and Loss Adjustment Expenses amounted to $2.3 million and $4.1 million, respectively, for the years ended December 31, 2013 and 2012. During 2013, we experienced improved loss experience due to fewer convectional thunderstorm events in the geographical areas where our business is located, plus to lesser extent, favorable loss development with respect to our net unpaid losses and loss adjustment expenses established as of December 31, 2012. Together, these factors contributed to the overall favorable variance of approximately $1.8 million with respect to the total losses and loss adjustment expenses incurred for the year ended December 31, 2013 as compared to the year ended December 31, 2012. Our liability for losses and loss adjustment expense (“Reserves”) is more fully described below under “Critical Accounting Policies and Estimates”. These Reserves include both case reserves on reported claims and our reserves for incurred but not reported (“IBNR”) losses. At each period-end date, the balance of our Reserves is based on our best estimate of the ultimate cost of each claim for those known cases and the IBNR loss reserves are estimated based primarily on our historical experience.
Policy Acquisition Expenses for the years ended December 31, 2013 and 2012 were $11.6 million and $10.2 million, respectively, which primarily reflect the amortization of deferred acquisition costs including commissions payable to agents for production and renewal of policies, premium taxes and other costs associated with the acquisition of insurance policies. The net increase in 2013 is primarily attributable to the increase in our overall production.
Underwriting and Other Operating Expenses for the years ended December 31, 2013 and 2012 were $5.7 million and $5.3 million, respectively. The $352,000 increase is primarily attributable to increases in compensation and compensation-related costs, and other administrative costs, which include a variety of professional service fees, recruiting fees, and other general expenses. As of December 31, 2013, we had 39 employees all but one whom are full time compared to 36 employees as of December 31, 2012.
The loss ratio applicable to the year ended December 31, 2013 (losses and loss adjustment expenses incurred related to net premiums earned) was 46.91% compared to 81.65% for the year ended December 31, 2012. Our loss ratio was positively impacted by a significant decrease in incurred losses incurred as a result of spring storm events, as previously mentioned.
Our expenses (policy acquisition, underwriting, and other operating expenses), as a percentage of direct earned premium was 32.46% for the year ended December 31, 2013, compared to 32.86% for the year ended December 31, 2012. The decrease in our expense ratio is primarily attributable to higher direct earned premium, the result of the expansion of our business.
Our cash flows from operating, investing and financing activities for the years ended December 31, 2013 and 2012 are summarized below.
Net cash provided by operating activities for the year ended December 31, 2012 was approximately $6.0 million, which consisted primarily of cash received from net written premiums and investment income less cash disbursed for operating expenses and losses and loss adjustment expenses. Net cash used in investing activities of $4.0 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 $0.2 million. Net cash provided by financing activities totaled $1.0 million from proceeds of convertible notes payable.
Credit risk is a major factor in operating our business. We review credit risk from a variety of sources: financial institutions in regard to cash deposits; investment risk; counter-party risk from reinsurers; premium receivables; notes receivable and long-term investment assets; loss sensitive underwriting accounts; and key vendor relationships. We have established specific guidelines and procedures to evaluate our exposure, particularly with regard to our excess cash and investment holdings, and our receivable balances from insureds and reinsurers.
In regard to our investments and cash deposits as of December 31, 2013, we have limited our credit exposure to financial instruments by investing and holding our excess cash in bank demand and time deposits (i.e., CDs) as well as money market accounts which are covered by FDIC insurance. To meet liquidity needs, all deposit mature in no more than eighteen months.
The credit risk we are exposed to on ceded premium and losses recoverable from reinsurers is managed through the careful selection of reinsurance companies. When selecting reinsurance coverage, we consider the financial strength and stability of the providers, their history of responding to claims, and their overall reputation. We require that all reinsurers have an A.M. Best rating of A- (Excellent), or better, or an S&P rating of AA- or better, in order to minimize the risk of uncollectable balances. HAIC continually monitors the financial condition of its reinsurers with the aid of its reinsurance brokers, AON, and Guy Carpenter. As of December 31, 2013, no reinsurance recoverable balance is outstanding beyond 30 days. We do not use credit default swaps to mitigate our credit exposure from either investments or counterparties.
Our key vendor (agent) and insured credit risk centers around the collectability of policy premium. Initially, overall premium collection credit risk is limited by our collection of approximately 62% of our property insurance policies through property mortgagee escrow accounts. Agent credit risk is limited through the daily sweep of all premiums paid directly to the agent by the insured. Finally, on any premium collected directly from an insured, we require a 17% down payment and limit the period over which the balance is collected to a maximum of 8 installments. Policies are cancelled as soon as any installment is past due, where the policy is out of equity.
IBNR reserves are developed separately for non-catastrophe losses and catastrophe based claims. Both types of IBNR reserves contain factors for case development on known claims:
Traditional monthly loss reserving factors are not deemed appropriate for determining IBNR estimates for catastrophic events as these events do not occur evenly throughout a month, as regular loss events do. So an alternative approach to loss development has to be used, one that takes into consideration development and reporting from a specific loss date, rather than from the end of a specific month. In addition, since the HAIC is subject to catastrophic loss events (hurricane and convectional thunderstorms) which have differing cycles for loss reporting and claim development, calculations need to be made for each type event. Each analysis is made by projecting the ultimate loss value into the future and subtracting it from the known incurred losses. The Company’s claim system has the ability to track incurred claims on a “days to report” basis, so that we can look at incurred claim values for claims reported in the following bands:
Lastly, event losses are capped based on the company’s catastrophe reinsurance coverage, so that no more than $3.0 million per event is included. Once the projected event limit reaches $3.0 million, no further retained IBNR is projected for the event, only gross and ceded IBNR. Effective April 1, 2013, the Company’s reinsurance coverage caps losses at $4.0 million per event. As such, for events occurring after April 1, 2013, once the event projected losses reach $4.0 million, no further retained IBNR is projected for the event.
Because the establishment of loss reserves is an inherently uncertain process, we cannot be certain that ultimate losses will not exceed the established loss reserves and have a material adverse effect on our results of operations and financial condition. Changes in estimates, or differences between estimates and amounts ultimately paid, are reflected in the operating results of the period during which such adjustments are made.
We have audited the accompanying consolidated balance sheets of Homeowners of America Holding Corporation and Subsidiaries (the Company) as of December 31, 2013 and 2012, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2013. The Company’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”).
Cash and cash equivalents include cash and highly liquid short-term investments, with original maturities of three months or less. The amount is carried at cost, which approximates fair value. At December 31, 2013 and 2012, cash and cash equivalents consist of cash on deposit with financial institutions, as well as money market mutual funds.
Premiums are recognized as revenue on a daily pro rata basis over the policy term. The portion of premiums related to the unexpired term of policies in force as of the end of the measurement period and to be earned over the remaining term of those polices, is deferred and reported as unearned premiums.
Ceding commissions represent acquisition costs associated with insurance risk ceded to reinsurers and is earned on a pro-rata basis over the life of the associated policy.
Policy fee income includes application fees which are intended to reimburse the Company for a portion of the costs incurred in establishing the insurance. Policy fees on policies where premium is traditionally paid in full upon inception of the policy are recognized when written, while fees charged on policies where premiums are paid in installments, are recognized when collected.
Reinsurance profit share income is recognized when earned. Installment and other fees associated with the collection of installment premium payments are recognized as income when collected. Reinsurance profit share income for the year ended December 31, 2013 was 5.82% of total revenue within this classification on the consolidated statement of operations. There was no amount over 5% of total revenue within this classification on the consolidated statement of operations for the year ended December 31, 2012.
Deferred policy acquisitions costs (“DAC”) as of December 31, 2013 and 2012, 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.
The liability for losses and loss adjustment expenses (“LAE”) are estimates of the amounts required to cover known incurred losses and LAE, developed through the review and assessment of loss reports, along with the development of known claims. In addition, loss and loss adjustment expense reserves include management’s estimate of an amount for losses incurred but not reported (“IBNR”), determined from reviewing overall loss reporting patterns as well as the loss development cycles of individual claim cases. Such liabilities are necessarily based on estimates and while management believes that the amount is adequate, the ultimate liability may be more or less than the amounts provided. The approach and methods for making such estimates and for establishing the resulting liability are continually reviewed and any adjustments are reflected in current earnings.
Due and deferred premiums consist of uncollateralized premiums and agents’ balances in the course of collection as well as premiums booked but not yet due.
In the normal course of business, the Company seeks to reduce the overall exposure to losses that may arise from catastrophes or other events that cause unfavorable underwriting results by reinsuring certain levels of risk with other insurance enterprises or reinsurers. The Company uses only quality, financially rated reinsurers and continually monitors the financial ratings of these companies through its brokers. The amount and type of reinsurance purchased each year is based on management’s estimate of its probable maximum loss and the conditions within the reinsurance market. The Company continually monitors its risk exposure through the use of the AIR modeling system and other modeling tools provided by its reinsurance brokers. Reinsurance premiums, expense reimbursements, and reserves related to reinsured business are accounted for on a basis consistent with those used in accounting for the original policies issued and the terms of the reinsurance contracts. Premiums paid for reinsurance are reported as reductions of earned premium income.
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets, including tax loss carryforwards, and liabilities are measured using enacted tax rates expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred income tax expense represents the change during the period in the deferred tax assets and deferred tax liabilities. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. In assessing the realizable value of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment.
The carrying value for the Company’s cash and cash equivalents, short-term investments, and convertible notes payable approximate fair values as of December 31, 2013 and 2012 due to their short-term nature. Fair value for securities is based on the framework for measuring fair value established by FASB ASC Topic 820, Fair Value Measurements and Disclosures.
For the year ended December 31, 2013, the net income attributable to common stockholders was decreased for cumulative dividends on preferred stock during the period of $974,179.
In conjunction with the retention of certain policy fees at MGA, HAIC allocates a significant portion of its general expense base to MGA. HAIC allocated $5,370,955 and $4,862,218 of general expenses and taxes, licenses and fees to MGA during the years ended December 31, 2013 and 2012, respectively. The expense allocation agreement has been approved by the Texas Department of Insurance. On a consolidated company basis these transactions are eliminated.
During the years ended December 31, 2013 and 2012, MGA collected policy fees in the amount of $4,655,315 and $4,442,069, respectively.
Gross investment income from investments totaled $41,649 and $17,980 for the years ended December 31, 2013 and 2012, respectively.
· Level 2 - quoted prices for similar assets in active markets, quoted prices from those willing to trade in markets that are not active, or other inputs that are observable or can be corroborated by market data for the term of the investment. Such inputs include market interest rates and volatilities, spreads and yield curves.
The Company’s short-term investments comprised of certificates of deposit held at financial institutions which are not measured at fair value on a recurring basis. A portion of the Company’s cash and cash equivalents include money market mutual fund accounts held at financial institutions which are measured at fair value on a recurring basis. The following tables provide information as of December 31, 2013 and 2012, about the Company’s financial assets measured at fair value on a recurring basis:
Depreciation and amortization expense for property, equipment and software totaled $88,770 and $72,704 for the years ended December 31, 2013 and 2012, respectively.
Total capitalized deferred policy acquisition costs as of December 31, 2013 and December 31, 2012, comprised of commissions, premium taxes and costs associated with underwriting and issuing policies were $6,214,334 and $5,274,515, respectively.
Deferred ceding commissions, which represent acquisition costs associated with insurance risk ceded to other reinsurance partners, as of December 31, 2013 and 2012 were $0 and $683,914, respectively. The decrease of $683,914 is primarily due to a change in settlement procedures affecting the property quota share reinsurance program.
On September 17, 2008, an assessment was levied against HAIC by the Texas Windstorm Insurance Association (“TWIA”) in the aftermath of Hurricane Ike. HAIC’s portion of the overall statutory assessment was $748,200. HAIC received an immediate premium tax credit of $400,200 for a portion of the assessment paid and established an asset for future credits against premium tax. The portion of the assessment applied against premium tax payments was amortized over a five year period during 2008 through 2012. No further TWIA assessments have been levied against HAIC since 2008.
Losses and loss adjustment expenses (LAE), less related reinsurance and deductibles, are charged to operations as incurred. Unpaid losses and LAE are based on claims adjusters’ estimates of the cost of settlement plus an estimate for losses IBNR based upon historical experience, industry loss experience, and management’s estimates. Loss reserves reflect Company management’s best estimate of the total cost of (i) claims that have been incurred but not yet paid, and (ii) claims that have been incurred, but not yet reported (IBNR). Loss reserves that are established by Company management are not an exact calculation of our liability, but rather loss reserves represent management’s best estimate for our Company’s liability based on the application of actuarial techniques and other projection methodology, taking into consideration other facts and circumstances known as of the balance sheet date. The process of setting reserves is complex and necessarily imprecise. The impact of both internal and external variables on ultimate loss and LAE costs is difficult to estimate. To arrive at its best estimate for losses, the Company uses damage estimating software developed and owned by acknowledged industry leader, Insurance Service Office. Reserve factors for IBNR are reviewed quarterly by an independent actuarial consultant. In addition, our appointed independent actuary attests to the adequacy of our unpaid claim reserve, including IBNR at calendar year end.
To the extent the existing Series A convertible preferred stock is no longer outstanding at the time of conversion, the notes shall be convertible, using the above ratio, into stock or other consideration received for the existing Series A convertible preferred stock.
During the year ended December 31, 2013, and 2012 interest expense on these notes totaled $68,164, and $1,644, respectively.
As more fully described below in Note 11, these shares were part of the 2.5:1 forward stock split which took place on August 31, 2013. As a result of the forward stock split, the 922,461 shares of Series A preferred stock noted above were converted into 2,306,152 common shares.
On December 26, 2013, Phoenix Associates, Inc. elected to convert all of its $50,000 Convertible Promissory Note and accrued interest in accordance with the terms of the Convertible Promissory Note into 49,995 shares of Series A preferred stock.
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.
On December 26, 2013, there were no Series A convertible preferred stock outstanding, therefore the convertible promissory note was converted into common stock on a 1:1 basis.
As of December 31, 2012, the Series A and Series B preferred stockholders had not elected to convert or redeem their preferred stock.
On July 24, 2013 the Delaware Secretary of State approved an amendment to the Amended and Restated Certificate of Incorporation increasing the authorized common stock to 40,000,000 shares.
On August 31, 2013, the Board of Directors of the Company unanimously approved and recommended for approval by the stockholders of the Company, and the holders of voting shares representing 99.15% of the voting rights of our common stock approved, an amendment to the Company’s Amended and Restated Certificate of Incorporation. The Certificate of Amendment was filed with the Delaware Secretary of State and is effective. The Certificate of Amendment provides for a 2.5 for 1 forward stock split of the Company’s common stock. All holders of the Company’s Series A and Series B preferred shares converted their preferred shares to common stock prior to the effectiveness of the stock split.
The above shares have been adjusted to reflect the conversion of Series A & B preferred stock into common stock and the forward stock split of common stock on August 31, 2013.
The above shares have been adjusted to reflect the conversion of Series A preferred stock into common stock and the forward stock split of common stock.
On October 24, 2013, the Board of Directors (“the Board) of the Company unanimously approved and adopted the 2013 Equity Compensation Plan (the “2013 Plan”) which became effective October 24, 2013. The 2013 Plan provides granting of stock options, incentive stock options, stock awards, and restricted stock units 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 2013 Plan, options may be granted to purchase a total not to exceed 2,925,000 shares, made up of original issue shares, treasury shares or a combination of the two. The 2013 Plan will terminate on October 23, 2023. At December 31, 2013, options to purchase 1,925,000 shares had been granted under the 2013 Plan.
At December 31, 2013, options to purchase under the 2005 Plan was 783,750 shares and under the 2013 Plan was 1,925,000 shares for a total of 2,708,750 shares.
A summary of the activity of the Company’s stock option plan (as adjusted for the 2.5:1 forward split) for the years ended December 31, 2013 and 2012 is as follows:
The fair value of options granted is estimated using a market value approach and the Black-Scholes option pricing model using the following assumptions for the year ended December 31, 2013:
As of December 31, 2013, there was approximately $190,000 of total unrecognized compensation cost related to non-vested stock options, of which approximately $38,000 is expected to be recognized each year in 2014 through 2018.
No compensation expense was recognized for the years ended December 31, 2013 and 2012 as the amounts were deemed not to be material.
Stock options granted in 2013 had a weighted average grant date fair value of $0.10. There were no stock options granted in 2012. Stock options granted prior to 2012 had a weighted average grant date fair value $0.00.
From April 1, 2012 through March 31, 2013, the Company reinsured with various reinsurers under homeowners quotashare reinsurance treaties ceding 90% of its risk to reinsurers. The reinsurers’ liability under the quota share arrangement beginning April 1, 2012, in respect to any one loss occurrence shall not exceed $60,000,000. Property catastrophe treaties in effect at the end of 2012 develop over four layers and cover a gross loss of $62,000,000 excess of $3,000,000 per occurrence. The Company’s net retention is $300,000 per occurrence.
Following is a summary of HAIC’s reinsurance balances under the above described reinsurance treaties as of December 31, 2013 and December 31, 2012:
The following is a summary of the names of each of HAIC’s significant reinsurer and the amount due from each for paid losses, LAE and unearned premium.
The Company has exposure and remains liable in the event of an insolvency of one of its primary reinsurers. Management and its reinsurance intermediary regularly assess the credit quality and ratings of its reinsurer base companies.
Financial instruments which potentially subject the Company to credit risk consist principally of cash and money market accounts on deposit with financial institutions, money market funds, certificates of deposit and premium balance in the course of collection. With respect to cash and money market accounts. Section 343 of the Dodd-Frank Wall Street Reform and Consumer Protection Act provides temporary (to December 31, 2012) Federal Deposit Insurance Corporation (“FDIC”) insurance coverage on all balances held in non-interest bearing accounts. Subsequent to December 31, 2012, insurance coverage on interest and non-interest bearing accounts continues at $250,000 per bank. At times, the Company’s bank deposits may exceed the FDIC limit.
The concentration of credit risk with respect to premium balances in the course of collection is limited, due to the large number of insureds comprising the Company’s customer base. However, substantially all of the Company’s revenues are derived from customers in Texas, which could be adversely affected by economic conditions, an increase in competition, or other environmental changes.
The Company leases its corporate office space and certain office equipment under non-cancelable operating leases which expire at various dates through 2017. Future minimum lease payments required under the non-cancelable operating leases are as follows for the years ending December 31:
Rent expense under such leases in the year ended December 31, 2013 and December 31, 2012 was $123,187 and $101,746, respectively.
HAIC is subject to the laws and regulations of the State of Texas and the regulations of any other states in which HAIC conducts business. State regulations cover all aspects of HAIC’s business and are generally designed to protect the interests of insurance policyholders, as opposed to the interests of stockholders. The Texas Insurance Code requires all property and casualty insurers to have a minimum of $2.5 million in capital stock and $2.5 million in surplus. Companies already authorized to do business in Texas as of September 1, 2009, which includes HAIC, are able to increase their capital and surplus to these levels incrementally, with compliance with the new requirements by December 31, 2019.
As of December 31, 2012, HAIC’s total statutory surplus was $6,716,222 (capital stock of $1,500,000 and surplus of $5,216,222).
As of December 31, 2013 and 2012, HAIC had restricted cash and investments totaling $1 million which have been pledged to the Texas Department of Insurance for the benefit of the State of Texas. States routinely require deposits of assets for the protection of policyholders.
The Texas Insurance Code limits dividends from insurance companies to their stockholders to net income accumulated in the Company’s surplus account, or “earned surplus”.
The maximum dividend that may be paid without approval of the Insurance Commissioner is limited to the greater of 10% of the statutory surplus at the end of the preceding calendar year or the statutory net income of the preceding calendar year. No dividends were paid by HAIC in 2013 or 2012.
On February 1, 2014, the Company issued 288,462 shares of common stock at $0.52 a share, as determined by an independent valuation expert who valued the Company as of December 31, 2013, to Inter-Atlantic Management, Inc., a beneficial owner of more than 5% of the outstanding shares of common stock. Per the terms of the Advisory Agreement dated August 1, 2013, Inter-Atlantic Management, Inc. will be issued annually on February 1st , a grant of the Company’s common stock which in aggregate will have a fair market value of $150,000 at the time of grant.