As of December 31, 2015, we leased approximately 11,486 square feet of office space in Irving, Texas and the monthly rent for this space was $11,597 payable in equal monthly installments. Rent may be increased each December 31st, with a maximum increase equal to 95% of our pro rata share, based on occupancy, of any increase in the landlord's operating costs. The cost of utilities is charged separately, prorated based on occupancy. The lease for this office space expires on May 31, 2017.
To support future business development, we have applied for licenses to write business in thirty-two states, in which we have received twenty-five certificates of authority. Our current plan is to enter up to two additional states in 2016. Dwelling fire and extended coverage, tenant and condominium owner's policies will be added to our current expansion states as soon as development of these programs is completed and state approval is obtained. We expect both of these to occur in 2016.
● Texas' seasonally adjusted unemployment rate was 4.7% at December month end, as compared to the national U.S. rate of 5.0%.
Our principal revenues include earned premiums, which are reported net of reinsurance costs, and ceding commissions from our insurance company and policy and other fee income collected and reported by our MGA. We cede a substantial portion of our earned premium to reinsurers under our quota share programs to mitigate high frequency risks as well as to protect us from catastrophic events and, under an excess of loss contract program, to mitigate losses from catastrophic events. Our principal expenses are claims from policyholders, policy acquisition and other underwriting expenses, and general and administrative expenses.
Net income available to common stockholders was $4,038,807 and $2,164,125, respectively, for the year ended December 31, 2015 and 2014. As of December 31, 2015, we had total assets of $129.6 million and stockholders' equity of $14.9 million.
Net income for the year ended December 31, 2015 was $4,038,807, as compared to net income of $2,164,125 for the year ended December 31, 2014. Results for the year ended December 31, 2015, as compared to the year ended December 31, 2014, were favorably impacted primarily by:
an increase in direct written premium of $23.9 million, or 32.4%, resulting in increased ceding commissions coming from our quota share reinsurance program;
an increase of $2.1 million, or 29.0%, of policy related fee income from our MGA, offset by an increase in policy acquisition costs, a direct result of increased business volume; and
loss and loss adjustment expenses of $2.3 million, primarily related to springtime convectional thunderstorm events occurring during the second quarter of 2015 and the unusual occurrence of significant weather events during the fourth quarter 2015.
Income available to common stockholders for the year ended December 31, 2015 was $4,038,807, or $0.23 earnings per diluted common share, compared to income available to common stockholders of $2,164,125, or $0.12 earnings per diluted common share, for the year ended December 31, 2014.
Commencing April 1, 2015, we reinsured our property and casualty risk under multiple quota share reinsurance treaties with third party reinsurers. The treaties cover 40% of our risk under property coverage on any one loss occurrence not to exceed $20,000,000; 50% of our risk under property coverage on any one loss occurrence not to exceed $175,000,000; and approximately 35% of our risk under casualty coverages.
We also purchased property per risk reinsurance covering non-weather losses (ten occurrences) in excess of a gross loss of $500,000 per occurrence (a net loss of $50,000). This coverage was obtained principally to protect the Company in the event of a large fire loss.
Gross Premiums Earned for the year ended December 31, 2015 were $83.4 million, an increase of $18.5 million, or 28.5 %, over the same period in 2014.
Premiums Ceded for the year ended December 31, 2015 and 2014 were approximately $78.0 million and $60.5 million, respectively. Our premiums ceded represent amounts paid to reinsurers to cover losses under both our quota share and excess of loss reinsurance treaties. Premiums ceded were 93.6 % and 93.2 % of gross premiums earned during the year ended December 31, 2015 and 2014, respectively. We expect our reinsurance premiums applicable to our 2016 fiscal year, as well as our 2016 - 2017 reinsurance treaty year, to remain in excess of 90% of direct earned premium, trending slightly upward reflecting our growth.
Net Premiums Earned for the year ended December 31, 2015 and 2014 were $5.4 million and $4.4 million, respectively, and reflect the gross premiums earned less the appropriate reinsurance costs as described above.
MGA Policy Related Fee Income for the year ended December 31, 2015 and 2014 was $9.2 million and $7.1 million, respectively. The $2.1 million increase was primarily attributable to an increase in insured properties as compared to the same period in 2014.
Ceding Commission and Other Fee Income for the year ended December 31, 2015 was $22.9 million compared to $15.0 million for the year ended December 31, 2014. The primary factor for this improvement was increased policy volume, further supported by improved reinsurance terms for our 2015 - 2016 reinsurance treaty year.
Reinsurance Profit Sharing income for the year ended December 31, 2015 was $0.8 million compared to $1.7 million for the year ended December 31, 2014. Reinsurance profit sharing income, calculated on a treaty year basis, is recognized when earned, which includes adjustments to earned reinsurance profit share based on changes in incurred losses and reserves for future loss development. The $0.9 million decrease in income reported in 2015 was primarily due to adverse loss development in treaty years 2014 and 2015.
Net Premiums Written during the year ended December 31, 2015 and 2014 was $12.8 million and $8.5 million, respectively. Net premiums written represent the premiums charged on policies issued during a fiscal period less any applicable quota share reinsurance costs.
Change in unearned premium for the year ended December 31, 2015 increased $1.0 million as compared to 2014. The increase was primarily due to growth in the portfolio. Catastrophe and EXOL premium for the year ended December 31, 2015 increased $2.2 million as compared to 2014. The increase in catastrophe and EXOL premium was primarily the result of our increased purchase of additional catastrophe reinsurance over our net quota share reinsurance program to $175 million from $110 million and our increase in direct earned premiums.
Investment Income, Net of Investment Expenses increased approximately $95,000 for the year ended December 31, 2015, as compared to the same period in 2014. This increase was primarily the result of a higher invested assets base, which increased approximately 97.7% during the year ended December 31, 2015 compared to the year ended December 31, 2014, supported by a slight improvement in yield.
Policy Acquisition and Other Underwriting Expenses for the years ended December 31, 2015 and 2014 were $20.3 million and $16.5 million, respectively, and 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 from the corresponding period in 2014 was primarily attributable to the increase in our overall production.
Income Taxes for the years ended December 31, 2015 and 2014 were $2.1 million and $1.2 million, respectively, for state and federal taxes resulting in an effective tax rate of 34.4 % for 2015 and 35.0 % for 2014. The effective tax rate for the year ended December 31, 2015 was impacted primarily by permanent tax differences on meals and entertainment and stock-based compensation.
The loss ratio applicable to the year ended December 31, 2015 (losses and loss adjustment expenses incurred related to net premiums earned) was 96.9 % compared to 66.4 % for the year ended December 31, 2014. Our loss ratio was negatively impacted primarily by seven severe convectional thunderstorm events occurring during the second quarter of 2015 and the unusual occurrence of significant weather events during the fourth quarter of 2015.
Another measurement of our operational effectiveness is the margin between our fee income and acquisition, underwriting, and other operating expenses. This margin is important due to our reliance on quota share reinsurance, under which approximately 90% of our property insurance premium is ceded to reinsurers. We receive a ceding commission from reinsurers for the production of the business. This fee income, along with other policy related fees that we charge, are used to offset the underwriting and other operating expenses we incur in the production of premium. For the year ended December 31, 2015, our acquisition and underwriting and other operating expenses were 82.2 % of policy related fee income, as compared to 92.4 % for the year ended December 31, 2014.
Due to the impact our reinsurance costs have on net premiums earned from period to period, we believe the combined loss and expense ratio measured to total earned revenues is more relevant in assessing overall performance. Our ratio of combined loss and expense to total earned revenue for the year ended December 31, 2015 was 84.3 % compared to 88.4 % for the year ended December 31, 2014.
Our operational goals of premium growth and state expansion are dependent upon adequate capital and surplus.
We believe that we maintain sufficient liquidity to pay our claims and expense obligations as well as to satisfy any unforeseen events, including inadequate premium rates and reserve deficiencies. We maintain substantial reinsurance through reinsurers with superior financial ratings to provide sufficient liquidity in the case disasters impact the business we underwrite.
Deferred policy acquisition costs "DAC" are reviewed quarterly by management and are expected to be recoverable from future income, including investment income. However, the amount of DAC considered recoverable could be reduced in the near term if our estimates of future premium and investment income is reduced which could impair our ability to recover these costs.
Our cash flows from operating, investing and financing activities for the years ended December 31, 2015 and 2014 are summarized below.
Net cash provided by operating activities for the year ended December 31, 2015 was approximately $12.7 million. Significant factors in this increase from 2014 were an increase in cash received from net written premiums and policy related fees less cash disbursed for operating expenses and losses and loss adjustment expenses. Net cash used in investing activities of $12.7 million was primarily due to purchases of fixed-maturity securities, available-for-sale of $2.5 million, purchases of short-term investments of $9.6 million, purchases of long-term investments of $8.5 million, offset by redemptions of short-term and long-term investments of $3.2 million and $2.2 million, respectively, and $2.5 million from early calls and maturities of several fixed-maturity securities held as available-for-sale.
Net cash provided by operating activities for the year ended December 31, 2014 was approximately $3.5 million. Significant factors in this increase from 2013 were an increase in cash received from net written premiums and policy related fees, less cash disbursed for operating expenses and losses and loss adjustment expenses. Net cash used in investing activities of $6.0 million was primarily due to purchases of fixed-maturity securities, held as available-for-sale of $5.0 million, purchases of short-term investments of $4.3 million, purchases of long-term investments of $3.4 million and purchases of furniture, equipment, and software of approximately $228,000, offset by redemptions of short-term and long-term investments of $4.4 million and $1.9 million, respectively, and $0.6 million from early calls of several fixed-maturity securities held as available-for-sale. Net cash provided by financing activities consisted of $7,850 generated from proceeds from stock options exercised.
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 eight installments. Policies are cancelled as soon as any installment is past due, where the policy is out of equity.
In addition to physical security measures employed at our offsite operations center, which is audited annually under SOC 1 (SSAE No.16) standards, our third party operations center uses firewalls, intrusion detection systems, data base field encryption and other "best practices" to protect access to customer data. Access to the databases is not allowed from outside our network, except for specific IP addresses which we specify and have control over. These configurations are reviewed quarterly, to ensure policies and procedures are followed. Our third party operations site administration performs annual "ethical hack" tests to identify possible vulnerabilities. We maintain corporate insurance to mitigate the costs associated with this risk.
We lease our corporate office space and certain office equipment under non-cancelable operating leases. None of these lease commitments subject us to material uncertainties through escalation clauses or other cost adjustments.
We are required to make estimates and assumptions in certain circumstances that affect amounts reported in our consolidated financial statements and related footnotes. We continually evaluate these estimates and assumptions based on historical developments, market conditions, industry trends and other information that we believe to be reasonable under the circumstances. There can be no assurance that actual results will conform to our estimates and assumptions, and that reported results of operation will not be materially adversely affected by the need to make accounting adjustments to reflect changes in these estimates and assumptions from time to time. We believe the following reserve liabilities are the most sensitive to estimates and judgments.
We establish reserves for the estimated total unpaid costs of losses including loss adjustment expenses, or LAE. Unless otherwise specified below, the term "loss reserves" shall encompass reserves for both losses and LAE. Loss reserves reflect our 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. Loss reserves established by us are not an exact calculation of our liability. Rather, loss reserves represent our best estimate of our liability based on application of actuarial techniques and other projection methodology, taking into consideration other facts and circumstances known at the balance sheet date. The process of establishing loss reserves is complex and necessarily imprecise, as it involves judgment which is affected by many variables such as past loss experience, current claim trends and the prevailing social, economic and legal environments. The impact of both internal and external variables on ultimate loss and LAE costs is difficult to estimate. Our exposure is impacted by both the risk characteristics of the physical locations where we write policies, such as weather-related risks, as well as risks associated with varying social, judicial and legislative characteristics in Texas, the state in which we operate. In determining loss reserves, we give careful consideration to all available data and actuarial analyses, however this process involves significant judgment.
Case reserves on reported claims are established on a claim by claim basis. Supported by a property damage estimate software package, more fully described later, our experienced claim personnel estimate the ultimate expected loss amount as soon as possible after the claim event, but in no case greater than 30 days from receipt of the notice of loss. Being primarily a property insurance company, our case loss reserves are "short-tail", meaning that ultimate loss values are known and settled comparatively quickly. Most often, claims are paid out within 60 to 90 days of their reporting. Factoring into the claim cost is only damage to tangible property, requiring either its repair or replacement. The setting of case reserves for property related short-tail claims is far less complex. Claims rarely include coverage elements which routinely take many years to develop and are often paid out over long periods of time. As such, there is very little impact resulting from the "time value of money" on our reserve values, nor are there estimates of long term medical expenses, educational expenses and or the valuation of the loss of companionship, etc.
Reserves are developed by using accident month / reported month grids, which are then rolled up into a cumulative incurred loss triangle. Loss factors are calculated based on aggregating the month-to-month diagonals within the grid (i.e., month two incurred / initial accident month incurred, month three incurred / month two incurred). For each accident month, development is reviewed for consistency, and outlying results (on the high and the low side) as well as the most recent couple of months, for which data is considered immature, are deleted from the data for smoothing purposes. Period-to-period development factors are then calculated, from which period to ultimate loss incurred factors are developed. Factors are reviewed annually and adjusted as needed. Factor changes for the periods under review, from period to period, are considered to be within reasonable ranges. Therefore, the methodology used is considered to be consistent from period to period.
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 we are 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 of event. Because we have experienced only one hurricane event, aggregate event factors have only been developed for convectional thunderstorm / tornado hail events. The analysis is made by projecting the ultimate loss value into the future and subtracting it from the known incurred losses. Initially, our claim reporting system had the ability to track incurred claims on a banded "days to report" basis, so that we could look at incurred claim values for claims reported in the following bands:
Beginning with calendar year 2015, we developed factors on a daily basis, then grouped to allow for more effective smoothing of the factors. The factors are then grouped into the above bands to allow for comparison to prior analyses. Our 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 on a by-day basis. Data reflects each individual event. This data is rolled up into cumulative totals, and factors developed, scaled and smoothed so that reporting is maxed out at 720 days, when the vast majority of reported claims are thought to be known. In application, the factors are applied on an actual days from the event basis to select the specific factors used for each event.
IBNR reserve levels, are estimated on a direct written basis and at retained loss levels reflecting reinsurance limits.
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. IBNR estimates for catastrophe and non-catastrophe losses are reviewed and revised on a monthly basis so that changes in loss reporting trends can be evaluated and reflected in the estimates. 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. The Company's loss reserves, including IBNR, are reviewed and attested to by its independent actuary.
Our independent actuary who reviews our loss reserves at calendar year ends has not required, nor suggested, there be an increase to loss reserves established by management.
Reinsurance recoverables recorded with respect to insurance losses ceded to reinsurers under reinsurance contracts are also subject to estimation error. The value of ceded losses are determined using the same methods as described above, and therefore, are subject to the same uncertainties as reserves for direct losses and LAE. Additionally, estimates of reinsurance recoverables may prove uncollectible if the reinsurer is unable or unwilling to perform under the contract. The ceding of insurance does not legally discharge the ceding company from its primary liability for the full amount of the policies, and the ceding company is required to pay the loss and bear collection risk if the reinsurer fails to meet its obligation under the reinsurance agreement. We evaluate the balances due from reinsurance companies for collectability, and when indicated, in management's opinion, issues of collectability exist, establish an allowance for doubtful accounts. For information about the risks of non-collectability of reinsurance, see the risk factor under Item 1A.entitled "We face a risk of non-collectability of reinsurance, which could materially and adversely affect our business, results of operations and/or financial condition".
We utilize the criteria established under Accounting Standards Codification (ASC) 740 to annually evaluate the need for a deferred tax valuation allowance. All available evidence, including potential effects of both positive and negative evidence, is assessed in making the determination. We have established a relatively consistent pattern of annual taxable income and currently have no operating loss carryback or carryforward balances. Further, the majority of our deferred tax assets have a short recovery period from a future realization standpoint. Accordingly, the deferred tax asset has been deemed to be a fully realized amount as of December 31, 2015.
Homeowners of America Holding Corporation ("HAHC") is an insurance holding company established to hold insurance entities for the purpose of marketing personal lines insurance products on a national basis. HAHC owns 100% of Homeowners of America Insurance Company ("HAIC"). HAIC is domiciled in Texas, licensed in multiple states and is authorized to write various forms of homeowners and auto insurance. Coverage is concentrated in Texas. HAHC also owns 100% of Homeowners of America MGA, Inc. ("HAMGA"), a Texas Corporation, formed to provide marketing and claims administration services. HAHC, along with its subsidiaries HAIC and HAMGA, are collectively referred to as "the Company".
The Company's investments are comprised of short-term, restricted, long-term investments and fixed-maturity securities classified as available-for-sale as of December 31, 2015 and 2014. Restricted investments and long-term investments are described below. Short-term investments include certificates of deposit with original maturities greater than three months and maturities of one year or less. Due to the short-term nature of these investments, significant changes in prevailing interest rates and economic conditions should not adversely affect the timing and amount of cash flows on such investments or their related values. Accordingly, certificates of deposit are carried at cost, which approximates fair value. Fixed-maturity securities are classified as available-for-sale when it is not management's intent to make profits by buying and selling the securities within a short period of time or when it is not management's intent to hold the securities to maturity. Fixed-maturity securities classified as available-for-sale are carried at fair value. The unrealized holding gains and losses, net of applicable deferred income taxes, are shown as a separate component of stockholders' equity as a part of accumulated other comprehensive income (loss) and, as such, are not included in the determination of net income (loss).
As of December 31, 2015 and 2014, the Company has restricted cash and investments, in the amount of $3.3 million and $4.3 million, respectively, pledged to the Department of Insurance in certain states as a condition of its Certificate of Authority for the purpose of meeting obligations to policyholders and creditors. Restricted assets are shown separately in the accompanying consolidated balance sheets as "Restricted cash and investments" and include money market accounts and certificates of deposits. "Restricted fixed-maturity securities, classified as available-for-sale" are shown separately in the accompanying consolidated balance sheets and recorded at fair value. With the approval of the Departments of Insurance, the Company may exchange the investments with other funds or investments. In respect to certificates of deposit, management intends to hold the portion of these restricted investments to their maturity. As such, these restricted certificates of deposit are carried at cost, which approximates fair value. Interest earned on these investments inures to the benefit of the Company.
The following table provides the Company's restricted cash and investments as of December 31, 2015 and December 31, 2014.
FASB ASC Topic 220 - Comprehensive Income, requires that recognized revenues, expenses, gains and losses be included in net income (loss). Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the consolidated balance sheet, these items, along with net income (loss), are components of comprehensive income. The Company characterizes their fixed income portfolio as available-for-sale securities when it is not management's intent to make profits by buying and selling the securities within a short period of time or when it is not management's intent to hold the securities to maturity, with appropriate adjustments to other comprehensive income. For the year ended December 31, 2015 and 2014, the Company recorded $10,851 and $73, respectively, of unrealized gains on available-for-sale securities in other comprehensive income.
Policy fee income collected by the Company's MGA, 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.
Loss adjustment and other fee income is recognized as income when collected. Loss adjustment fee income for the year ended December 31, 2015 was in excess of 5% of total revenue on the consolidated statement of operations. For the year ended December 31, 2014, loss adjustment and other fee income did not exceed 5% of total revenue on the consolidated statement of operations.
Deferred policy acquisitions costs ("DAC") as of December 31, 2015 and 2014, 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 management's estimates of future premium and investment income is reduced which could impair the Company's ability to recover these costs.
The Company recognizes uncertain tax positions in the consolidated financial statements when it is more-likely-than-not the position will be sustained upon examination by the tax authorities. Such tax positions are initially and subsequently measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the tax authority assuming full knowledge of the position and relevant facts. The Company believes that it has appropriate support for the income tax positions taken and to be taken on its tax returns, and that its accruals for tax liabilities are adequate for all open tax years based on an assessment of many factors including experience and interpretations of tax laws applied to the facts of each matter. At December 31, 2015, the Company's tax years from 2012 through 2015 remain subject to examination.
The carrying value for the Company's cash and cash equivalents and short-term investments approximate fair values as of December 31, 2015 and 2014 due to their short-term nature. Fair value for securities are based on the framework for measuring fair value established by FASB ASC Topic 820, Fair Value Measurements and Disclosures.
Basic earnings (loss) per share of common stock is computed by dividing net income or loss, less cumulative preferred stock dividends for the period whether or not earned or paid, by the weighted-average number of common shares during the period.
On January 5, 2016, the FASB issued Accounting Standards Update No. 2016-01 ("ASU 2016-01"), Financial Instruments - Overall (Subtopic 825-10), Recognition and Measurement of Financial Assets and Financial Liabilities. The amendment affects the accounting for equity investments, financial liabilities under the fair value option and the presentation and disclosure requirements of financial instruments. ASU 2016-01 is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods for public business entities. For all other entities, ASU 2016-01 is effective for annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. The Company is currently assessing the impact the adoption of ASU 2016-01 will have on future disclosures.
On May 21, 2015, the FASB issued Accounting Standards Update No. 2015-09 ("ASU 2015-09"), Financial Services - Insurance (Topic 944), Disclosures about Short-Duration Contracts. ASU 2015-09 provides enhanced disclosures related to the reserve for losses and loss expenses. The enhanced disclosures required by ASU 2015-09 include (1) net incurred and paid claims development by accident year, (2) a reconciliation of incurred and paid claims development information to the aggregate carrying amount of the reserve for losses and loss expenses, (3) for each accident year presented of incurred claims development information, the total of reserves for incurred but not reported (IBNR), including expected development on reported claims, included in the reserve for losses and loss expenses and a description of the reserving methodologies and changes to the reserving methodologies, and (4) for each accident year presented of incurred claims development information, quantitative information about claims frequency, as well as a description of methodologies used for determining claim frequency information. ASU 2015-09 is effective for annual periods beginning after December 15, 2015, and interim periods within annual periods beginning after December 15, 2016. The amendments in ASU 2015-09 should be applied retrospectively by providing comparative disclosures for each period presented, except for those requirements that apply only to the current period. The Company is currently assessing the impact the adoption of ASU 2015-09 will have on future disclosures.
For the year ended December 31, 2014, the Company incurred an expense of $450,000 (of which $150,000 is represented by the issuance of 288,462 shares of common stock) for services performed under the Advisory Agreement.
For the year ended December 31, 2015, there were $1,049 of realized gains recognized and $4,832 of realized losses recognized for the period. There were no realized gains or losses recognized for the year ended December 31, 2014 due to the short term nature of the investments held during 2014. The intent is to hold to maturity certificates of deposit carried at amortized cost.
The amortized cost and fair value of available-for-sale fixed-maturity securities at December 31, 2015 and 2014, by contractual maturity, are shown in the following table. Actual 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 length of time and the extent to which the market value of the security has been below its cost or amortized cost;
● the Company's intent and ability to hold the investment for a period of time sufficient to allow for the recovery of costs.
At December 31, 2015, there were 32 securities in an unrealized loss position. Of these securities, three securities had been in an unrealized loss position for 12 months or greater.
The Company's financial assets carried at fair value have been classified, for disclosure purposes, based on the hierarchy established within FASB ASC Topic 820-10 - Fair Value Measurements and Disclosures. When market prices are not available, fair value is generally estimated utilizing valuation techniques that vary by asset class and incorporate available trade, bid and other market information, when available. The acceptable valuation techniques include (a) market approach, which uses prices or relevant information derived from market transactions for identical or comparable assets or liabilities, (b) the Income Approach, which converts future amounts such as cash flows or earnings to a single present value amount based on current market expectations about those future amounts, and (c) the Cost Approach, which is based on the amount that currently would be required to replace the service capacity of an asset. In certain circumstances, these valuation techniques may involve some level of management estimation and judgment which becomes significant with increasingly complex instruments or pricing models. Where appropriate, adjustments are included to reflect the risk premium inherent in a particular methodology, model or input used.
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. Fixed-maturity securities held as available-for-sale are carried at fair value in our consolidated financial statements. The following tables provide information as of December 31, 2015 and 2014, about the Company's financial assets measured at fair value on a recurring basis:
Money market mutual funds are valued at the closing price reported by the fund sponsor from an actively traded exchange. As the funds are generally maintained at a net asset value which does not fluctuate, cost approximates fair value. These are included as a Level 1 measurement in the table above. The fair values for available-for-sale fixed-maturity securities are based upon prices provided by an independent pricing service. The Company has reviewed these prices for reasonableness and has not adjusted any prices received from the independent provider. Level 2 securities represent assets whose fair value is determined using observable market information such as previous day trade prices, quotes from less active markets or quoted prices of securities with similar characteristics. There were no transfers between Level 1 and Level 2 during the year ended December 31, 2015 or 2014.
Property, equipment, and software net consist of the following as of December 31, 2015 and 2014, respectively:
Total capitalized deferred policy acquisition costs as of December 31, 2015 and December 31, 2014, comprised of commissions, premium taxes and costs associated with underwriting and issuing policies were $10,548,203 and $7,897,806, respectively.
Changes in deferred policy acquisition costs for the years ended December 31, 2015 and 2014 are as follows:
The following table provides the reconciliation of the beginning and ending reserve balances for losses and LAE, gross of reinsurance for 2015 and 2014:
As of December 31, 2015 and December 31, 2014, the Company has 20,500,000 shares of preferred stock, convertible, 12.50 % cumulative, $0.0001 par value per share, authorized and none issued and outstanding.
As of December 31, 2015, the Company had 40,000,000 shares authorized and 17,708,125 shares issued and 16,400,125 shares outstanding of $0.0001 par value common stock. Holders of common stock are entitled to one (1) vote for each share of common stock held at all meetings of stockholders.
As of December 31, 2014, the Company had 40,000,000 shares authorized and 17,479,852 shares issued and 16,168,852 shares outstanding of $0.0001 par value common stock. Holders of common stock are entitled to one (1) vote for each share of common stock held at all meetings of stockholders.
There were no common stock warrants issued during the years ended December 31, 2015 and 2014.
The following table represents the reconciliation of the Company's basic earnings per common share and diluted earnings per common share computations reported on the Consolidated Statements of Operations for the year ended December 31, 2015 and 2014:
The Company's 2005 Management Incentive Plan (the "2005 Plan") provides for granting of stock options to enable the Company to obtain and retain the services of selected persons, both employees and directors, considered to be essential to the long-range success of the Company. Under the 2005 Plan, options may be granted to purchase a total not to exceed 789,475 shares in the aggregate, made up of original issue shares, treasury share or a combination of the two. At December 31, 2015 and 2014, options to purchase 783,750 shares have been granted under the 2005 Plan.
A summary of the activity of the Company's stock option plan for the years ended December 31, 2015 and 2014 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 and December 31, 2014:
As of December 31, 2015, the Company expects to record compensation expense in the future as follows:
As of December 31, 2015 and 2014, it was determined that no valuation allowance against deferred tax assets was considered necessary.
In assessing the realizability of deferred tax assets, management utilizes the criteria established under Accounting Standards Codification (ASC) 740 to annually evaluate the need for a deferred tax valuation allowance in order to determine whether it is more likely than not that some or all of the deferred tax assets will not be realized. Management considers the reversal of deferred tax liabilities and projected future taxable income in making this assessment. The results of operations during the years ended December 31, 2015 and 2014, continued growth in the Company's insurance policy and premium base with a wider demographic and geographic spread, as well as changes in the Company's reinsurance and catastrophe coverage were also considered important factors in assessing the realizability of deferred tax assets.
The total income tax provision (benefit) incurred is different from that which would be obtained by applying the statutory federal income tax rate to income before income taxes. The significant items causing this difference for 2015 and 2014 are as follows:
Commencing April 1, 2015, the Company reinsured its property and casualty risk under multiple quota share reinsurance treaties with third party reinsurers. The treaties cover 40 % of its risk under property coverage on any one loss occurrence not to exceed $20 million; 50 % of its risk under property coverage on any one loss occurrence not to exceed $175 million and approximately 35 % of its risk under casualty coverages.
The Company also purchased per risk reinsurance covering non-weather losses (ten occurrences) in excess of a gross loss of $500,000 per occurrence for all coverage lines (a net loss of $50,000). This coverage is obtained principally to protect the Company in the event of a large fire loss.
Due to the Company's increased exposure to casualty risk as previously mentioned, the Company entered into a per risk casualty excess of loss reinsurance program, beginning April 1, 2015. The program allows for 10 reinstatements during the treaty period, with an annual loss limit of $7.15 million and a per occurrence limit of $650,000.
Finally, in support of the Company's expansion in the Houston metropolitan area, commencing June 1, 2015, the Company entered into a property quota share reinsurance treaty with a third party reinsurer, specifically to mitigate named tropical cyclone storm risk. The treaty covers 90 % of the Company's risk under property coverage on any named hurricane or tropical storm system which affects certain geographical areas in the Houston metropolitan area, not to exceed the lesser of $75 million or a 250 year return period. This reinsurance coverage is in addition to the reinsurance programs described above.
The effects of reinsurance on premiums written and earned were as follows, for the years ended December 31, 2015 and December 31, 2014:
Following is a summary of HAIC's reinsurance balances under the above described reinsurance treaties as of December 31, 2015 and December 31, 2014:
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.
As of December 31, 2014, HAIC's total statutory surplus was $12,317,735 (capital stock of $3,000,000 and surplus of $9,317,735).
As of December 31, 2015 and December 31, 2014, HAIC had restricted cash and investments totaling $3.3 million and $4.3 million, respectively, pledged to the Department of Insurance in certain states as a condition of its Certificate of Authority for the purpose of meeting obligations to policyholders and creditors. See Note 1 Organization and Summary of Significant Accounting Policies, Investments for additional disclosure.
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 2015 or 2014.