Our executive offices are now located at 14050 N.W. 14th Street, Suite 180, Sunrise, Florida 33323 in an 18,500 square feet office facility and our telephone number is (800) 293-2532. All of our operations are consolidated within this facility. We believe that the facilities are well maintained, in substantial compliance with environmental laws and regulations, and adequately covered by insurance. We also believe that these leased facilities are not unique and could be replaced, if necessary, at the end of the lease term. Our lease for this office space will expire in May 2017.
FNIC is licensed as a non-admitted carrier in Arkansas, Kentucky, Missouri, Nevada, Oklahoma, South Carolina and Tennessee and can underwrite commercial general liability insurance in all of these states. A non-admitted carrier, sometimes referred to as a “excess and surplus lines” carrier, is permitted to do business in a state and, although it is strictly regulated to protect policyholders from a variety of illegal and unethical practices, including fraud, non-admitted carriers are subject to considerably less regulation with respect to policy rates and forms. Non-admitted carriers are not required to financially contribute to and benefit from the state guarantee fund, which is used to pay for losses if an insurance carrier becomes insolvent or unable to pay the losses due their policyholders.
Federated National Underwriters, Inc. (“FNU”), formerly known as Assurance Managing General Agents, a wholly owned subsidiary of the Company, acts as FNIC’s exclusive managing general agent in Florida and is also licensed as a managing general agent in the States of Alabama, Georgia, Louisiana, Mississippi, Missouri, North Carolina, Nevada, South Carolina, Texas and Virginia. FNU has contracted with several unaffiliated insurance companies to sell commercial general liability, workers compensation, personal umbrella, inland marine and other various lines of insurance through FNU’s existing network of agents.
Although we are authorized to underwrite the various lines described above, our business is primarily underwriting homeowners’ policies. During 2013, 89.6%, 4.3%, 2.6% and 3.5% of the premiums we underwrote were for homeowners’, commercial general liability, federal flood, and personal automobile insurance, respectively. During 2013, $29.7 million or 13.6% of the $218.3 million of homeowners’ premiums we underwrote were produced under an agency agreement with Ivantage Select Agency, Inc. (“ISA”), an affiliate of Allstate Insurance Company, that grants Allstate agents the authority to offer certain FNU products. The $29.7 million of homeowners’ premiums produced under this agreement with ISA represents 25.5% of the total increase in the sale of homeowners’ policies during 2013, compared with 2012. This network of agents began writing for FNIC in March 2013. During 2012, 85.3%, 7.8%, 4.4% and 2.5% of the premiums we underwrote were for homeowners’, commercial general liability, federal flood, and personal automobile insurance, respectively.
Gross premiums written increased $123.9 million, or 103.7%, to $243.4 million for 2013, compared with $119.5 million for 2012. Florida homeowners’ represents 94% and Texas private passenger automobile represents the remaining 6% of the increased premium volume. We believe that our growth in 2013 reflects management’s efforts over several years. Our success today reflects our goal to be an agent-friendly carrier that provides exceptional service. We have invested in our agent relationships and our staff, have created easy to use systems for the agent, and increased our relevance to the agents’ operations by providing insurance products that meet their market needs.
· and supporting a marketing team dedicated to promoting the quality and quantity of products and services that we offer.
As of December 31, 2013 and 2012, our investments consisted primarily of corporate bonds held in various industries, municipal bonds and United States government bonds. As of December 31, 2013, 83% of our debt portfolio was in diverse industries and 17% is in United States government bonds. As of December 31, 2013, approximately 91% of our equity holdings were in equities related to diverse industries and 9% were in mutual funds. As of December 31, 2012, 69% of our debt portfolio was in diverse industries and 31% is in United States government bonds. As of December 31, 2012, approximately 87% of our equity holdings were in equities related to diverse industries and 13% were in mutual funds.
The $0.1 million of unrealized losses from equity securities is from common stocks and mutual funds held in diverse industries as of December 31, 2013. The Company evaluated the near-term prospects in relation to the severity and duration of the impairment. Based on this evaluation and the Company’s ability and intent to hold these investments for a reasonable period of time sufficient for a forecasted recovery of fair value, the Company does not consider these investments to be other-than-temporarily impaired at December 31, 2013.
As of December 31, 2013 and December 31, 2012, respectively, all of our securities are in good standing and not impaired, except as noted above, as defined by FASB issued guidance.
Debt securities are carried on the balance sheet at market. At December 31, 2013 and 2012, debt securities had the following quality ratings by S&P and for securities not assigned a rating by S&P, Moody’s or Fitch ratings were used.
As December 31, 2013, the duration of the bond portfolio was approximately 3.9 years.
As of December 31, 2013 and December 31, 2012, we have classified $7.2 million and $7.4 million, respectively, of our bond portfolio as held-to-maturity. We classify bonds as held-to-maturity to support securitization of credit requirements.
During 2013 we reclassified $150,000 of our bond portfolio to available-for-sale from held-to-maturity. During 2012, we did not re-classify any of our bond portfolio between available-for-sale and held-to-maturity.
Cash and short-term investments, which include cash, certificates of deposits, and money market accounts, increased $20.3 million, or 96.0%, to $41.4 million as of December 31, 2013, compared with $21.1 million as of December 31, 2012. The increase in cash and short-term investments is for a planned reinsurance payment. We evaluate our asset class allocation on an ongoing basis continually adjust based on economic and business risk.
Prepaid reinsurance premiums increased $0.6 million, or 7.8%, to $7.6 million as of December 31, 2013, compared with $7.0 million as of December 31, 2012 due to the amortization of our payment patterns. We believe concentrations of credit risk associated with our prepaid reinsurance premiums are not significant.
Our homeowners’ insurance premiums receivable increased $13.4 million, or 226.4%, to $19.4 million as of December 31, 2013, compared with $6.0 million as of December 31, 2012, resulting from the increase to gross premiums written during 2013 compared with 2012.
Our commercial general liability insurance premiums receivable decreased $0.2 million, or 33.5%, to $0.3 million as of December 31, 2013, compared with $0.5 million as of December 31, 2012.
Premiums receivable in connection with our automobile line of business increased $1.1 million, or 69.5%, to $2.8 million as of December 31, 2013, compared with $1.7 million as of December 31, 2012.
Other assets increased $0.5 million, or 20.1%, to $3.2 million as of December 31, 2013, compared with $2.7 million as of December 31, 2012. Major components of other assets are shown in the following table; the accrued interest income receivable is primarily investment related.
Unpaid losses and LAE increased $11.1 million, or 22.3%, to $61.0 million as of December 31, 2013, compared with $49.9 million as of December 31, 2012, in conjunction with the increase to net premiums earned during 2013 compared with 2012. The composition of unpaid losses and LAE by product line is as follows.
Premium deposits and customer credit balances increased $1.3 million, or 56.0%, to $3.8 million as of December 31, 2013, compared with $2.5 million as of December 31, 2012. Premium deposits are monies received on policies not yet in-force as of December 31, 2013.
Bank overdraft increased $0.2 million, or 3.6%, to $6.2 million as of December 31, 2013, compared with $6.0 million as of December 31, 2012. The bank overdraft relates primarily to losses and LAE disbursements paid but not presented for payment by the policyholder or vendor. The change relates to the timing of presentation of claims checks to the issuing bank.
Our in-force homeowners’ policies increased by approximately 55,300, or approximately 91%, to approximately 116,400 as of December 31, 2013, as compared with approximately 61,100 as of December 31, 2012.
Our earnings can also be impacted by our ratings, such as the rating of FNIC by Demotech, Inc. (“Demotech”). FNIC’s rating as of December 31, 2013 was "A" ("Exceptional"). For more information regarding our rating and the impact of a change or withdrawal of our rating, please see “Business-Regulation-Industry Rating Services.”
The Company’s sale of commercial general liability policies increased by $1.1 million to $10.4 million for 2013, compared with $9.3 million for 2012. The primary factor for this increase has been renewal retention combined with new business growth.
The Company’s sale of auto insurance policies increased by $5.4 million to $8.4 million for 2013, compared with $3.0 million for 2012. The primary factor for this increase has been renewal retention combined with new Texas business growth for which 2013 was the first full year of operations.
The increased homeowners’ gross premiums ceded is due to an additional 75.7% of reinsurance coverage purchased for the 2013-2014 season as compared with the 2012 - 2013 season.
Net premiums earned increased $45.0 million, or 75.8%, to $104.4 million for 2013, compared with $59.4 million for 2012. The following table denotes net premiums earned by product line.
Our investment yield, net and gross of investment expenses, excluding equities and including cash, was 1.8% and 2.0%, respectively, for 2013. Our investment yield, net and gross of investment expenses, excluding equities and including cash, was 2.5% and 2.8%, respectively, for 2012.
Our investment yield, net and gross of investment expenses measured against debt securities, excluding equities and cash, was 2.1% and 2.4%, respectively, for 2013. The primary reason for our lower investment yield in 2013 pertained to selling higher yielding and longer duration bonds, purchasing shorter duration and lower yielding bonds to protect our bond portfolio against principal erosion. Our investment yield, net and gross of investment expenses measured against debt securities, excluding equities and cash, was 2.6% and 2.9%, respectively, for 2012.
FASB has issued guidance regarding when an investment is considered impaired, whether that impairment is other-than temporary, and the measurement of an impairment loss. Management periodically reviews the individual investments that comprise our portfolio in order to determine whether a decline in fair value below our cost either is other-than temporarily or permanently impaired. During 2013, pursuant to guidelines prescribed in FASB issued guidance, we have not charged to operations any investment losses. During 2012, pursuant to guidelines prescribed in FASB issued guidance, we charged to operations, realized investment losses of $44,000. In reaching a conclusion that a security is either other than temporarily or permanently impaired we consider such factors as the timeliness and completeness of expected dividends, principal and interest payments, ratings from nationally recognized statistical rating organizations such as S&P and Moody’s, as well as information released via the general media channels.
The increase to losses and LAE for 2013, compared with 2012, reflects the additional reserves we added in response to the substantial increase in the number of policies we wrote during 2013. The increase to losses and LAE was more than offset by the increase to net premiums earned during this same period.
Operating and underwriting expenses increased $4.5 million, or 44.8%, to $14.5 million for 2013, compared with $10.0 million for 2012. The change is primarily due to a $2.5 million increase in premium tax expense, a $0.5 million increase in postage, a $0.9 million increase in surveys and underwriting reports, a $0.2 million increase in rent, a $0.2 million increase in computer service fees and a $0.2 million increase in other general expenses.
Salaries and wages increased $1.8 million, or 20.7%, to $10.2 million for 2013, compared with $8.4 million for 2012 and is primarily due to an increased number of employees. The charge to operations for stock-based compensation, in accordance with FASB guidance, was approximately $0.4 million during 2013, compared with approximately $0.3 million for 2012.
Gross premiums written increased $21.2 million, or 21.6%, to $119.5 million for 2012, compared with $98.3 million for 2011. The following table denotes gross premiums written by major product line. This increase reflected primarily an increase in the sale of homeowners’ policies.
Our in-force homeowners’ policies increased by approximately 17,300, or approximately 40%, to approximately 61,100 as of December 31, 2012, as compared with approximately 43,800 as of December 31, 2011.
We received approval from the Florida OIR in 2010 for a premium rate increase for our voluntary homeowners’ program within the State of Florida. That premium rate increase averaged approximately 20.2% and was implemented for policies with effective dates as soon as permitted following approval. In addition, in 2010 we received approval from the Florida OIR for a premium rate increase of approximately 15% for homeowners policies assumed from Citizens in Florida beginning July 2010. In February 2012, we received approval from the Florida OIR of a 14.1% rate increase. That rate increase, together with our 2011 rate increase for our voluntary property book of homeowners’ business averaged 20.2% statewide, and our assumed property book of homeowners’ business, averaged 13.9% statewide.
We are required to report write-your-own flood premiums on a direct and 100% ceded basis.
The Company’s sale of auto insurance policies decreased to $3.0 million for 2012, compared with $3.3 million for 2011. The Company’s sale of auto insurance included new and renewal policies in 2012 and only renewal policies in 2011.
The increase in prepaid reinsurance premiums was $2.1 million in 2012, compared with a $2.7 million decrease in 2011. The benefit to written premium is associated with the timing of our reinsurance payments measured against the term of the underlying reinsurance policies.
Our investment yield, net and gross of investment expenses measured against debt securities, excluding equities and cash, was 2.6% and 2.9%, respectively, for 2012. The primary reason for our lower investment yield in 2012 was the result of the Federal Reserve's activity in the bond market, which pushed up bond prices and lowered yields. Our investment yield, net and gross of investment expenses measured against debt securities, excluding equities and cash, was 3.1% and 3.4%, respectively, for 2011.
A summary of long-term contractual obligations as of December 31, 2013 follows. The amounts represent estimates of gross undiscounted amounts payable over time.
In 2013, our primary sources of capital included proceeds from the sale of investment securities, increased unearned premiums, issuance of common stock, increased unpaid losses and LAE, increased accounts payable and accrued expenses, increased income taxes payable and decreased deferred income tax expense. Additional sources of capital included amortization of investment premium discount, net, increased premium deposits and customer credit balances, exercised stock options, decreased reinsurance recoverable, net, non-cash compensation, depreciation and amortization, increased bank overdraft and a tax benefit related to non-cash compensation. Because we are a holding company, we are largely dependent upon fees and commissions from our subsidiaries for cash flow.
In 2013, 2012 and 2011, net cash provided by operating activities was $79.7 million, $1.5 million and $4.1 million, respectively.
In 2013, operations used $26.6 million of gross cash flow primarily due to a $14.3 million increase in premiums receivable, an $8.2 million increase in policy acquisition costs, net of amortization and $2.9 million of net realized investment gains. Additional uses of cash included a $0.6 million increase in prepaid reinsurance premiums, a $0.5 million increase in other assets and a $0.1 million decrease in recovery for uncollectible premiums receivable.
In 2013, net cash provided by financing activities was $27.7 million. In 2012 and 2011, net cash provided by financing activities was less than $0.1 million. In 2013, the sources of cash in connection with financing activities included $27.9 million from issuance of common stock, $0.9 million from exercised stock options and a $0.1 million tax benefit related to non-cash compensation. In 2013, the use of cash in connection with financing activities was $1.2 million of dividends paid.
We offer direct billing in connection with our homeowners’ and commercial general liability programs. Direct billing is an agreement in which the insurance company accepts from the insured, as a receivable, a promise to pay the premium, as opposed to requiring the full amount of the policy at policy inception, either directly from the insured or from a premium finance company. The advantage of direct billing a policyholder by the insurance company is that we are not reliant on a credit facility, but remain able to charge and collect interest from the policyholder.
As discussed above, we have experienced significant growth, as evidenced by the 103.7% increase in gross premiums written during the twelve months of 2013 as compared with the same period in 2012 and the 91.0% increase in the number of our in-force homeowners’ policies during 2013.
We have audited the accompanying consolidated balance sheets of Federated National Holding Company as of December 31, 2013 and 2012 and the related consolidated statements of income and comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2013. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the 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 audits 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 includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Federated National Holding Company at December 31, 2013 and 2012, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2013, in conformity with accounting principles generally accepted in the United States of America.
In January 2011, we merged FNIC and our other wholly owned insurance subsidiary, American Vehicle Insurance Company (“American Vehicle”), with FNIC continuing the operations of both entities. In connection with this merger, the Company, FNIC and American Vehicle entered into a Consent Order with the Florida Office of Insurance Regulation (“Florida OIR”) pursuant to which we agreed to certain restrictions on our business operations. The Consent Order was amended in February 2013 to lessen or eliminate certain of the original requirements, due to FNIC’s statutory underwriting profit during 2012. See "Footnote 8 - Regulatory Requirements and Restrictions”.
During the years ended December 31, 2013, 2012 or 2011, we did not experience any weather-related catastrophic events such as the hurricanes that occurred in Florida during 2005 and 2004. We are not able to predict how hurricanes or other insurable events will affect our future results of operations and liquidity. Loss and loss adjustment expenses (“LAE”) are affected by a number of factors, many of which are partially or entirely beyond our control, including the following.
Provisions for credit losses are provided in amounts sufficient to maintain the allowance for credit losses at a level considered adequate to cover anticipated losses. Generally, accounts that are over 90 days old are written off to the allowance for credit losses. We have been increasing our reliance on direct billing of our policyholders for their insurance premiums. Direct billing is when the insurance company accepts from the insured, as a receivable, a promise to pay the premium, as opposed to requiring payment of the full amount of the policy, either directly from the insured or from a premium finance company. We manage the credit risk associated with our direct billing program through our integrated computer system which allows us to monitor the equity in the unearned premium to the underlying policy. Underwriting criteria are designed with down payment requirements and monthly payments that create policyholder equity, also called unearned premium, in the insurance policy. The equity in the policy is collateral for the extension of credit to the insured.
In July 2012, the FASB issued ASU No. 2012-02: Intangibles - Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment. The objective of the amendments in this ASU is to reduce the cost and complexity of performing an impairment test for indefinite-lived intangible assets by simplifying how an entity tests those assets for impairment and to improve consistency in impairment testing guidance among long-lived asset categories. The amendments permit an entity first to assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test in accordance with Subtopic 350-30. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. Upon adoption, these amendments are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012; early adoption is permitted. The adoption of these amendments did not have a material impact on our financial condition, results of operations or cash flows.
In June 2011, the FASB issued ASU No. 2011-05: Comprehensive Income (Topic 220): Presentation of Comprehensive Income. The guidance in this ASU is intended to increase the prominence of items reported in other comprehensive income in the financial statements by presenting the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This ASU eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders' equity. The guidance in this ASU does not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. Upon adoption, this update is to be applied retrospectively and is effective during interim and annual periods beginning after December 15, 2011. Early adoption is permitted. The adoption of this ASU did not have a material impact on our financial condition, results of operations or cash flows.
Other recent accounting pronouncements issued by FASB, the American Institute of Certified Public Accountants (“AICPA”), and the Securities and Exchange Commission (“SEC”) did not or are not believed by management to have a material impact on the Company’s present or future financial statements.
· We face a risk of non-collectability of reinsurance, which could materially and adversely affect our business, results of operations and/or financial condition.
· Our January 2011 Consent Order with the Florida OIR, as amended in February 2013, limits our business in certain respects and may prevent us from growing our business.
· Our loss reserves may be inadequate to cover our actual liability for losses, causing our results of operations to be adversely affected.
· We may experience a loss due to the concentration of credit risk.
· Our insurance company is subject to minimum capital and surplus requirements, and our failure to meet these requirements could subject us to regulatory action.
· We may not obtain the necessary regulatory approvals to expand the types of insurance products we offer or the states in which we operate.
· Nonstandard automobile insurance historically has a higher frequency of claims than standard automobile insurance, thereby increasing our potential for loss exposure beyond what we would be likely to experience if we offered only standard automobile insurance.
· Florida's personal injury protection insurance statute contains provisions that favor claimants, causing us to experience a higher frequency of claims than might otherwise be the case if we operated only outside of Florida.
· Our stock price in recent years has been volatile and is likely to continue to be volatile. As a result, the market price of our common stock may drop below the price you pay, and you may not be able to resell your shares at a profit.
· If we report a material weakness in our internal controls and procedures, we may lose investor confidence and remedial measures may be costly.
· As a holding company, we depend on the earnings of our subsidiaries and their ability to pay management fees and dividends to the holding company as the primary source of our income.
The fair value of our investments is estimated based on prices published by financial services or quotations received from securities dealers and is reflective of the interest rate environment that existed as of the close of business on December 31, 2013 and 2012. Changes in interest rates subsequent to December 31, 2013 may affect the fair value of our investments. Refer to Footnote 21 of the Notes to Consolidated Financial Statements for details.
Effective January 1, 2006, the Company adopted the fair value recognition provisions of FASB issued guidance using the modified-prospective-transition method. Under that transition method, compensation costs recognized during 2013, 2012 and 2011 include:
· Compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of FASB issued guidance, and
· Compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair-value estimated in accordance with the provisions of FASB issued guidance. Results for prior periods have not been restated, as they are not required to be by the pronouncement.
The 2012 and 2011 financial statement amounts have not been reclassified to conform to the 2013 presentations.
In reaching a conclusion that a security is either other-than-temporarily or permanently impaired we consider such factors as the timeliness and completeness of expected dividends, principal and interest payments, ratings from nationally recognized statistical rating organizations such as Standard and Poor’s (“S&P”) and Moody’s Investors Service, Inc. (“Moody’s”), as well as information released via the general media channels. During 2013, in connection with the process, we have not charged any investment losses to operations. During 2012, in connection with the process, we have charged to operations $44,000 of investment losses.
During April 2006, American Vehicle finalized a $15.0 million irrevocable letter of credit in conjunction with the 100% Quota Share Reinsurance Agreement with Republic Underwriters Insurance Company (“Republic”) which was terminated in April 2007. During 2010, the letter of credit in favor of Republic was replaced by a fully funded trust agreement. As of December 31, 2013 and 2012 respectively, the amount held in trust was $1.0 million.
The following table summarizes, by type, our investments as of December 31, 2013 and 2012.
Below is a summary of debt securities at December 31, 2013 and 2012 by contractual or expected maturity periods. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
United States Treasury notes with a book value of $62,490 and $2,193,814, maturing in 2016 and 2022, respectively, were on deposit with the Florida OIR as of December 31, 2013, as required by law for FNIC, and are included with other investments held until maturity.
United States Treasury notes with a book value of $63,481 and $2,193,300, maturing in 2016 and 2022, respectively, were on deposit with the Florida OIR as of December 31, 2012, as required by law for FNIC, and are included with other investments held until maturity.
The impact of the reinsurance treaties on the financial statements is as follows.
As shown above, and as a result of review of liability for losses and LAE, which includes a re-evaluation of the adequacy of reserve levels for prior year’s claims, we increased the liability for losses and LAE for claims occurring in prior years by $0.2 million for the year ended December 31, 2013 and decreased the liability for losses and LAE for claims occurring in prior years by $1.4 million and $1.0 million for the years ended December 31, 2012 and 2011, respectively.
Paid Loss & DCCE Development Method - This method is similar to the Incurred Loss & DCCE Development Method only paid loss & DCCE and paid patterns are substituted for the incurred loss & DCCE and incurred patterns.
We select an estimate of ultimate loss & DCCE for each accident quarter after considering the results of each projection method for the quarter and the relative maturity of the quarter (the time elapsed between the start of the quarter and December 31, 2013). Reserves for unpaid losses & DCCE for each quarter are the differences between these ultimate estimates and the amount already paid. The reserves for each quarter and each coverage are summed, and the result is the overall estimate of unpaid losses & DCCE liability for the company.
A key assumption underlying the estimation of the reserve for loss and LAE is that past experience serves as the most reliable estimator of future events. This assumption may materially affect the estimates when the insurance market, the regulatory environment, the legal environment, the economic environment, the book of business, the claims handling department, or other factors (known or unknown) have varied over time during the experience period and / or will vary (expectedly or unexpectedly) in the future. 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. Therefore, the ultimate liability for unpaid losses and LAE will likely differ from the amount recorded at December 31, 2013.
In January 2011, we merged FNIC and our other wholly owned insurance subsidiary, American Vehicle Insurance Company (“American Vehicle”), with FNIC continuing the operations of both entities. As part of its approval of the merger between FNIC and American Vehicle, the Florida Office of Insurance Regulation (“Florida OIR”), the Company, FNIC and American Vehicle entered into a consent order with the Florida OIR dated January 25, 2011 (the “Consent Order”), which was amended in February 2013, due to FNIC’s statutory underwriting profit during 2012. Pursuant to the amended Consent Order, the Company and the resulting company in the merger (the “Merged Company”) have agreed to the following:
· The Merged Company will not write commercial multi peril policy premium without prior approval from the Florida OIR. The Merged Company has no commercial multi peril policy premium in force.
· The Merged Company surrendered its surety license. The Merged Company has no surety policy premium in force.
· The Merged Company will not write new commercial habitation condominium associations without prior approval from the Florida OIR. The current commercial habitation book of business is fully earned.
· The Merged Company agreed to maintain the total number of its homeowners’ policies in Miami-Dade, Broward and Palm Beach counties (the “Tri-County Area”) at 35% of its entire homeowners’ book. As of December 31, 2013, the Company had approximately 18.3% of its homeowners’ policies located within Tri-County Area.
· The managing general agency fees payable by the Merged Company to Federated National Underwriters, Inc. (“FNU”), formerly known as Assurance Managing General Agents, Inc., a wholly owned subsidiary of the Company, which were traditionally 6% of gross written premium, were reduced and will not exceed 4% without prior approval from the Florida OIR. The Merged Company has lowered the fee to amounts varying between 2% and 4% of gross written to further support the FNIC results of operations. This will have no impact on the Company’s consolidated financial results.
An insurance company is also required to adhere to prescribed premium-to-capital surplus ratios. As of December 31, 2013, 2012 and 2011, FNIC was in compliance with the prescribed premium-to-surplus ratio.
We had bonds with a carrying value of approximately $2.3 million and $2.2 million pledged to the Florida OIR, as of December 31, 2013 and 2012, respectively, in accordance with regulatory requirements.
No dividends were paid by FNIC or American Vehicle in 2013, 2012 and 2011, and none are anticipated in 2014. Although we believe that amounts required to meet our financial and operating obligations will be available from sources other than dividends from our insurance subsidiaries, there can be no assurance in this regard. Further, there can be no assurance that, if requested, the Florida OIR will allow any dividends to be paid by FNIC to us, the parent company, in the future. The maximum dividends permitted by state law are not necessarily indicative of an insurer’s actual ability to pay dividends or other distributions to a parent company, which also may be constrained by business and regulatory considerations, such as the impact of dividends on capital surplus, which could affect an insurer’s competitive position, the amount of premiums that can be written and the ability to pay future dividends. Further, state insurance laws and regulations require that the statutory capital surplus of an insurance company following any dividend or distribution by it be reasonable in relation to its outstanding liabilities and adequate for its financial needs.
Most recently the Florida OIR subjected FNIC to a balance sheet audit as of December 31, 2009. There were no material findings by the independent auditors in connection with this examination. FNIC also experienced a regularly scheduled statutory examination by the Florida OIR which occurred during 2010 for the five years ended December 31, 2009. There were no material findings in connection with this examination. The previous regulatory examination conducted by the Florida OIR on FNIC covered the three-year period ended on December 31, 2004.
There was no action taken by the Florida OIR in connection with the December 31, 2012 or 2011 IRIS ratio results. We do not currently believe that the Florida OIR will take any significant action with respect to FNIC regarding the 2013 IRIS ratios, although there can be no assurance that will be the case.
The table below reflects the range and test results for FNIC for the years ended December 31, 2013 and 2012, respectively.
GAAP differs in some respects from reporting practices prescribed or permitted by the Florida OIR. FNIC’s statutory capital and surplus was $76.9 million and $52.1 million as of December 31, 2013 and 2012, respectively. FNIC’s statutory net income was $3.6 million, $6.6 million and $0.8 million for 2013, 2012 and 2011, respectively. FNIC’s statutory non-admitted assets were nearly nothing and nearly nothing as of December 31, 2013 and 2012, respectively.
Management has a responsibility to continually measure and monitor its commitments and its contingencies. The nature of the Company’s commitments and contingencies can be grouped into three major categories: insured claim activity, assessment related activities and operational matters.
We are involved in claims and legal actions arising in the ordinary course of business. The amount of liability for these claims and lawsuits is uncertain. Revisions to our estimates are based on our analysis of subsequent information that we receive regarding various factors, including: (i) per claim information; (ii) company and industry historical loss experience; (iii) legislative enactments, judicial decisions, legal developments in the awarding of damages; and (iv) trends in general economic conditions, including the effects of inflation. Management revises its estimates based on the results of its analysis. This process assumes that experience, adjusted for the effects of current developments and anticipated trends, is an appropriate basis for estimating the ultimate settlement of all claims. There is no precise method for subsequently evaluating the impact of any specific factor on the adequacy of the reserves, because the eventual redundancy or deficiency is affected by multiple factors. In the opinion of management, the ultimate disposition of these matters may have a material adverse effect on our consolidated financial position, results of operations, or liquidity.
We operate in a regulatory environment where certain entities and organizations have the authority to require us to participate in assessments. Currently these entities and organizations include, but are not limited to, Florida Insurance Guaranty Association (“FIGA”), Citizens Property Insurance Corporation (“Citizens”), Florida Hurricane Catastrophe Fund (“FHCF”) and Florida Joint Underwriters Insurance Association (“JUA”). As a direct premium writer in the state of Florida, we are required to participate in certain insurer solvency associations under Florida Statutes Section 631.57(3) (a), administered by FIGA.
During December 2012, the Company was assessed $0.8 million by FIGA relating to the failures of Florida domestic property and casualty insurance companies. Future assessments are likely, although the impact of these assessments on our balance sheet, results of operations or cash flow are undeterminable at this time.
FNIC is also required to participate in an insurance apportionment plan under Florida Statutes Section 627.351, which is referred to as a JUA Plan. The JUA Plan provides for the equitable apportionment of any profits realized, or losses and expenses incurred, among participating automobile insurers. In the event of an underwriting deficit incurred by the JUA Plan which is not recovered through the policyholders in the JUA Plan, such deficit shall be recovered from the companies participating in the JUA Plan in the proportion that the net direct written premiums of each such member during the preceding calendar year bear to the aggregate net direct premiums written in this state by all members of the JUA Plan. FNIC was not assessed by the JUA Plan during 2013 or 2012. Future assessments by this association are undeterminable at this time.
Rent expense was $0.4 million, $0.2 million and $0.7 million in 2013, 2012 and 2011, respectively.
Operating segments that are not reportable should be combined and disclosed in the ‘‘all other’’ category. Disclosure should be made of the sources of revenue for these segments.
We implemented a stock option plan in 2002 (the “2002 Plan”), which expired in April 2012. Under this plan, we were authorized to grant options to purchase up to 1,800,000 common shares, and as of December 31, 2013 and December 31, 2012, we had outstanding exercisable options to purchase 523,521 and 702,597 shares, respectively.
In April 2012, our Board of Directors adopted, and in September 2012 our shareholders approved, the Company’s 2012 Stock Incentive Plan (the “2012 Plan”). The 2012 Plan permits the issuance of up to 1,000,000 shares of our common stock, subject to adjustment as provided for in the 2012 Plan, in connection with the grant of a variety of equity incentive awards, such as incentive stock options, non-qualified stock options, stock appreciation rights, dividend equivalent rights, restricted stock, restricted stock units, and performance shares. Officers, directors and executive, managerial, administrative and professional employees of the Company and its subsidiaries are eligible to participate in the 2012 Plan. Awards may be granted singly, in combination, or in tandem. The 2012 Plan was amended and restated in March 2013 to clarify the plan administrator’s authority to permit the vesting of unvested restricted shares in the event of the death of the grantee. The 2012 Plan will expire on April 5, 2022.
Options outstanding as of December 31, 2013 are exercisable as follows.
The weighted average fair value of options granted during 2012 and 2011 estimated on the date of grant using the Black-Scholes option-pricing model was $1.45 and $0.72 to $0.78, respectively; no options were granted during 2013.
Summary information about the Company’s stock options outstanding at December 31, 2013 follows.
For the years ended December 31, 2013, 2012 and 2011, comprehensive income (loss) consisted of the following.
FNHC (the parent company only) has no long term obligations, guarantees or material contingencies as of December 31, 2013. The following summarizes the major categories of the parent company’s financial statements.
Assets measured at fair value on a recurring basis as of December 31, 2013, presented in accordance with this guidance, are as follows.
On March 4, 2014, a total of 88,648 restricted shares from the 2012 Plan were granted pursuant to the vesting requirements and other terms and conditions set forth in Restricted Stock Agreements. Of the total, 43,997 shares were granted to the Company's Chief Executive Officer and President and 16,341 shares were granted to the Company's Chief Financial Officer. An aggregate of 15,710 shares were granted to the Company's directors and the remaining 12,600 shares were granted to other employees of the Company.
On February 24, 2014, Federated National entered into a Reimbursement Contract with the SBA for the 2014-2015 hurricane season. This Reimbursement Contract is part of the Company’s reinsurance program and will reimburse Federated National for covered property losses under its homeowners’ insurance policies resulting from hurricanes that cause damage in the State of Florida through May 31, 2015.