We incurred losses from operations over the last five years, including an operating loss of $8.5 million for the year ended December 31, 2013. Losses over this period were primarily due to underwriting losses, significant revenue declines, expenses declining less than the amount of revenue declines, and goodwill impairments. The losses from operations were the result of prior pricing issues in some states in which we have taken significant pricing and underwriting actions to address profitability, losses from states that we have exited, such as Florida and Michigan, and goodwill impairment charges as a result of such losses.
The senior secured and subordinated credit facilities contain quarterly debt covenants that set forth, among other things, minimum risk-based capital requirements for our insurance subsidiaries as well as minimum cash flow requirements for our non-regulated businesses. As of December 31, 2013, we were in compliance with these covenants. However, it is probable we will not meet certain of these covenants in 2014. If we are unable to maintain compliance with the covenants or obtain a forbearance or waiver of any non-compliance or amend the agreements to change such covenants, the lenders could declare all amounts outstanding under the facilities to be immediately due and payable. If our lenders declare the amounts outstanding to be immediately due and payable, it would have a material adverse effect on our operations and our creditors and stockholders.
Sale of retail business - On September 30, 2013, we sold our retail agency distribution business for $101.9 million plus the potential to receive an additional $20.0 million of cash proceeds. We already paid down the senior secured note by $5.0 million in November 2013 from the $20.0 million originally established in an escrow account on the sale date. We expect to pay down an additional $5.0 million of the senior secured note in April 2014 based on the risk-based capital measurement as of December 31, 2013. In addition, the purchase agreement was amended in March 2014 to suspend the measurement of risk-based capital as of March 31, 2014, which determines how the remaining escrow account is utilized until the measurement date as of June 30, 2014.
Debt refinancing - We used proceeds from the sale of the retail agency distribution business and two new debt arrangements to replace the existing senior secured credit facility. Our new debt arrangement
consists of a $40.0 million senior secured credit facility with a maturity date of March 30, 2016, and a $10.0 million subordinated secured credit facility with a maturity date of March 30, 2017.
Paid Loss Development - We use historical loss and LAE payments over discrete periods of time to estimate future loss and LAE payments. Paid development methods assume that the patterns of paid loss or LAE that occurred in past periods will be similar to loss and LAE payment patterns that will occur in future periods.
Incurred Bornhuetter/Ferguson - This method combines case incurred development and expected loss and LAE ratio methods. We use the same expected loss and LAE ratios as the Paid Bornhuetter-Ferguson method, which we combine with earned premium and undeveloped loss and LAE, and then add them to the actual case incurred loss and LAE to date.
We consider multiple internal and external factors as part of evaluating the reasonability of the methods and selecting management’s best estimates. Many of these factors vary by state, coverage, program, and time period. Some examples of internal factors include: changes to product mix, changes to claims-handling practices, changes to coverage or products, or changes to underwriting rules. External factors include: frequency trends, severity trends, changes to state-mandated minimum limits, medical inflation, inflation in repair or replacement costs, general economic trends, and changes to the legislative environment.
We routinely monitor the collectability of the reinsurance recoverables of our insurance companies to determine if an amount is potentially uncollectible. Our evaluation is based on periodic reviews of our aged recoverables, as well as our assessment of recoverables due from reinsurers known to be in financial difficulty. When appropriate, we obtain irrevocable letters of credit or require the reinsurer to establish trust funds to secure their obligations to us. All significant reinsurers are currently rated A- or better by A. M. Best excluding the run-off business reinsured by Vesta Fire Insurance Company (VFIC). Our estimates and judgment about collectability of the recoverables and the financial condition of reinsurers can change, and these changes can affect the level of reserve required.
At December 31, 2013, our receivables from reinsurers included $13.4 million net recoverable from VFIC. At December 31, 2013, the VFIC Trust held $16.6 million to collateralize the $13.4 million net recoverable from VFIC. We have, with the approval of the VFIC Special Deputy Receiver and the District Court, Austin, Texas, withdrawn $9.0 million through December 31, 2013 from the trust securing our reinsurance recoverables from VFIC, which represented 100% of the amount we paid in losses as of the date of the withdrawal covered by the VFIC reinsurance. We have made arrangements with the VFIC Special Deputy Receiver to submit quarterly statements for approval to withdraw additional funds from the trust based upon losses paid.
As of December 31, 2013 and 2012, we had no reserve for uncollectible reinsurance recoverables. We assessed the collectability of our year-end receivables and believe all amounts are collectible based on currently available information.
Accounting Standards Update (ASU) 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, requires disclosure of amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present either on the face of the statement of operations or in the notes to the financial statements, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income, but only if the amount reclassified is required to be reclassified to net income in its entirety in the same reporting period. This ASU is effective prospectively for annual and interim periods beginning after December 15, 2012. The adoption of this standard did not have an impact on our consolidated financial position, results of operations or cash flows.
ASU 2012-02, Intangibles-Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment, provides companies with the option to assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. If the Company concludes that it is more likely than not that the asset is impaired, it is required to determine the fair value of the intangible asset and perform a quantitative impairment test by comparing the fair value with the carrying value in accordance with Topic 350. If the Company concludes otherwise, no further quantitative assessment is required. This standard was effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. The adoption of this standard did not have a material impact on our consolidated financial position, results of operations or cash flows.
In connection with the sale of the retail business, we also entered into a distribution agreement pursuant to which the purchaser will continue to produce insurance business for our insurance subsidiaries at least until the earlier of December 15, 2015, or when Confie’s obligation to pay the contingent proceeds pursuant to the purchase agreement is discharged. Among other things, the distribution agreement sets forth the terms and conditions under which Confie will produce insurance business for the Company after the closing and includes terms designed to preserve the volume of business produced by the retail business for the Company as of the closing. In turn, the distribution agreement obligates our insurance subsidiaries to maintain reinsurance and their underwriting capacity in the markets where the retail business operates for the duration of the distribution agreement, including certain restrictions on increasing fees and rates beyond certain thresholds without Confie’s consent. Additionally, Confie will continue to provide premium financing capability for the Company’s policies, including for business written through other independent agencies in certain markets, and the parties will share equally in any increased profits from premium financing other independent agency business during the term of the distribution agreement. Due to the Company’s significant continuing involvement as the underwriter for business produced by the retail agency distribution business and the ongoing premium finance arrangements, the operating activities of the retail agency distribution are not reflected as discontinued operations as of December 31, 2013.
The Company realized a pretax gain on the sale of $65.0 million. The Company’s consolidated results of operations include the retail business’s results of operations through the date of the sale, September 30, 2013.
Our ability to develop strong and mutually beneficial relationships with independent agencies is important to the success of our distribution strategy. We believe that strong product positioning and high service standards
are key to independent agency loyalty. We foster our independent agency relationships by providing them our agency software applications designed to strengthen and expand their sales and service capabilities for our products. These software applications provide independent agencies with the ability to service their customers’ accounts and access their own commission information. We maintain strict and high standards for call answering and abandonment rate service levels in our customer service call centers. We believe the level and array of services that we offer to independent agencies creates value in their businesses.
Premiums. One measurement of our performance is the level of gross written premiums managed and a second measurement is the relative proportion of premiums written through our distribution channels. The following table displays our gross written premiums managed by distribution channel (in thousands):
Total gross written premiums managed for 2013 increased $103.4 million, or 43.6%, compared with 2012. This increase was primarily due to an increase in new business policies generated in Texas and California. We believe this growth in Texas and California was due to a number of competitors that had been aggressive on pricing in the past either exiting the marketplace or reducing their writings significantly. Historically, we assumed premiums from a Texas county mutual insurance company (the county mutual) whereby we assumed 100% of the policies issued by the county mutual for business produced by our owned general agents. The county mutual did not retain any of this business and there were no loss limits other than the underlying policy limits. The assumed reinsurance agreement was terminated on January 1, 2013 on a cut-off basis and the third-party reinsurance company that we had quota-share agreements with since September 2011 was assuming 100% of the business originated through the county mutual. However, we continue to manage the business as a general agent. Unearned premium of $11.8 million was returned to the Texas county mutual as of January 1, 2013 related to the termination of the reinsurance agreement.
In our other independent agency distribution channel, gross written premiums managed for 2013 increased $53.7 million, or 77.0% for 2013. We believe this increase was primarily due to a reduction in competition from companies that were aggressive in pricing. In our other independent agency distribution channel, gross written premiums for 2012 increased $13.8 million, or 24.7%, compared with 2011 primarily due to increases in our Texas business.
Gross written premiums managed by our unaffiliated underwriting agency for 2013 increased $56.0 million, or 315.0%, compared with 2012 due to a reduction in competition from companies that were aggressive on pricing. Gross written premiums managed by our unaffiliated underwriting agency for 2012 increased $2.9 million, or 19.4%, compared with 2011.
Also in 2011, we entered into a quota-share agreement with a different third-party reinsurance company under which we ceded 10% of business produced in Louisiana, Alabama, Texas and Illinois from September 1, 2011 through December 31, 2011. At December 31, 2011, this contract converted to a 40% quota-share
The amount of recoveries pertaining to reinsurance contracts that were deducted from losses and loss adjustment expenses incurred during 2013, 2012 and 2011 was approximately $80.1 million, $49.8 million and $40.6 million, respectively. The amount of loss reserves and unearned premium we would remain liable for in the event our reinsurers are unable to meet their obligations was as follows (in thousands):
Premium finance revenue for 2013 decreased $4.8 million, or 22.8%, compared to 2012 due to the sale of the retail business. Premium finance revenue for 2012 decreased $1.8 million, or 7.9%, compared to 2011 due to decreases in the number of policies financed and revenue per policy.
Net investment income for 2012 decreased $1.9 million, or 37.8%, compared with 2011. The decrease was primarily due to a 52.1% decrease in total average invested assets to $76.3 million during 2012 from $159.4 million during 2011, which was partially offset by a $0.3 million increase in income from our investment in real estate. The average investment yield was 1.9% (2.0% on a taxable equivalent basis) in 2012, compared with 2.3% (2.4% on a taxable equivalent basis) in 2011.
At December 31, 2013, our fixed-income investments were invested in the following: corporate debt securities 51.8%; U.S. Treasury and government agencies securities 28.6%; certificates of deposit 7.9%; mortgage-backed securities 6.4%; and states and political subdivisions securities 5.3%. The average quality of our portfolio was A+ at December 31, 2013. We attempt to mitigate interest rate risk by managing the duration of our fixed-income portfolio to the duration of our reserves. As of December 31, 2013, the effective duration of our fixed-income investment portfolio was 2.4 years.
Losses and Loss Adjustment Expenses. Losses and loss adjustment expenses for 2013 increased $36.0 million, or 32.1%, compared with 2012. Losses and loss adjustment expenses for 2012 decreased $25.8 million, or 18.7%, compared with 2011.
In 2013, the percentage of net losses and loss adjustment expense to net premiums earned (the net loss ratio) was 89.2% compared with 77.8% in 2012. The current year included $7.0 million of unfavorable prior period development primarily related to the 2011 accident year for our Louisiana business, $3.6 million related to the 2011 and 2012 Texas business, and $1.3 million for the accident year 2012 California business. Excluding the prior year development, the current accident year net loss ratio was 81.8% compared with 74.0% in 2012. The use of quota-share reinsurance overstates the net loss ratio. Loss adjustment expenses include all of the business subject to the quota-share treaties with ceding commission income booked as an offset to selling, general and administrative expenses. As such, the quota-share treaties’ impact on the loss ratio was to increase it by 6.5 points for 2013 and 4.6 points for 2012. Excluding the impact of the quota-share, the net loss ratio for the 2013 accident year was 75.3% and 69.4% for the 2012 accident year. The increase in the current year was primarily due to a significant increase in new business, which tends to have a higher loss ratio than renewal business. Also reflected in the above numbers is the effect of catastrophes. In the current accident year we have incurred catastrophes, net of reinsurance, equal to 2.0 points for 2013 and 2012. Both of these numbers are higher than our long term average expectation of 0.5 points.
Our losses and loss adjustment expenses are a blend of the specific estimated and actual costs of providing the coverage contracted by the purchasers of our insurance policies. We maintain reserves to cover our estimated ultimate liability for losses and related loss adjustment expenses for both reported and unreported claims on the insurance policies issued by our insurance companies. The establishment of appropriate reserves is an inherently uncertain process, involving actuarial and statistical projections of what we expect to be the cost of the ultimate settlement and administration of claims based on historical claims information, estimates of future trends in claims severity and other variable factors such as inflation. Significant change in claims practices that began in the third quarter of 2009 and continued throughout 2010 and 2011 added additional uncertainty to the reserving process. Due to the inherent uncertainty of estimating reserves, reserve estimates can be expected to vary from period to period. To the extent that our reserves prove to be inadequate in the future, we would be required to increase our reserves for losses and loss adjustment expenses and incur a charge to earnings in the period during
Our losses and loss adjustment expense reserves of $133.6 million on a gross basis and $61.2 million on a net basis are our best estimates as of December 31, 2013. The analysis provided by our internal valuation methods indicated that the expected range for the ultimate liability for our losses and loss adjustment expense reserves, as of December 31, 2013, was between $112.0 million and $147.8 million on a gross basis and between $51.2 million and $67.6 million on a net basis.
The following table presents the development of reserves for unpaid losses and loss adjustment expenses from 2004 through 2013 for our insurance company subsidiaries, net of reinsurance recoveries or recoverables. The first line of the table presents the reserves at December 31 for each indicated year. This represents the estimated amounts of losses and loss adjustment expenses for claims arising in that year and all prior years that are unpaid at the balance sheet date, including losses incurred but not reported to us. The upper portion of the table presents the cumulative amounts subsequently paid as of successive years with respect to those claims. The lower portion of the table presents an update of the estimated amount of the previously recorded reserves based upon the experience as of the end of each succeeding year. The estimates are revised as more information becomes known about the payments, frequency and severity of claims for individual years. A redundancy (deficiency) exists when the reestimated reserves at each December 31 is less (greater) than the prior reserve estimate. The cumulative redundancy (deficiency) depicted in the table, for any particular calendar year, represents the aggregate change in the initial estimates over all subsequent calendar years.
Our historical net liabilities for losses and loss adjustment expenses are impacted by our 100% quota-share reinsurance contract with VFIC. The following table summarizes the development of reserves for unpaid losses and loss adjustment expenses (in thousands):
The adverse prior period development recognized in 2013 and 2012 was primarily due to an increase in the estimated severity for Louisiana bodily injury claims in 2011. The gross cumulative redundancy in 2010 was primarily due to a reduction of Michigan case reserves for 2010 due to revised estimates of losses. The gross cumulative deficiency in 2009 increased as a result of revised case reserves on our Michigan business due to increased estimates of ultimate losses.
Selling, General and Administrative Expenses. Another measurement of our performance that addresses our overall efficiency is the level of selling, general and administrative expenses. We recognize that our customers are primarily motivated by low prices. As a result, we strive to keep our costs as low as possible to be able to keep our prices affordable and thus to maximize our sales while still maintaining profitability. Our selling, general and administrative expenses include not only the cost of acquiring the insurance policies through our insurance carriers (the amortization of the deferred acquisition costs) and managing our insurance carriers and former retail stores, but also the costs of the holding company. The largest component of selling, general and administrative expenses is personnel costs, including compensation and benefits. Selling, general and administrative expenses for 2013 increased $3.7 million, or 3.8%, compared with 2012, primarily due to a $26.8 million increase in policy acquisition expenses due to the increase in gross written premiums. This was partially offset by a $7.0 million decline in employee compensation and benefits, $6.7 million decline in professional fees, $4.2 million decline in advertising costs and $5.3 million in other overhead costs due to management actions to reduce expenses and the departure of employees with the sale of the retail business. Selling, general and administrative expenses for 2012 decreased $14.7 million, or 13.2%, compared with 2011, primarily due to a $10.0 million decline in policy acquisition expenses, a $2.2 million impairment in the fourth quarter of 2011 related to our office space, and a $3.7 million decline in employee compensation and benefits due to management actions to reduce expenses.
Net expenses, defined as the sum of selling, general and administrative expenses and depreciation and amortization less commission income, fees and managing general agent revenue, as a percentage of net premiums earned (the net expense ratio) decreased to 17.7% in 2013 compared with 31.0% in 2012. The decrease was primarily due to a 15.3% increase in net premiums earned, a 26.1% increase in commission income, fees and managing general agent revenue, and a 29.6% decrease in depreciation and amortization. Net expenses as a percentage of net premiums earned (the net expense ratio) increased to 31.0% in 2012 compared with 29.7% in 2011. The increase was primarily due to an 18.6% decrease in net premiums earned and a 13.2% decrease in selling, general and administrative expenses, which were partially offset by a 9.4% decrease in commission income, fees and managing general agent revenue. The following table sets forth the components of the net expenses and the computation of the net expense ratios (in thousands):
Depreciation and Amortization. Depreciation and amortization expenses for 2013 decreased $3.0 million, or 29.6%, compared with 2012 due to the sale of the retail business. Depreciation and amortization expenses for 2012 increased $0.4 million, or 4.0%, compared with 2011.
Loss on Extinguishment of Debt. On September 30, 2013, we replaced our existing senior credit facility with the proceeds from the sale of the retail agency distribution business and with proceeds from two new debt arrangements. Our new debt arrangement consists of a $40.0 million senior secured credit facility with a maturity date of March 30, 2016, and a $10.0 million subordinated secured credit facility with a maturity date of March 30, 2017.
Income Taxes. Income tax expense for 2013 was $0.9 million as compared to $0.3 million for 2012. Income tax expense for 2013 is primarily due to the sale of the retail business.
Income tax expense for 2012 was $0.3 million as compared to an income tax benefit of $9.0 million in 2011. Income tax expense for 2012 represents increasing deferred tax liabilities arising from timing differences on goodwill and other intangible assets.
There are no restrictions on the payment of dividends by our non-insurance company subsidiaries other than state corporate laws regarding solvency. As a result, our non-insurance company subsidiaries generate revenues, profits and net cash flows that are generally unrestricted as to their availability for the payment of dividends and we have and expect to continue to use those revenues to service our corporate financial obligations, such as debt service and stockholder dividends. As of December 31, 2013, we had $3.7 million of cash and cash equivalents at our holding company and non-insurance company subsidiaries.
The accompanying consolidated financial statements have been prepared assuming we will continue as a going concern. This assumes continuing operations and the realization of assets and liabilities in the normal course of business.
Our recent history of recurring losses from operations and our probable failure to comply with certain financial covenants in our senior secured and subordinated credit facilities in 2014 raises substantial doubt about the Company’s ability to continue as a going concern.
In 2010, we entered into a capital lease obligation related to certain computer software, software licenses, and hardware currently used by and on the books of Affirmative Insurance Company. The lease term was 60 months and the lease obligation was fully secured with certificates of deposit. On October 17, 2012, we received notice from one of the lessors (Lessor) under a capital lease obligation that, based upon Lessor’s claim of an alleged default under the terms of the applicable lease and security agreements, it elected to immediately seek recovery of an amount equal to the casualty loss value of the leased property, together with all other sums allegedly due to Lessor, which Lessor calculated as $9.6 million. Lessor informed the Company that it had directed the escrow agent to redeem the CDs securing the Company’s lease payment obligation and disburse to it the approximately $8.3 million in proceeds, which Lessor received on October 15, 2012. Lessor threatened legal action against the Company to recover the remaining $1.3 million, alleged liquidated damages. The Company contests that any event of default has occurred and also disputes Lessor’s demand for payment of the casualty loss value of the leased property. On December 26, 2012, Lessor conveyed all right and interest in the leased property back to the Company, although both parties reserved all claims with respect to the disputed demands for payment. Neither party has filed suit at this time.
In March 2013, we entered into a $4.8 million loan secured by commercial real estate to provide liquidity to AIC. The loan is evidenced by a promissory note secured by a mortgage security agreement and assignment of
On February 28, 2012, we exercised our right to defer interest payments on selected Notes Payable beginning with the scheduled interest payment due in March 2012 and continuing for a period of up to five years. The affected notes are associated with obligations to our unconsolidated trusts. The outstanding balance of the affected notes was $56.7 million as of December 31, 2013. We will continue to accrue interest on the principal during the extension period and the unpaid deferred interest will also accrue interest. Deferred interest will be due and payable at the expiration of the extension period.
The pricing under the senior secured credit facility is currently subject to an adjusted LIBOR rate floor of 1.25%, plus 7.25%. The interest rate as of December 31, 2013 was 8.50%. We made a $5.0 million payment in November 2013 and as of December 31, 2013, the principal balance of the senior secured credit facility was $35.0 million. The senior secured credit facility was issued at a discount of $2.0 million that will be amortized as interest expense over the expected term of the loan using the effective interest method. Repayment of the facility is due quarterly with $2.0 million payable for each quarter through September 30, 2014, $3.5 million payable
each quarter through September 30, 2015, $4.5 million payable on December 31, 2015 and the remaining balance of $13.5 million due in full on March 30, 2016. Prepayments under this agreement are applied to the earliest payments due. After the $5.0 million payment was made in November 2013, the next payment due is $1.0 million on June 30, 2014.
New debt issuance costs of $4.5 million were capitalized and will be amortized to interest expense over the expected term of the new credit agreements.
(1) As of December 31, 2013, we leased an aggregate of approximately 164,331 square feet of office space for our agencies and insurance companies in various locations throughout the United States. These amounts represent our minimum future operating lease commitments.
(2) On December 31, 2013, we entered into a capital lease transaction with an equipment finance company wherein we sold $4.9 million of computer software, software licenses and hardware used in our insurance operations and simultaneously entered into a capital lease for the EDP Equipment. In 2010, we entered into a similar capital lease.
(3) All of the outstanding notes payable at December 31, 2013 are redeemable in whole or in part after five years from issuance. For this disclosure, it is assumed that none of these notes will be redeemed before their contractual maturities and interest rates on these notes will remain at their current levels.
(4) In March 2013, we entered into a $4.8 million loan secured by commercial real estate. The mortgage requires monthly payments of principal and interest with the final payment due on the maturity date of December 15, 2015. For this disclosure, it is assumed that the mortgage will not be redeemed before the contractual maturity and the interest rate will remain at its current level.
We have audited the accompanying consolidated balance sheets of Affirmative Insurance Holdings, Inc. and subsidiaries (the Company) as of December 31, 2013 and 2012, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ deficit, and cash flows for each of the years in the three-year period ended December 31, 2013. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company’s recent history of recurring losses from operations and its probable failure to comply with certain financial covenants in the senior secured and subordinated credit facilities in 2014 raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
The accompanying consolidated statement of cash flows for the year ended December 31, 2012 includes an immaterial correction of an error related to bank overdraft activity. In the prior year presentation, $4.5 million of cash provided from bank overdrafts was incorrectly presented as a use of cash rather than as a source of cash. The impact of this error on the statement of cash flows overstated the reported amount of cash used in financing activities by $9.0 million and understated cash used in the operating activities section by the same amount. The error had no impact on the previously reported net loss, earnings per share, balance sheet or stockholders’ deficit accounts and is properly reflected on the consolidated statement of cash flows for the year ended December 31, 2012 in the accompanying consolidated financial statements.
The Company incurred losses from operations over the last five years, including an operating loss of $8.5 million for the year ended December 31, 2013. Losses over this period were primarily due to underwriting losses, significant revenue declines, expenses declining less than the amount of revenue declines, and goodwill impairments. The losses from operations were the result of prior pricing issues in some states in which the Company has taken significant pricing and underwriting actions to address profitability, losses from states that the Company has exited, such as Florida and Michigan, and goodwill impairment charges as a result of such losses.
The senior secured and subordinated credit facilities contain quarterly debt covenants that set forth, among other things, minimum risk-based capital requirements for the Company’s insurance subsidiaries as well as minimum cash flow requirements for the Company’s non-regulated businesses. As of December 31, 2013, the Company was in compliance with these covenants. However, it is probable the Company will not meet certain of these covenants in 2014. If the Company is unable to maintain compliance with the covenants or obtain a forbearance or waiver of any non-compliance or amend the agreements to change such covenants, the lenders could declare all amounts outstanding under the facilities to be immediately due and payable. If the Company’s lenders declare the amounts outstanding to be immediately due and payable, it would have a material adverse effect on the Company’s operations and the Company’s creditors and stockholders.
Sale of retail business - On September 30, 2013, the Company sold its retail agency distribution business for $101.9 million plus the potential to receive an additional $20.0 million of cash proceeds. The Company already paid down the senior secured note by $5.0 million in November 2013 from the
The Company’s recent history of recurring losses from operations and its probable failure to comply with certain financial covenants in its senior secured and subordinated credit facilities in 2014 raises substantial doubt about the Company’s ability to continue as a going concern.
Investments are considered to be impaired when a decline in fair value is judged to be other-than-temporary. On a quarterly basis, the Company considers available quantitative and qualitative evidence in evaluating potential impairment of its investments. If the cost of an investment exceeds its fair value, the Company evaluates, among other factors, general market conditions, the duration and extent to which the fair value is less than cost. If the fair value of a debt security is less than its amortized cost basis, an other-than-temporary impairment may be triggered in circumstances where (1) an entity has an intent to sell the security, (2) it is more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis, or (3) the entity does not expect to recover the entire amortized cost basis of the security (that is, a credit loss exists). Other-than-temporary impairments are separated into amounts representing credit losses which are recognized in earnings and amounts related to all other factors which are recognized in other comprehensive income (loss). The Company also considers potential adverse conditions related to the financial health of the issuer based on rating agency actions.
Premium Finance Receivable • Prior to the sale of the retail agency distribution business on September 30, 2013, the Company recognized interest and origination fees from finance receivables over the term of the finance contract. Late fee revenue was recognized when received. Premium finance receivables were secured by the underlying unearned policy premiums for which the Company obtained assignment from the policyholder in the event of non-payment. When a payment became past due, the Company canceled the underlying policy with the insurance carrier and received the unearned premium to clear unpaid principal and interest. The loan was closed by writing off any uncollected amounts or refunding any overpayment to the customer.
Affirmative Insurance Holdings Statutory Trust II (“Trust II”), is an unconsolidated trust subsidiary, for the sole purpose of issuing $25.0 million trust preferred securities in 2005. Trust II used the proceeds from the sale of these securities and the Company’s initial capital contribution to purchase $25.8 million of subordinated debt securities from the Company. The debt securities are the sole assets of Trust II, and the payments under the debt securities are the sole revenues of Trust II. The Company’s initial capital contribution consisted of the purchase of 774,000 common securities issued by Trust II for $774,000, which represented 3% of the total dollar amount of subordinated debentures issued.
Commission income - Represents revenues from the retail agency business prior to being sold on September 30, 2013. Commission income and related policy fees, written for third-party insurance companies, are recognized, net of an allowance for estimated policy cancellations, at the date the customer is initially billed or as of the effective date of the insurance policy, whichever is later. Commissions on premium endorsements are recognized when premiums are processed. The allowance for estimated third-party cancellations is periodically evaluated and adjusted as necessary.
legal entities: insurance companies, an underwriting agency and a service company from which all employees are paid. Insurance subsidiaries possess the certificates of authority and capital necessary to transact insurance business and issue policies, but they rely on both affiliated and an unaffiliated underwriting agency to design, distribute and service those policies. Underwriting agencies primarily design, distribute and service policies issued or reinsured by the Company’s insurance subsidiaries and that are distributed by independent agents. Given the homogeneity of the Company’s products, the regulatory environments in which the Company operates, the nature of the Company’s customers and distribution channels, Company management monitors, controls and manages the business as an integrated entity offering non-standard personal automobile insurance products through multiple distribution channels.
Statutory Accounting Practices • The Company’s insurance subsidiaries are required to report results of operations and financial position to insurance regulatory authorities based upon statutory accounting principles (SAP). The more significant differences between SAP and GAAP are as follows:
On September 30, 2013, the Company sold its retail agency distribution business to Confie Seguros (Confie). The Company’s retail agency distribution business consisted of 195 retail locations in Louisiana, Alabama, Texas, Illinois, Indiana, Missouri, Kansas, South Carolina and Wisconsin and two premium finance companies (the retail business). Proceeds from the sale were $101.9 million in cash with the potential to receive an additional $20.0 million of cash proceeds. The cash proceeds included $20.0 million placed in an escrow account which is included in other assets on the consolidated balance sheet. The funds held in escrow will, dependent upon the risk-based capital status of Affirmative Insurance Company (AIC), be utilized to either infuse capital into AIC or pay down debt. The risk-based capital measurement will be made quarterly through June 30, 2014. As of the first measurement date of September 30, 2013, AIC met the risk-based capital target and in November 2013, $5.0 million was released from the escrow account and was used to pay down the senior secured credit facility. The Company expects to pay down an additional $5.0 million of the senior secured credit facility in April 2014 based on the risk-based capital measurement as of December 31, 2013. In addition, the purchase agreement was amended in March 2014 to suspend the measurement of risk-based capital as of March 31, 2014, which determines how the remaining escrow account is utilized until the measurement date as of June 30, 2014. The initial cash proceeds also included a preliminary working capital adjustment of $1.8 million as of September 30, 2013. Upon review by the purchaser, an additional working capital adjustment of $0.1 million was received in the fourth quarter of 2013.
The Company may receive up to an additional $20.0 million of proceeds that could be used to pay down debt or infuse capital into AIC. The additional proceeds are contingent on AIC meeting certain risk-based capital thresholds and maintaining the obligations of the distribution agreement. The risk-based capital measurement begins as of June 30, 2014 and can be achieved quarterly through December 31, 2015. In the best case scenario, the Company would receive an additional $10.0 million of proceeds based on the risk-based capital measurement as of June 30, 2014, and an additional $10.0 million of proceeds based on the measurement as of September 30, 2014. These contingent proceeds will be recognized in future periods as risk-based capital measurement thresholds are achieved.
In connection with the sale of the retail business, the Company also entered into a distribution agreement pursuant to which the purchaser will continue to produce insurance business for the Company’s insurance subsidiaries at least until the earlier of December 15, 2015, or when Confie’s obligation to pay the contingent proceeds pursuant to the purchase agreement is discharged. Among other things, the distribution agreement sets forth the terms and conditions under which Confie will produce insurance business for the Company after the closing and includes terms designed to preserve the volume of business produced by the retail business for the Company as of the closing. In turn, the distribution agreement obligates the Company’s insurance subsidiaries to maintain reinsurance and their underwriting capacity in the markets where the retail business operates for the duration of the distribution agreement, including certain restrictions on increasing fees and rates beyond certain thresholds without Confie’s consent. Additionally, Confie will continue to provide premium financing capability for the Company’s policies, including for business written through other independent agencies in certain markets, and the parties will share equally in any increased profits from premium financing other independent agency business during the term of the distribution agreement. Due to the Company’s significant continuing involvement as the underwriter for business produced by the retail agency distribution business and the ongoing premium finance arrangements, the operating activities of the retail agency distribution are not reflected as discontinued operations as of December 31, 2013.
Intercompany balances between the Company and the retail subsidiaries sold which were previously eliminated are now reflected in the consolidated financial statements gross, including premiums and fees receivable and due to third-party carriers of $20.9 million.
The Company’s available-for-sale investment securities are carried at fair value with unrealized gains and losses reported in accumulated other comprehensive income (loss), a separate component of stockholders’ deficit. No income tax effect of unrealized gains and losses is reflected in other comprehensive income (loss) due to the Company carrying a full deferred tax valuation allowance. Gains and losses realized on the disposition of investment securities are determined on the specific-identification basis and credited or charged to income at the time of disposal.
The amortized cost, gross unrealized gains (losses), and estimated fair value of the Company’s available-for-sale securities at December 31, 2013 and 2012, were as follows (in thousands):
The following table summarizes the Company’s available-for-sale securities in an unrealized loss position at December 31, 2013 and 2012, the estimated fair value and amount of gross unrealized losses, aggregated by investment category and length of time those securities have been continuously in an unrealized loss position (in thousands):
The unrealized losses at December 31, 2013 were primarily attributable to changes in market interest rates since the securities were purchased. Management systematically evaluates investment securities for other-than-temporary declines in fair value on a quarterly basis. Investments are considered to be impaired when a decline in fair value is judged to be other-than-temporary. On a quarterly basis, the Company considers available quantitative and qualitative evidence in evaluating potential impairment of its investments. If the cost of an investment exceeds its fair value, the Company evaluates, among other factors, general market conditions, duration and extent to which the fair value is less than cost. If the fair value of a debt security is less than its amortized cost basis, an other-than-temporary impairment may be triggered in circumstances where (1) an entity has an intent to sell the security, (2) it is more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis, or (3) the entity does not expect to recover the entire amortized cost basis of the security (that is, a credit loss exists). Other-than-temporary impairments are separated into amounts representing credit losses which are recognized in earnings and amounts related to all other factors which are recognized in other comprehensive income (loss). The Company also considers potential adverse conditions related to the financial health of the issuer based on rating agency actions. As a result of management’s quarterly analyses for the years ended December 31, 2013 and 2012, no individual securities were considered other-than-temporarily impaired.
As of December 31, 2013, certificates of deposit in the amount of $4.9 million were pledged as collateral associated with the capital lease related to certain computer software, software licenses, and hardware used in the Company’s insurance operations. See Note 12 for discussion of the associated capital lease obligation.
At December 31, 2013 and 2012, investments in fixed-maturity securities with an approximate carrying value of $6.9 million and $7.1 million, respectively, were on deposit with regulatory authorities as required by insurance regulations.
During 2011, the Company entered into a quota-share reinsurance agreement with a third-party reinsurance company effective January 1, 2011 ceding 28% of gross written premium in all states other than Michigan through December 31, 2011. This contract terminated on January 1, 2012 on a cut-off basis and resulted in the return of $11.8 million of ceded unearned premium, net of $4.3 million of deferred ceding commissions. Written premiums ceded under this agreement totaled $50.6 million.
Effective December 31, 2013, the Company entered into a new reinsurance agreement with four new third-party reinsurance companies. Under this agreement, the Company cedes 20% of premiums and losses in Alabama, Illinois, Louisiana and Texas, and 60% in California on policies in force on December 31, 2013 or written or renewed on and after that date. Written premiums ceded under this agreement totaled $22.2 million as of December 31, 2013. On January 1, 2014, the quota-share rate increases to 60% for all business in force in these same states and for new and renewal business through January 1, 2015.
The Company assumes reinsurance from a Texas county mutual insurance company (the county mutual) whereby the Company has assumed 100% of the policies issued by the county mutual for business produced by the Company’s owned general agents with policies in force prior to January 1, 2013. The county mutual does not retain any of this business and there are no loss limits other than the underlying policy limits. AIC has established a trust to secure the Company’s obligation under this reinsurance contract with a balance of $15.0 million and $27.7 million as of December 31, 2013 and 2012, of which $3.6 million and $9.9 million was held in cash equivalents as of December 31, 2013 and 2012, respectively. On January 1, 2013, the Company terminated this agreement on a cut-off basis and unearned premium of $11.8 million was returned to the ceding company.
The table below presents the ceded premiums written and ceded loss and loss adjustment expenses to the MCCA for the year ended December 31, 2012 and 2011 (in thousands):
The table below presents the total amount of receivables due from reinsurers as of December 31, 2013 and 2012 (in thousands):
The quota-share reinsurers and the excess of loss reinsurers all have at least A- ratings from A.M. Best. Accordingly, the Company believes there is minimal credit risk related to these reinsurance receivables. Under the reinsurance agreement with Vesta Insurance Group (VIG), including primarily Vesta Fire Insurance Corporation (VFIC), AIC had the right, under certain circumstances, to require VFIC to provide a letter of credit or establish a trust account to collateralize gross amounts due from VFIC under the reinsurance agreement. At December 31, 2013, the VFIC Trust held $16.6 million (after cumulative withdrawals of $9.0 million through December 31, 2013), consisting of a U.S. Treasury money market account held in cash and cash equivalents, to collateralize the $13.4 million net recoverable from VFIC.
VIG indemnified the Company for any losses due to uncollectible reinsurance related to reinsurance agreements entered into with unaffiliated reinsurers prior to December 31, 2003. As of December 31, 2013, all such unaffiliated reinsurers had A.M. best ratings of A- or better. The Company had reinsurance recoverable from VIG of $2.2 million and $2.5 million as of December 31, 2013 and 2012, respectively.
Property and equipment, net, consisted of the following as of December 31, 2013 and 2012 (in thousands):
The Company’s depreciation expense was $7.1 million, $10.0 million and $9.5 million for the years ended December 31, 2013, 2012 and 2011, respectively.
In 2012, the percentage of calendar year losses and loss adjustment expense to net premiums earned (the net loss ratio) was 77.8% compared with 78.0% in 2011. On an accident year basis, the net loss ratio was 74.0% in 2012 compared with 75.1% in 2011. Loss adjustment expenses include all of the business subject to the quota-share treaties with ceding commission income booked as an offset to selling, general and administrative expenses. As such, the quota-share treaties’ impact on the loss ratio was to increase it by 4.6 points for 2012 and 3.1 points for 2011. Excluding the impact of the quota-share, the net loss ratio for the 2012 accident year was 69.4% and 71.1% for the 2011 accident year. Management believes this decrease reflects the pricing, claims and underwriting actions that commenced in the second half of 2010 through 2011. Also reflected in the above numbers is the effect of catastrophes. For the 2012 accident year we have incurred catastrophes, net of reinsurance, equal to 2.0 points for 2012 compared to 1.5 points in 2011. The adverse prior period development recognized in 2012 was primarily due to an increase in the estimated severity for Louisiana bodily injury claims in 2011.
On February 28, 2012, the Company exercised its right to defer interest payments on the two notes payable mentioned above beginning with the scheduled interest payment due in March 2012 and continuing for a period of up to five years. The affected notes are associated with obligations to the Company’s unconsolidated trusts. The outstanding balance of the affected notes was $56.7 million as of December 31, 2013. The Company will continue to accrue interest on the principal during the interest deferral period and the unpaid deferred interest will also accrue interest. Deferred interest will be due and payable at the expiration of the interest deferral period and totaled $4.6 million as of December 31, 2013.
The Company recorded a $4.2 million pretax loss on extinguishment of debt as a result of the refinancing on September 30, 2013. The $4.2 million debt extinguishment loss resulted from the write-off of $2.2 million of deferred debt issuance costs and unamortized discount relating to the senior secured credit facility effective January 2007, $1.4 million of legal fees and a $0.6 million prepayment premium.
Repayment of the full $8.0 million will be on a first out basis, payable in full, on or prior to January 17, 2014, with priority over all other amounts outstanding under the senior secured credit facility. The incremental term loan lenders retained $2.5 million, representing non-cash original issue discount.
Of the total proceeds, $900 thousand is to be used solely for paying the incremental term loan lenders’ and administrative agent’s professional fees.
As of December 31, 2012, a non-cash $550,000 commitment fee was recorded in other liabilities, and subsequently added to the principal amount of the incremental term loan.
The incremental term loan lenders receive an 8% prepayment premium of the principal amount if the incremental term loan is prepaid.
In addition, the Company paid a 0.25% fee to all lenders that approved the amendment.
In December 2013, the Company entered into a capital lease obligation related to certain computer software, software licenses and hardware used in the Company’s insurance operations. The Company received cash proceeds from the financing in the amount of $4.9 million in January 2014. A receivable for settlement of this transaction was included in other assets as of December 31, 2013. The transaction proceeds, when received, will be pledged as collateral against all the Company’s obligations under the lease. The dollar amount of collateral pledged is set to decline over the term of the lease as the Company makes the scheduled lease payments. At the end of the initial term, the Company will have the right to purchase the software for a nominal fee, after which all rights, title and interest would transfer to the Company.
Tax effects of temporary differences that give rise to significant portions of the Company’s deferred tax assets and deferred tax liabilities at December 31, 2013 and 2012 were as follows (in thousands):
The change in valuation allowance attributable to continuing operations and other comprehensive income is presented for the years ended December 31 as follows (in thousands):
As of December 31, 2013, the Company has available for income tax purposes federal net operating loss carryforwards (NOL’s), which may be used to offset future taxable income. The Company’s NOL’s expire as follows (in thousands):
In 2006, the Company entered into an IT outsourcing contract with a data processing services provider under which the Company outsourced substantially all of its IT operations, including the Company’s data center, field support and application management. The initial term of the agreement was ten years, although it may be terminated for convenience by the Company at any time upon six months notice after the first two years, subject to the payment of certain stranded costs and other termination fees. In October 2012, the Company amended its Master Service Agreement with a third party whereby the Company assumed responsibility for managing substantially all of its IT operations, including data center and applications management at an annual cost of $6.1 million. In addition, the Company contracted with a third party to provide network infrastructure services for $1.2 million annually. This contract was terminated as of June 30, 2013. An early termination penalty was invoked by the third party whereby the Company will pay out $1.8 million over a twelve month period which started in July 2013. The Company’s IT outsourcing expenses were $3.5 million, $11.2 million and $13.0 million for the years ended December 31, 2013, 2012 and 2011, respectively.
As of December 31, 2013, the Company leased office space for its insurance companies in various locations throughout the United States. The Company’s operating lease rental expenses were $6.8 million, $8.8 million and $7.8 million for the years ended December 31, 2013, 2012 and 2011, respectively.
In December 2013, the Company was served with a complaint filed in the 44th Judicial District Court of Dallas County, Texas. The lawsuit also names as a defendant an unaffiliated county mutual insurance company (county mutual) for which the Company serves as managing general agent. The Company is contractually obligated to indemnify the county mutual under certain circumstances. Plaintiffs allege that in May 2013, they obtained a default judgment against an insured of the county mutual in the aggregate amount of $454,194, and, through entry of a turnover order, became assignees of the insured’s rights against the Company and the county mutual insurance company. Plaintiffs assert claims for breach of the duty to defend, breach of the duty of good faith and fair dealing, violations of the Texas Insurance Code, and negligence. Plaintiffs seek a declaratory judgment as well as damages in the amount of the default judgment, incidental and consequential damages, punitive damages, attorney’s fees and costs, pre and post-judgment interest, and statutory damages. The Company disputes Plaintiffs’ claims and intends to defend itself vigorously. No determination that an unfavorable outcome is either probable or remote can be made at this time. Similarly, no accurate estimate of the range of potential loss can be made at this time.
On March 20, 2013, the Company was served with a Class Action Petition for Damages and Penalties for Arbitrary and Capricious Behavior filed in the 13th Judicial District Court, Parish of Evangeline, Louisiana against USAgencies Casualty Insurance Company (USAgencies). The named plaintiffs allege that the denial of their first-party property damage claim based on USAgencies’ policy exclusion for driving under the influence of alcohol was arbitrary and capricious, and that USAgencies’ enforcement of the subject policy exclusion violates Louisiana public policy. On August 2, 2013, the Court ruled that USAgencies’ policy exclusion violated Louisiana public policy and was unenforceable. On August 30, 2013, USAgencies filed its application for supervisory writ with the Louisiana Third Circuit Court of Appeal, which was denied on November 5, 2013. The Company is now pursuing a regular appeal in the Louisiana Third Circuit Court of Appeal. At this time, no accurate estimate of the range of potential loss can be made.
On March 18, 2011, 433,500 shares of Affirmative’s common stock were issued on a restricted basis, and the voting rights for all of the shares were assigned to New Affirmative, LLC via a written irrevocable proxy at the time the stock awards were made. On August 10, 2011, the restricted shares were repurchased at par and 1,272,500 stock options were awarded to various executives. Stock options were awarded on February 24, 2012, to various executives totaling 750,000. On September 15, 2013, 250,000 stock options were awarded in exchange for the forfeiture of 600,000 stock options from the August 10, 2011 awards which were in excess of amounts then available for granting under the 2004 Plan.
In May 2004, the Company’s board of directors adopted and its stockholders approved the 2004 Stock Incentive Plan (2004 Plan) to enable the Company to attract, retain and motivate eligible employees, directors and consultants through equity-based compensatory awards, including stock options, stock bonus awards,
restricted and unrestricted stock awards, performance stock awards, stock appreciation rights and dividend equivalent rights. The maximum number of shares of common stock reserved for issuance under the 2004 Plan, as amended, is 3,000,000, subject to adjustment to reflect certain corporate transactions or changes in the Company’s capital structure. At December 31, 2013, 1,244,194 shares were reserved for future grants under the 2004 Plan.
The Company recognized total compensation expense related to the stock options of $300,000, $403,000 and $378,000 during 2013, 2012 and 2011, respectively. Compensation expense is included in selling, general and administrative expenses in the consolidated statements of operations. Total unrecognized compensation expense related to unvested stock options was $234,000 at December 31, 2013, which will be recognized over a weighted-average period of approximately 1.8 years.
Stock options outstanding and exercisable at December 31, 2013 were as follows (shares in thousands):
The stock options outstanding and exercisable at December 31, 2013 had aggregate intrinsic values of zero as the aggregate exercise price was greater than the aggregate market value. No stock options were exercised during 2013, 2012 or 2011.
Restricted Stock Awards • The Company recognized compensation expense related to the restricted stock awards of $0 in 2013, $4,000 during 2012 and $159,000 in 2011. Compensation expense is included in selling, general and administrative expenses in the consolidated statements of operations. As of December 31, 2013, there was no unrecognized compensation cost related to unvested restricted stock awards.
The aggregate fair value of restricted stock awards vested during 2012 and 2011 was $1,000 and $15,000 at the date of vesting, respectively.
The Company sponsors a defined contribution retirement plan under Section 401(k) of the Internal Revenue Code. The plan covers substantially all employees who meet specified service requirements. Under the plan, the Company may, at its discretion, match 100% of each employee’s contribution, up to 3% of the employee’s earnings, plus 50% of each employee’s contribution for the next 2% of the employee’s salary. There were no employer matching contributions to the 401(k) plan in 2013, 2012 or 2011.
Net gain in accumulated other comprehensive income (loss) reclassifications for previously unrealized net gains on available-for-sale securities was $49,000 and $888,000 for the years ended December 31, 2013 and 2012, respectively. The gain was not net of any taxes due to the valuation allowance for deferred income taxes.
The Company’s insurance company subsidiaries are subject to risk-based capital standards and other minimum capital and surplus requirements imposed under applicable state laws, including the laws of their state of domicile. The risk-based capital standards, based upon the Risk-Based Capital Model Act, adopted by the National Association of Insurance Commissioners (NAIC), require the Company’s insurance company subsidiaries to report their results of risk-based capital calculations to state departments of insurance and the NAIC. Failure to meet applicable risk-based capital requirements or minimum statutory capital requirements could subject the Company to further examination or corrective action imposed by state regulators, including limitations on the Company’s writing of additional business, state supervision or liquidation. Any changes in existing risk-based capital requirements or minimum statutory capital requirements may require the Company to increase its statutory capital levels. At December 31, 2013, each of the Company’s insurance subsidiaries maintained a risk-based capital level that was in excess of an amount that would require any corrective actions.
Level 2 - Observable prices in active markets for similar assets or liabilities. Prices for identical or similar assets or liabilities in markets that are not active. Directly observable market inputs for substantially the full term of the asset or liability, e.g., interest rates and yield curves at commonly quoted intervals, volatilities, prepayment speeds, default rates, and credit spreads. Market inputs that are not directly observable, but are derived from or corroborated by observable market data.
The following table provides information as of December 31, 2013 about the Company’s financial assets measured at fair value on a recurring basis (in thousands):
The following table provides information as of December 31, 2012 about the Company’s financial assets measured at fair value on a recurring basis (in thousands):
Financial assets classified as Level 2 in the fair value hierarchy include mortgage-backed securities, tax-exempt securities, corporate bonds and certificates of deposit. The fair value of these securities is determined based on observable market inputs provided by independent third-party pricing services. To date, the Company has not experienced a circumstance where it has determined that an adjustment is required to a quote or price received from independent third-party pricing sources. To the extent the Company determines that a price or quote is inconsistent with actual trading activity observed in that investment or similar investments, the Company
The Company did not have any transfers between Levels 1 and 2 during the years ended December 31, 2013 or 2012.
Fair values represent the Company’s best estimates and may not be substantiated by comparisons to independent markets and, in many cases, could not be realized in immediate settlement of the instruments.
The following table presents the carrying value and estimated fair value of the Company’s financial assets and liabilities disclosed, but not carried, at fair value at December 31, 2013 and the level within the fair value hierarchy (in thousands):
that insurance companies domiciled in those states prepare their statutory-basis financial statements in accordance with the National Association of Insurance Commissioners Accounting Principles and Procedures Manual subject to any deviations prescribed or permitted by the insurance commissioner in each state of domicile.
Affirmative Insurance Company of Michigan (AIC of Michigan), USAgencies Casualty Insurance Company, Inc. (Casualty), and USAgencies Direct Insurance Company (Direct) are wholly-owned subsidiaries of AIC and are included as common stock investments on AIC’s balance sheet in its statutory surplus. In November 2012, a former subsidiary of AIC, Insura Property and Casualty Company was merged into AIC and Direct was sold from AIC to Casualty. The following table summarizes selected statutory information of the Company’s insurance subsidiaries ended December 31 (in thousands):
The following is a summary of the Company’s unaudited quarterly consolidated results from continuing operations for the years ended December 31, 2013 and 2012 (in thousands, except per share data):