Like other sectors of the insurance industry, the workers’ compensation sector experiences underwriting cyclicality, which generally underpins changes in premium rates. This cyclicality is determined by a number of factors, but there are two notable drivers. First, ultimate loss costs become more difficult to predict when claims remain open for longer periods, generally as a result of wage and medical cost inflation. For example, the NCCI Report indicates that medical costs per claim increased by approximately 6.4% on average per year from 1995 through 2014. Second, the amount of investment income insurance carriers can earn may also influence such carrier’s underwriting practices. Investment income can be sufficiently significant, particularly when claims remain open for longer periods, to compensate for underwriting losses, such as those the workers’ compensation industry has experienced in recent years, as reflected in a greater than 100% combined ratio for all but two years from 1990 to 2014. However, in periods of low interest rates, similar to the current investment environment, insurance carriers cannot generate sufficient investment income to offset underwriting losses, and as a result have demanded higher premium rates. This has led to a modest “hardening” of the workers’ compensation market.
Operating cash flow for the year ended December 31, 2015 was $37.1 million compared to $4.5 million for the year ended December 31, 2014, an increase of $32.6 million. The increase was principally attributable to a $107.0 million increase in total fee income and fee income from related party, partially offset by an $82.7 million increase in total expenses (excluding depreciation and amortization, costs from debt payoff, stock compensation expenses, severance expenses, public offering costs, acquisition costs and changes in fair value of assets and liabilities, which are added back to net income to arrive at Adjusted EBITDA), a decrease of $6.8 million income tax expense and a decrease of $5.7 million interest expense, which were partially offset by a $4.1 million increase in capital expenditures.
Commission Expense. Commission expense for the year ended December 31, 2015 was $35.9 million compared to $16.9 million for the year ended December 31, 2014, an increase of $19.0 million or 112%. This increase is principally due to corresponding increase in fee income. Our commission rates for our brokerage and policyholder services were unchanged for the year ended December 31, 2015 relative to the year ended December 31, 2014 and, accordingly, the net increase in commission expense was related to changes in the volume of business we managed.
and these financial projections. We then discounted these payments to present value using a risk-adjusted rate that takes into consideration market-based rates of return that reflect the ability of the acquired entity to achieve the targets. Changes in financial projections, market participant assumptions for revenue growth and/or profitability, or the risk-adjusted discount rate, would result in a change in the fair value of recorded earnout obligations.
Commission expense for the year ended December 31, 2014 was $16.9 million compared to $8.8 million for the year ended December 31, 2013, an increase of $8.2 million or 93%. This increase is principally due to our assumption of the obligation to pay commissions to retail agencies producing Guarantee Insurance policies from August 6, 2014 pursuant to the new agreement with Guarantee Insurance to provide all of our brokerage and policyholder services to Guarantee Insurance, as described elsewhere in this 10-K. We did not incur such commission expense for the year ended December 31, 2013. Additionally, we incurred additional
All obligations under the PennantPark Loan Agreement were guaranteed by certain of our subsidiaries as well as several affiliated entities, including GUI, and were generally secured by the tangible and intangible property of the borrowers and the guarantors. In connection with both tranches of the PennantPark Loan Agreement, we issued warrants to the PennantPark Entities to purchase an aggregate of 1,110,555 shares of our common stock. As of December 31, 2015 all warrants associated with Pennant Park have been settled for shares of the company’s stock.
See above in “Recent Events” for a discussion of PIPE Transaction.
In the preparation of our consolidated financial statements as of December 31, 2015, management evaluated all material subsequent events or transactions that occurred after the balance sheet date through the date on which the financial statements were issued for potential recognition in our consolidated financial statements and/or disclosure in the notes thereto.
The deferred purchase consideration disclosed in the foregoing table represents non-contingent purchase consideration payable to sellers. These include $4.5 million payable to a seller of TriGen Holding Group, Inc. on the first anniversary of the effective date, deferred stock consideration of $1.2 million and cash escrow amounts of $0.5 million to sellers of Global HR Research LLC payable on the anniversary of the effective date, all recorded at fair value.
The consideration paid in excess of GUI’s carrying amounts for the net assets acquired as of August 6, 2014, which was charged to equity as a deemed dividend, was as follows (in thousands):
Equity and fixed income security investments are carried at fair value. We classify these investments as a trading portfolio with changes to the fair value of investments marked-to-market value and reflected in the aggregate net income or loss for the period incurred. The trading portfolio is utilized to generate investment income with available cash on hand.
The Company’s earnout payable on acquisitions, deferred purchase consideration, and warrant redemption liability, for which carrying values were equal to fair values, classified by level within the fair value hierarchy, were as follows as of December 31, 2015 and 2014:
Pursuant to Program Administrator Agreement, we act as Guarantee Insurance’s exclusive general agent for the purpose of underwriting, issuing and delivering insurance contracts in connection with Guarantee Insurance’s workers’ compensation insurance program. The agreement with Guarantee Insurance remains in effect until terminated by either party upon 180 days’ prior written notice to the other party for cause. Guarantee Insurance may also terminate the agreement, in whole or in part, immediately upon written notice to us in the event of our insolvency or bankruptcy, systematic risk-binding that is not in compliance with the applicable underwriting guidelines or procedures and the occurrence of certain other events. The fees we receive are based upon premiums written for each account bound with Guarantee Insurance.
Our prices by customer for our brokerage and policyholder services and claims administration services were unchanged for the years ended December 31, 2015 and 2014, and, accordingly, the net increase in fee income was solely related to changes in the volume of business we managed.
whether the transaction would likely impair the judgment of a director or executive officer to act in the best interest of the Company;
As described in Note 1 to our consolidated financial statements, “Description of Business and Basis of Presentation,” Patriot National filed a consolidated federal income tax return for the period from inception (November 15, 2013) to December 31, 2014 which included the results of its wholly and majority owned subsidiaries, all of which became subsidiaries of the Company effective November 27, 2013.
On February 1, 2016, we entered into an Amendment No. 2 to the TriGen Stock Purchase Agreement splitting the payment of the Class B Purchase price into 2 installment payments.