Adjusted net income is considered a non-GAAP financial measure because it reflects the following adjustments to net income, which is the most directly comparable measure calculated in accordance with GAAP: the pro forma provision for income taxes as if the Company had been treated as a C Corporation for each period presented, and the exclusion (net of tax benefit) of the increase in the Company’s deferred tax asset as a result of the conversion to C Corporation status, the amount of founder special compensation and the non-recurring, infrequent or unusual offering-related expenses and contract modification expense related to the amendment to our alliance agreement with CUNA Mutual. Management believes this measure is helpful to investors because it provides comparability in evaluating core financial performance between periods before and after the completion of our private placement in June 2014. Management uses adjusted net income to evaluate core financial performance against historical results without the effect of these items.
An allowance for policy cancellations is provided for the estimated amount of return premiums and policy fees, net of commission expense and premium taxes that will be incurred on expected future policy cancellations associated with the Company’s CPI business. Premiums and cancellation data are accumulated by accounting month (month in which the premium was written/collected), lending institution and at the corporate level. The estimation methodology utilizes actual cancellation rates (premium refunds divided by premiums written by accounting month) to determine expected future cancellations for that accounting month. The estimate for each accounting month decreases each subsequent month as actual refunds emerge. While management believes the amounts included in the consolidated financial statements are adequate, such estimates may be more or less than the amounts ultimately refunded. The estimates are reviewed quarterly by management, and any changes are reflected in current operations.
Alliance with CUNA Mutual. The Company’s alliance with CUNA Mutual that began in 2009 provides us access to a wider array of clients and added significant additional scale to our CPI business. For the years ended December 31, 2016, 2015 and 2014, we have generated net premiums earned of $69.6 million, $59.5 million and $40.7 million, respectively, through the alliance with CUNA Mutual. Prior to July 1, 2014, this business was subject to a 50% quota share agreement with CUNA Mutual. Effective July 1, 2014, we amended the alliance agreement to increase our retention of the business subject to the alliance to 70% in exchange for payments made to CUNA Mutual totaling $17.8 million. The Company’s net premiums earned increased $18.6 million, $15.8 million and $5.4 million related to the amendment of the alliance agreement for the years ended December 31, 2016, 2015 and 2014, respectively. In addition, the term of the alliance has been extended at least through July 31, 2018.
Adjusted pre-tax income. Our financial statements are presented in conformity with generally accepted accounting principles in the U.S. (“GAAP”). Adjusted pre-tax income is considered a non-GAAP financial measure because it reflects adjustments to pre-tax income, which is the most directly comparable measure calculated in accordance with GAAP, for the amount of founder special compensation and the non-recurring offering-related expenses and contract modification expense related to the amendment to our alliance with CUNA Mutual, as applicable. The Company’s management (“Management”) believes this measure is helpful to investors because it provides comparability in evaluating core financial performance between periods before and after the completion of our private placement in June 2014. Management uses adjusted pre-tax income to evaluate core financial performance against historical results without the effect of these items.
The liability for unpaid losses and LAE includes an estimate for claims reported and an additional liability for claims incurred but not reported at the balance sheet date, as well as estimates of the expenses associated with processing and settling all reported and unreported claims, less estimates of anticipated salvage and subrogation recoveries. Estimates are based upon past loss experience modified for current trends as well as economic, legal and social conditions. Loss reserves are not discounted to present value, which would involve recognizing the time value of money and offsetting estimates of future payments by future expected investment income.
The Company has three statutory business trusts that were formed between 2002 and 2004, for the sole purpose of issuing $44.5 million of trust preferred securities in private offering transactions. The trusts used the proceeds from these offerings, together with the equity proceeds received upon their initial formation from TBA, an indirect wholly-owned subsidiary of State National, to purchase variable-rate subordinated debentures issued by TBA. All voting securities of the trusts are owned by TBA, and the debentures are the sole assets of the trusts. The trusts meet the obligations of the trust preferred securities with the interest and principal paid on the debentures. These trusts’ interest rates range from 3.80% to 4.10% plus the three-month LIBOR. The three-month LIBOR at December 31, 2016, was 1.0%. All of the debentures mature between 2032 and 2034.