Ceded premiums increased from $87.9 million for the year ended December 31, 2014 to $148.5 million for the year ended December 31, 2015. The increase in ceded premiums is primarily a result of the significant increase in the policies in force noted above, in particular the introduction of commercial residential business which has higher reinsurance costs as measured against gross earned premium than personal residential. The increase in ceded premiums was partially offset by lower reinsurance costs due to favorable reinsurance market conditions and the availability of lower cost reinsurance related to $477.5 million of catastrophe bonds issued by Citrus Re, and improved geographic spread of risk.
Our gross expense ratio decreased from 22.5% for the year ended December 31, 2014 to 19.7% for the year ended December 31, 2015, primarily as a result of general and administrative expenses increasing at significantly slower pace than gross premiums earned.
Provision for income taxes was $21.2 million and $27.2 million for the years ended December 31, 2013 and 2014, respectively. Our effective tax rates for the years ended December 31, 2013 and 2014 were 38.3% and 36.6%, respectively. The decrease in the effective tax rate is a result of limited liability company status income in 2014, prior to the conversion of the Company to a corporation in May 2014 compared to a loss recognized by the limited liability company status of the parent company in 2013.
The Company defers certain costs in connection with written policies, called Deferred Policy Acquisition Costs (“DPAC”), net of corresponding amounts of ceded reinsurance commissions, called Deferred Reinsurance Ceding Commissions (“DRCC”). Net DPAC is amortized over the effective period of the related insurance policies.
Aggregate Coverage. In addition to the layers described above, the Company also purchased $170 million of aggregate reinsurance coverage for losses and loss adjustment expenses in excess of $401.5 million for a first catastrophic event. To the extent that this coverage was not fully exhausted in the first catastrophic event, it provided coverage commencing at its reduced retention levels for second and subsequent events and where underlying coverage has been previously exhausted. There is no reinstatement of the aggregate reinsurance coverage once exhausted, but it did provide coverage for multiple events.
CAT Bond Layer. Immediately above the FHCF layer is the coverage provided by the reinsurance agreements entered into with Citrus Re Ltd, as described above in this footnote. The first contract with Citrus Re Ltd provides $150 million of coverage and the second contract provides an additional $50 million of coverage. Osprey provides $25 million of coverage alongside the second contract.
For a first catastrophic event, the Company’s reinsurance program provides coverage for $990 million of losses and loss adjustment expenses, including its retention, and the Company was responsible for all losses and loss adjustment expenses in excess of such amount. For subsequent catastrophic events, the Company’s total available coverage depends on the magnitude of the first event, as the Company may have coverage remaining from layers that were not previously fully exhausted. The Company purchased reinstatement premium protection insurance to provide an additional $185 million of coverage. The Company aggregate reinsurance layer also provides coverage for second and subsequent events to the extent not exhausted in prior events.
The Company’s Retention. For the first catastrophic event, the Company has a primary retention of the first $35 million of losses and loss adjustment expenses, of which Osprey is responsible for $20 million. For a second event, Heritage P&C’s primary retention decreases to $5 million and Osprey is responsible for $10 million. To the extent that there is reinsurance coverage remaining, Heritage P&C has a $5 million primary retention for events beyond the second catastrophic event. Osprey has no primary retention beyond the second catastrophic event.
On December 2, 2014, the Company granted options to purchase 1,326,923 shares to certain employees and directors. The employee options were awarded with the strike price set at the fair market value at the grant date, and vest at 50 percent upon grant and 50 percent on April 30, 2015 with an expiration date of December 2, 2017. The directors’ options were awarded with the strike price set at the fair market value at the grant date, and vest quarterly commencing on January 1, 2015 with an expiration date of December 2, 2017. The fair value of each option grant, which ranged from $3.07 to $3.54 per option granted in 2014, is estimated on the date of grant using the Black-Scholes option-pricing model.
In February 2016, the Commissioner of the Hawaii Division of Insurance approved the filing for the indirect acquisition of ZIC. The Company anticipates to complete the acquisition of ZAC and its wholly-owned subsidiaries, HI Holdings, Inc. and Zephyr Insurance Company, Inc. (“Zephyr”), a specialty insurance provider in Hawaii in March 2016. The acquisition purchase price is for approximately $120 million adjusted by any increase or decrease in stockholders equity of ZAC.