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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q

 

 

 

 

(Mark One)

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

 

For the quarterly period ended

March 31, 2015

 

Or

 

 

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

 

 

 

 

 

For the transition period from

 

to

 

 

Commission File Number

001-36712

 

 

 

STATE NATIONAL COMPANIES, INC.

(Exact name of registrant as specified in its charter)

 

 

 

 

Delaware

 

26-0017421

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

1900 L. Don Dodson Drive, Bedford, Texas 76021

 

76021

(Address of principal executive offices)

 

(Zip Code)

 

 

 

(817) 265-2000

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes   No 

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes   No 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

 

Large accelerated filer 

Accelerated filer 

Non-accelerated filer 
(Do not check if a smaller reporting company)

Smaller reporting company 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes No

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

 

 

 

Class

 

Outstanding at May 14, 2015

(Common stock, $.001 par value)

 

44,477,162 Shares

 

 

 

 


 

STATE NATIONAL COMPANIES, INC.

 

INDEX

 

 

 

 

 

 

 

 

    

    

    

Page No.

 

Part I - Financial Information 

 

 

 

 

 

 

 

Item 1: 

 

Unaudited Condensed Consolidated Financial Statements

 

 

 

 

 

Condensed Consolidated Balance Sheets –
March 31, 2015 (unaudited) and December 31, 2014

 

1

 

 

 

 

 

 

 

 

 

Unaudited Condensed Consolidated Statements of Income –
three months ended March 31, 2015 and 2014

 

3

 

 

 

 

 

 

 

 

 

Unaudited Condensed Consolidated Statements of Comprehensive Income –
three months ended March 31, 2015 and 2014

 

4

 

 

 

 

 

 

 

 

 

Unaudited Condensed Consolidated Statements of Shareholders’ Equity –
three months ended March 31, 2015 and 2014

 

5

 

 

 

 

 

 

 

 

 

Unaudited Condensed Consolidated Statements of Cash Flows –
three months ended March 31, 2015 and 2014

 

6

 

 

 

 

 

 

 

 

 

Notes to Unaudited Condensed Consolidated Financial Statements 

 

7

 

 

 

 

 

 

 

Item 2: 

 

Management’s Discussion and Analysis of Financial
Condition and Results of Operations

 

20

 

 

 

 

 

 

 

Item 3: 

 

Quantitative and Qualitative Disclosures About Market Risk

 

36

 

 

 

 

 

 

 

Item 4: 

 

Controls and Procedures

 

37

 

 

 

 

 

 

 

Part II - Other Information 

 

 

 

 

 

 

 

Item 1: 

 

Legal Proceedings

 

38

 

 

 

 

 

 

 

Item 1A: 

 

Risk Factors

 

38

 

 

 

 

 

 

 

Item 2: 

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

38

 

 

 

 

 

 

 

Item 3: 

 

Defaults Upon Senior Securities

 

38

 

 

 

 

 

 

 

Item 4: 

 

Mine Safety Disclosures

 

38

 

 

 

 

 

 

 

Item 5: 

 

Other Information

 

38

 

 

 

 

 

 

 

Item 6: 

 

Exhibits

 

38

 

 

 

 

 

 


 

PART I - FINANCIAL INFORMATION

 

Item 1:  Unaudited Condensed Consolidated Financial Statements

 

STATE NATIONAL COMPANIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

($ in thousands, except for share and per share information)

 

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

 

 

2015

 

2014

 

Assets

 

 

(Unaudited)

 

 

 

 

Investments:

 

 

 

 

 

 

 

Fixed-maturity securities – available-for-sale, at fair value (amortized cost – $310,676,  $305,019, respectively)

 

$

318,445 

 

$

309,911 

 

Equity securities – available-for-sale, at fair value (cost – $1,967,  $1,419, respectively)

 

 

3,171 

 

 

2,642 

 

Total investments

 

 

321,616 

 

 

312,553 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

31,239 

 

 

38,348 

 

Restricted cash and investments

 

 

3,716 

 

 

6,597 

 

Accounts receivable from agents, net

 

 

23,295 

 

 

18,528 

 

Reinsurance recoverable on paid losses

 

 

948 

 

 

1,200 

 

Deferred acquisition costs

 

 

921 

 

 

1,036 

 

Reinsurance recoverables

 

 

1,711,956 

 

 

1,656,534 

 

Property and equipment, net (includes land held for sale – $1,034,  $1,034, respectively)

 

 

18,020 

 

 

18,397 

 

Interest receivable

 

 

1,829 

 

 

1,795 

 

Deferred income taxes, net

 

 

23,037 

 

 

23,864 

 

Goodwill and intangible assets, net

 

 

6,502 

 

 

6,683 

 

Other assets

 

 

5,992 

 

 

6,229 

 

Total assets

 

$

2,149,071 

 

$

2,091,764 

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

1


 

STATE NATIONAL COMPANIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (continued)

 ($ in thousands, except for share and per share information)

 

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

 

    

2015

    

2014

 

Liabilities

 

 

(Unaudited)

 

 

 

 

Unpaid losses and loss adjustment expenses

 

$

1,235,049 

 

$

1,209,905 

 

Unearned premiums

 

 

508,931 

 

 

480,124 

 

Allowance for policy cancellations

 

 

50,428 

 

 

55,500 

 

Deferred ceding fees

 

 

25,401 

 

 

23,612 

 

Accounts payable to agents

 

 

2,071 

 

 

2,448 

 

Accounts payable to insurance companies

 

 

2,386 

 

 

4,399 

 

Subordinated debentures

 

 

44,500 

 

 

44,500 

 

Income taxes payable

 

 

700 

 

 

1,762 

 

Other liabilities

 

 

27,877 

 

 

28,642 

 

Total liabilities

 

 

1,897,343 

 

 

1,850,892 

 

 

 

 

 

 

 

 

 

Shareholders’ equity

 

 

 

 

 

 

 

Common stock, $.001 par value (150,000,000 shares authorized; 44,477,162 and 44,247,102 shares issued at March 31, 2015 and December 31, 2014, respectively)

 

 

44 

 

 

44 

 

Preferred stock, $.001 par value (10,000,000 shares authorized; no shares issued and outstanding at March 31, 2015 and December 31, 2014)

 

 

 —

 

 

 —

 

Additional paid-in capital

 

 

221,343 

 

 

220,577 

 

Retained earnings

 

 

24,340 

 

 

16,108 

 

Accumulated other comprehensive income

 

 

6,001 

 

 

4,143 

 

Total shareholders’ equity

 

 

251,728 

 

 

240,872 

 

Total liabilities and shareholders’ equity

 

$

2,149,071 

 

$

2,091,764 

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 

 

 

 

 

 

 

 

 

 

2


 

STATE NATIONAL COMPANIES, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME

 ($ in thousands, except for per share information)

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

    

March 31,

    

March 31,

 

 

 

2015

 

2014

 

Revenues:

 

 

 

 

 

 

 

Premiums earned

 

$

29,284 

 

$

22,786 

 

Commission income

 

 

370 

 

 

417 

 

Ceding fees

 

 

14,144 

 

 

9,902 

 

Net investment income

 

 

1,681 

 

 

1,112 

 

Realized net investment gains

 

 

265 

 

 

400 

 

Other income

 

 

385 

 

 

910 

 

Total revenues

 

 

46,129 

 

 

35,527 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

Losses and loss adjustment expenses

 

 

13,533 

 

 

9,996 

 

Commissions

 

 

1,497 

 

 

836 

 

Taxes, licenses, and fees

 

 

712 

 

 

605 

 

General and administrative

 

 

16,142 

 

 

14,577 

 

Founder special compensation

 

 

 —

 

 

11,203 

 

Interest expense

 

 

500 

 

 

574 

 

Total expenses

 

 

32,384 

 

 

37,791 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

 

13,745 

 

 

(2,264)

 

 

 

 

 

 

 

 

 

Income taxes:

 

 

 

 

 

 

 

Current tax expense

 

 

5,244 

 

 

1,678 

 

Deferred tax benefit

 

 

(173)

 

 

(542)

 

 

 

 

5,071 

 

 

1,136 

 

Net income (loss)

 

$

8,674 

 

$

(3,400)

 

 

 

 

 

 

 

 

 

Net income (loss) per share attributable to common shareholders:

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.20 

 

$

(0.10)

 

Diluted earnings per share

 

 

0.20 

 

 

(0.10)

 

 

 

 

 

 

 

 

 

Dividends, per share

 

$

0.01 

 

$

0.34 

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

3


 

STATE NATIONAL COMPANIES, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 ($ in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

    

March 31,

    

March 31,

 

 

 

2015

 

2014

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

8,674 

 

$

(3,400)

 

 

 

 

 

 

 

 

 

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

Unrealized gains on securities:

 

 

 

 

 

 

 

Unrealized holding gains during the period

 

 

2,946 

 

 

1,607 

 

Tax effect on unrealized holding gains during the period

 

 

(1,031)

 

 

(545)

 

Less: reclassification adjustments for realized gains included in net income

 

 

(88)

 

 

(291)

 

Tax effect on reclassification adjustments for realized gains included in net income

 

 

31 

 

 

100 

 

Other comprehensive income

 

 

1,858 

 

 

871 

 

 

 

 

 

 

 

 

 

Total comprehensive income (loss)

 

$

10,532 

 

$

(2,529)

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 

4


 

STATE NATIONAL COMPANIES, INC.

unaudited condensed Consolidated Statements of Shareholders’ Equity

 ($ in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

Accumulated

    

 

 

 

 

 

 

 

 

Additional 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

Common

 

Paid-In

 

Retained

 

Treasury

 

Comprehensive

 

 

 

 

 

 

Stock

 

Capital

 

Earnings

 

Stock

 

Income

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2013

 

$

41 

 

$

24,367 

 

$

128,830 

 

$

(10,000)

 

$

2,116 

 

$

145,354 

 

Retirement of treasury stock

 

 

(7)

 

 

(9,993)

 

 

 —

 

 

10,000 

 

 

 —

 

 

 —

 

Issuance of common stock

 

 

31 

 

 

289,291 

 

 

 —

 

 

 —

 

 

 —

 

 

289,322 

 

Costs directly attributable to the issuance of common stock

 

 

 —

 

 

(1,578)

 

 

 —

 

 

 —

 

 

 —

 

 

(1,578)

 

Redemption of existing common stock

 

 

(21)

 

 

(190,574)

 

 

 —

 

 

 —

 

 

 —

 

 

(190,595)

 

Stock-based compensation expense

 

 

 —

 

 

2,012 

 

 

 —

 

 

 —

 

 

 —

 

 

2,012 

 

Conversion from S corporation to C corporation tax status

 

 

 —

 

 

107,052 

 

 

(107,052)

 

 

 —

 

 

 —

 

 

 —

 

Dividends declared

 

 

 —

 

 

 —

 

 

(16,683)

 

 

 —

 

 

 —

 

 

(16,683)

 

Net income

 

 

 —

 

 

 —

 

 

11,013 

 

 

 —

 

 

 —

 

 

11,013 

 

Other comprehensive income, net of tax

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

2,027 

 

 

2,027 

 

Balance at December 31, 2014

 

 

44 

 

 

220,577 

 

 

16,108 

 

 

 —

 

 

4,143 

 

 

240,872 

 

Stock-based compensation expense

 

 

 —

 

 

766 

 

 

 —

 

 

 —

 

 

 —

 

 

766 

 

Dividends declared

 

 

 —

 

 

 —

 

 

(442)

 

 

 —

 

 

 —

 

 

(442)

 

Net income

 

 

 —

 

 

 —

 

 

8,674 

 

 

 —

 

 

 —

 

 

8,674 

 

Other comprehensive income, net of tax

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

1,858 

 

 

1,858 

 

Balance at March 31, 2015

 

$

44 

 

$

221,343 

 

$

24,340 

 

$

 —

 

$

6,001 

 

$

251,728 

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

5


 

STATE NATIONAL COMPANIES, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 ($ in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

    

March 31,

    

March 31,

 

 

 

2015

 

2014

 

Operating activities

 

 

 

 

 

 

 

Net cash provided by (used in) operating activities

 

$

(437)

 

$

(17,827)

 

 

 

 

 

 

 

 

 

Investing activities

 

 

 

 

 

 

 

Purchase of investments

 

 

(20,596)

 

 

(12,022)

 

Proceeds from sale of investments

 

 

6,938 

 

 

3,111 

 

Proceeds from maturities and principal receipts

 

 

7,034 

 

 

6,942 

 

Proceeds from dispositions of property and equipment

 

 

55 

 

 

(54)

 

Purchase of property and equipment

 

 

(103)

 

 

(299)

 

Net cash used in investing activities

 

 

(6,672)

 

 

(2,322)

 

 

 

 

 

 

 

 

 

Financing activities

 

 

 

 

 

 

 

Dividends paid

 

 

 —

 

 

(11,519)

 

Net cash used in financing activities

 

 

 —

 

 

(11,519)

 

 

 

 

 

 

 

 

 

Net change in cash and cash equivalents

 

 

(7,109)

 

 

(31,668)

 

Cash and cash equivalents at beginning of period

 

 

38,348 

 

 

69,431 

 

Cash and cash equivalents at end of period

 

$

31,239 

 

$

37,763 

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 

6


 

Table of Contents

STATE NATIONAL COMPANIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1. Summary of Significant Accounting Policies

Description of Business

State National Companies, Inc. (the Company) refers to a group of companies that conduct insurance-related activities along two major segments. The Company’s Program Services segment generates fee income, in the form of ceding fees, by offering issuing carrier capacity to both specialty general agents and other producers (GAs), who sell, control, and administer books of insurance business that are supported by third parties that assume reinsurance risk.  Substantially all of the risk associated with the program business is ceded to unaffiliated, highly rated reinsurance companies or other reinsurers that provide substantial collateral. The Company’s Lender Services segment involves the writing and insuring of lines of insurance marketed to lending institutions, primarily collateral protection insurance (CPI) policies.

Basis of Presentation

Our unaudited condensed consolidated financial statements included herein have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) and include our accounts and the accounts of our subsidiaries. All significant intercompany accounts and those transactions have been eliminated in consolidation.  Certain footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to rules and regulations of the Securities and Exchange Commission (SEC) for interim financial reporting. These unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements for the years ended December 31, 2014 and 2013.

The interim financial data as of March 31, 2015 and 2014 is unaudited. However, in the opinion of the Company’s management (Management), the interim data includes all adjustments, consisting of normal recurring adjustments, necessary for fair statements of the results for the interim period. The results of operations for the period ended March 31, 2015 and 2014 are not necessarily indicative of the operating results to be expected for the full year.

Refer to “Summary of Significant Accounting Policies” in our consolidated financial statements for the years ended December 31, 2014, 2013 and 2012 for information on accounting policies that we consider critical in preparing our consolidated financial statements.

Estimates

The preparation of financial statements in conformity with GAAP requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ materially from these estimates.

Earnings Per Share

The computation of earnings per share is based upon the weighted average number of common shares outstanding during the period plus the effect of common shares potentially issuable (in periods in which they have a dilutive effect).  Earnings per share have been adjusted to reflect a 736 for 1 stock split in the form of a stock dividend on June 23, 2014.

Income Taxes

Historically, the Company had elected for its parent company to be taxed for federal income tax purposes as a “Subchapter S corporation” under the Internal Revenue Code.  On June 25, 2014, the Company completed a private placement of common stock, which resulted in the termination of its Subchapter S corporation status.  Prior to this change in tax status, deferred income taxes were recorded only on the Company’s insurance subsidiaries (and their immediate parent) to reflect

7


 

Table of Contents

STATE NATIONAL COMPANIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued)

 

the tax consequences on future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each year-end. All other entities included in the consolidated group filed under Subchapter S Corporation status; therefore, no provision for income taxes had been recorded for these entities.  The Company recorded a net deferred income tax benefit related to this change in tax status to reflect the tax consequences on future years of differences between the tax bases of assets and liabilities and their financial reporting amounts.

For any uncertain tax positions not meeting the “more likely than not” recognition threshold, accounting standards require recognition, measurement, and disclosure in the financial statements. There were no uncertain tax positions at March 31, 2015 and December 31, 2014.

Stock-based Compensation

Compensation expense for stock-based payments is recognized based on the measurement-date fair value for awards that will settle in shares.  Compensation expense for restricted stock grants and stock option awards that contain a service condition are recognized on a straight line pro rata basis over the vesting period.  For restricted stock awards that contain a performance condition, the expense is recognized based on the awards expected to vest and the cumulative expense is adjusted whenever our estimate of the number of awards to vest changes.  See Note 8 — “Stock-based Payments” for related disclosures.

Minimum Ceding Fees

Minimum ceding fees earned are based on estimates of annual premiums to be written for those programs that are subject to minimum premium levels and related ceding fees.  These estimates are based upon various assumptions made regarding the production plans for the underlying program.  These assumptions are reviewed by Management and the amount of annual premiums expected to be written are re-estimated as needed.  As actual premiums emerge and revisions are made to earlier estimates, minimum ceding fees are earned or reversed and are reflected in current operations.

Recent Accounting Pronouncements

In June 2014, the FASB issued an accounting standards update (ASU 2014-12), “Compensation – Stock Compensation” (Topic 718). The main provision of this ASU requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition.  Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. If the performance target becomes probable of being achieved before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period. This ASU is effective for annual reporting periods beginning after December 15, 2015 and interim periods within those annual periods.  The Company awarded performance based stock compensation on March 30, 2015.  The impact of this accounting pronouncement to the Company’s financial statements has not yet been determined.

In May 2014, the FASB issued an accounting standards update (ASU 2014-09), “Revenue from Contracts with Customers” (Topic 606). The core guidance of the ASU presents a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. The ASU provides a five-step analysis of transactions to determine when and how revenue is recognized and requires additional disclosures sufficient to describe the nature, amount, timing and uncertainty of revenue and cash flows for these transactions. This ASU is effective for annual periods beginning after December 15, 2016, including interim periods within that period.  Early adoption is not

8


 

Table of Contents

STATE NATIONAL COMPANIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued)

 

permitted under GAAP.  As insurance contracts are excluded from this ASU, the Company is currently evaluating what impact, if any, this ASU will have on our financial results and disclosures and which adoption method to apply.

In April 2015, the FASB issued an accounting standards update (ASU 2015-03), “Interest – Imputation of Interest” (Topic 835).  The new guidance requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. For public business entities, the guidance is effective for annual and interim periods beginning after December 15, 2015. Early adoption is permitted.  The Company does not plan to early adopt and expects the impact of this pronouncement to be minimal.

2. Investments

The following table summarizes information on the amortized cost, gross unrealized gains and losses, and the fair value of investment securities by class:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Cost or 

    

Gross 

    

Gross 

    

 

 

March 31, 2015

 

Amortized 

 

Unrealized 

 

Unrealized 

 

Fair

 

($ in thousands)

 

Cost

 

Gains

 

Losses

 

Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed-maturity securities

 

 

 

 

 

 

 

 

 

 

 

 

 

Government

 

$

14,382 

 

$

281 

 

$

(3)

 

$

14,660 

 

Government agency

 

 

2,313 

 

 

62 

 

 

(1)

 

 

2,374 

 

State and municipality

 

 

61,987 

 

 

1,560 

 

 

(9)

 

 

63,538 

 

Industrial and miscellaneous

 

 

112,804 

 

 

3,708 

 

 

(229)

 

 

116,283 

 

Residential mortgage-backed

 

 

93,933 

 

 

2,182 

 

 

(451)

 

 

95,664 

 

Commercial mortgage-backed

 

 

24,856 

 

 

669 

 

 

 —

 

 

25,525 

 

Redeemable preferred stock

 

 

401 

 

 

 —

 

 

 —

 

 

401 

 

Total fixed-maturity securities

 

 

310,676 

 

 

8,462 

 

 

(693)

 

 

318,445 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-redeemable preferred stock

 

 

1,955 

 

 

788 

 

 

 —

 

 

2,743 

 

Common stock

 

 

12 

 

 

416 

 

 

 —

 

 

428 

 

Total equity securities

 

 

1,967 

 

 

1,204 

 

 

 —

 

 

3,171 

 

Total investments

 

$

312,643 

 

$

9,666 

 

$

(693)

 

$

321,616 

 

 

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STATE NATIONAL COMPANIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Cost or 

    

Gross 

    

Gross 

    

 

 

December 31, 2014

 

Amortized 

 

Unrealized 

 

Unrealized 

 

Fair

 

($ in thousands)

 

Cost

 

Gains

 

Losses

 

Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed-maturity securities

 

 

 

 

 

 

 

 

 

 

 

 

 

Government

 

$

13,896 

 

$

195 

 

$

(49)

 

$

14,042 

 

Government agency

 

 

2,325 

 

 

57 

 

 

(9)

 

 

2,373 

 

State and municipality

 

 

61,179 

 

 

1,200 

 

 

(27)

 

 

62,352 

 

Industrial and miscellaneous

 

 

108,125 

 

 

2,582 

 

 

(460)

 

 

110,247 

 

Residential mortgage-backed

 

 

96,610 

 

 

1,825 

 

 

(764)

 

 

97,671 

 

Commercial mortgage-backed

 

 

22,483 

 

 

339 

 

 

(27)

 

 

22,795 

 

Redeemable preferred stock

 

 

401 

 

 

30 

 

 

 —

 

 

431 

 

Total fixed-maturity securities

 

 

305,019 

 

 

6,228 

 

 

(1,336)

 

 

309,911 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-redeemable preferred stock

 

 

1,407 

 

 

806 

 

 

 —

 

 

2,213 

 

Common stock

 

 

12 

 

 

417 

 

 

 —

 

 

429 

 

Total equity securities

 

 

1,419 

 

 

1,223 

 

 

 —

 

 

2,642 

 

Total investments

 

$

306,438 

 

$

7,451 

 

$

(1,336)

 

$

312,553 

 

 

Investment securities are exposed to various risks such as interest rate, market, and credit risk. Fair values of securities fluctuate based on the magnitude of changing market conditions; significant changes in market conditions could materially affect the portfolio fair value in the near term.

The following tables show the gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less than 12 Months

 

12 Months or More

 

Total

 

March 31, 2015

    

Fair

    

Unrealized

    

Fair

    

Unrealized

    

Fair

    

Unrealized

 

($ in thousands)

 

Value

 

Losses

 

Value

 

Losses

 

Value

 

Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed-maturity securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Government

 

$

1,340 

 

$

(3)

 

$

 —

 

$

 —

 

$

1,340 

 

$

(3)

 

Government agency

 

 

687 

 

 

(1)

 

 

 —

 

 

 —

 

 

687 

 

 

(1)

 

State and municipality

 

 

1,965 

 

 

(2)

 

 

676 

 

 

(7)

 

 

2,641 

 

 

(9)

 

Industrial and miscellaneous

 

 

9,031 

 

 

(224)

 

 

31 

 

 

(5)

 

 

9,062 

 

 

(229)

 

Residential mortgage-backed

 

 

9,037 

 

 

(70)

 

 

12,661 

 

 

(381)

 

 

21,698 

 

 

(451)

 

Total fixed-maturity securities

 

$

22,060 

 

$

(300)

 

$

13,368 

 

$

(393)

 

$

35,428 

 

$

(693)

 

 

10


 

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STATE NATIONAL COMPANIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less than 12 Months

 

12 Months or More

 

Total

 

December 31, 2014

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

($ in thousands)

    

Value

    

Losses

    

Value

    

Losses

    

Value

    

Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed-maturity securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Government

 

$

522 

 

$

(2)

 

$

3,094 

 

$

(47)

 

$

3,616 

 

$

(49)

 

Government agency

 

 

 —

 

 

 —

 

 

685 

 

 

(9)

 

 

685 

 

 

(9)

 

State and municipality

 

 

4,164 

 

 

(10)

 

 

2,001 

 

 

(17)

 

 

6,165 

 

 

(27)

 

Industrial and miscellaneous

 

 

34,433 

 

 

(418)

 

 

2,637 

 

 

(42)

 

 

37,070 

 

 

(460)

 

Residential mortgage-backed

 

 

15,491 

 

 

(94)

 

 

19,428 

 

 

(670)

 

 

34,919 

 

 

(764)

 

Commercial mortgage-backed

 

 

2,528 

 

 

(14)

 

 

694 

 

 

(13)

 

 

3,222 

 

 

(27)

 

Total fixed-maturity securities

 

$

57,138 

 

$

(538)

 

$

28,539 

 

$

(798)

 

$

85,677 

 

$

(1,336)

 

 

The determination that a security has incurred an other-than-temporary decline in fair value and the associated amount of any loss recognition requires the judgment of Management and a regular review of the Company’s investments. Management reviewed all securities with unrealized losses in accordance with the Company’s impairment policy described in Note 1 — “Summary of Significant Accounting Policies” in our consolidated financial statements for the years ended December 31, 2014, 2013 and 2012.  Management believes that the temporary impairments are primarily the result of interest rate fluctuations, current conditions in the capital markets, and the impact of those conditions on market liquidity and prices. There were 69 securities in an unrealized loss position at March 31, 2015. Over 95% of these investments were investment-grade at March 31, 2015. The Company does not intend to sell the securities, and it is not more likely than not that the Company will be required to sell these securities before recovery of their amortized cost. Management has the intent and ability to hold the equity securities in an unrealized loss position until the recovery of their fair value. Therefore, Management does not consider these investments to be other-than-temporarily impaired at March 31, 2015.

Proceeds from sales of investments in fixed-maturity, equity and short-term securities through March 31, 2015 and 2014 were $6.9 million and $3.1 million, respectively.

The following table presents the Company’s gross realized gains (losses) for the periods ended March 31:

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31,

    

March 31,

 

($ in thousands)

    

2015

 

2014

 

Realized gains:

 

 

 

 

 

 

 

Fixed-maturity securities

 

$

346 

 

$

395 

 

Equity securities

 

 

16 

 

 

26 

 

Gross realized gains

 

 

362 

 

 

421 

 

Realized losses:

 

 

 

 

 

 

 

Fixed-maturity securities

 

 

(97)

 

 

(19)

 

Equity securities

 

 

 —

 

 

(2)

 

Gross realized losses

 

 

(97)

 

 

(21)

 

Net realized investment gains

 

$

265 

 

$

400 

 

 

The Company had three non-cash exchanges of investment securities for the period ending March 31, 2015 and one non-cash exchange for the period ending March 31, 2014. Non-cash consideration received for these exchanges was $1.0 million and $549 thousand for the periods ending March 31, 2015 and March 31, 2014, respectively.  Gains of $40 thousand

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STATE NATIONAL COMPANIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued)

 

and $258 thousand were recognized on these exchanges and are reflected in the “Realized net investment gains” balance shown on the condensed consolidated statements of income.

The following schedule details the maturities of the Company’s fixed-maturity securities, available-for-sale, as of March 31, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair

 

($ in thousands)

    

Amortized Cost

    

Value

 

 

 

 

 

 

 

 

 

Due in one year or less

 

$

12,754 

 

$

12,887 

 

Due after one year through five years

 

 

77,637 

 

 

79,368 

 

Due after five years through ten years

 

 

91,094 

 

 

93,760 

 

Due after ten years

 

 

10,402 

 

 

11,241 

 

Residential mortgage-backed securities

 

 

93,933 

 

 

95,664 

 

Commercial mortgage-backed securities

 

 

24,856 

 

 

25,525 

 

 

 

$

310,676 

 

$

318,445 

 

 

Expected maturities may differ from contractual maturities because certain borrowers have the right to call or prepay obligations with or without call or prepayment penalties.

The Company’s investment portfolio includes $1.2 million of mortgage-backed securities collateralized by subprime residential loans, which represent approximately 0.37% of the Company’s total investments as of March 31, 2015. The Company does not own mortgage derivatives.

Net investment income for the periods ended March 31, consists of the following:

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31,

    

March 31,

 

($ in thousands)

    

2015

 

2014

 

 

 

 

 

 

 

 

 

Interest on investments

 

$

1,821 

 

$

1,228 

 

Dividends

 

 

29