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EX-31.2 - EX-31.2 - State National Companies, Inc.snc-20150630ex312225aab.htm
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EX-31.1 - EX-31.1 - State National Companies, Inc.snc-20150630ex311719a7e.htm

 

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

June 30, 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 August  12, 2015

(Common stock, $.001 par value)

 

44,488,190 Shares

 

 

 

 


 

STATE NATIONAL COMPANIES, INC.

 

INDEX

 

 

 

 

 

 

 

 

    

    

    

Page No.

 

Part I - Financial Information 

 

 

 

 

 

 

 

Item 1: 

 

Unaudited Condensed Consolidated Financial Statements

 

 

 

 

 

Condensed Consolidated Balance Sheets –
June 30, 2015 (unaudited) and December 31, 2014

 

1

 

 

 

 

 

 

 

 

 

Unaudited Condensed Consolidated Statements of Income –
six months ended June 30, 2015 and 2014

 

3

 

 

 

 

 

 

 

 

 

Unaudited Condensed Consolidated Statements of Comprehensive Income –
six months ended June 30, 2015 and 2014

 

4

 

 

 

 

 

 

 

 

 

Unaudited Condensed Consolidated Statements of Shareholders’ Equity –
six months ended June 30, 2015 and 2014

 

5

 

 

 

 

 

 

 

 

 

Unaudited Condensed Consolidated Statements of Cash Flows –
six months ended June 30, 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

 

40

 

 

 

 

 

 

 

Item 4: 

 

Controls and Procedures

 

42

 

 

 

 

 

 

 

Part II - Other Information 

 

 

 

 

 

 

 

Item 1: 

 

Legal Proceedings

 

42

 

 

 

 

 

 

 

Item 1A: 

 

Risk Factors

 

42

 

 

 

 

 

 

 

Item 2: 

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

42

 

 

 

 

 

 

 

Item 3: 

 

Defaults Upon Senior Securities

 

42

 

 

 

 

 

 

 

Item 4: 

 

Mine Safety Disclosures

 

42

 

 

 

 

 

 

 

Item 5: 

 

Other Information

 

42

 

 

 

 

 

 

 

Item 6: 

 

Exhibits

 

42

 

 

 

 

 

 


 

PART I - FINANCIAL INFORMATION

 

Item 1:  Unaudited Condensed Consolidated Financial Statements

 

STATE NATIONAL COMPANIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

($ in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

 

 

2015

 

2014

 

Assets

 

 

(Unaudited)

 

 

 

 

Investments:

 

 

 

 

 

 

 

Fixed-maturity securities – available-for-sale, at fair value (amortized cost – $309,027,  $305,019, respectively)

 

$

311,511

 

$

309,911

 

Equity securities – available-for-sale, at fair value (cost – $2,103,  $1,419, respectively)

 

 

3,221

 

 

2,642

 

Total investments

 

 

314,732

 

 

312,553

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

47,243

 

 

38,348

 

Restricted cash and investments

 

 

3,716

 

 

6,597

 

Accounts receivable from agents, net

 

 

24,579

 

 

18,528

 

Reinsurance recoverable on paid losses

 

 

1,103

 

 

1,200

 

Deferred acquisition costs

 

 

834

 

 

1,036

 

Reinsurance recoverables

 

 

1,783,801

 

 

1,656,534

 

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

 

 

17,758

 

 

18,397

 

Interest receivable

 

 

1,981

 

 

1,795

 

Deferred income taxes, net

 

 

27,125

 

 

23,864

 

Goodwill and intangible assets, net

 

 

6,320

 

 

6,683

 

Other assets

 

 

5,243

 

 

6,229

 

Total assets

 

$

2,234,435

 

$

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)

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

 

    

2015

    

2014

 

Liabilities

 

 

(Unaudited)

 

 

 

 

Unpaid losses and loss adjustment expenses

 

$

1,264,456

 

$

1,209,905

 

Unearned premiums

 

 

549,798

 

 

480,124

 

Allowance for policy cancellations

 

 

52,552

 

 

55,500

 

Deferred ceding fees

 

 

29,048

 

 

23,612

 

Accounts payable to agents

 

 

1,946

 

 

2,448

 

Accounts payable to insurance companies

 

 

3,619

 

 

4,399

 

Subordinated debentures

 

 

44,500

 

 

44,500

 

Income taxes payable

 

 

3,092

 

 

1,762

 

Other liabilities

 

 

26,984

 

 

28,642

 

Total liabilities

 

 

1,975,995

 

 

1,850,892

 

 

 

 

 

 

 

 

 

Shareholders’ equity

 

 

 

 

 

 

 

Common stock, $.001 par value (150,000,000 shares authorized; 44,488,190 and 44,247,102 shares issued at June 30, 2015 and December 31, 2014, respectively)

 

 

44

 

 

44

 

Preferred stock, $.001 par value (10,000,000 shares authorized; no shares issued and outstanding at June 30, 2015 and December 31, 2014)

 

 

 —

 

 

 —

 

Additional paid-in capital

 

 

222,487

 

 

220,577

 

Retained earnings

 

 

33,577

 

 

16,108

 

Accumulated other comprehensive income

 

 

2,332

 

 

4,143

 

Total shareholders’ equity

 

 

258,440

 

 

240,872

 

Total liabilities and shareholders’ equity

 

$

2,234,435

 

$

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

 

Six Months Ended

 

 

June 30,

    

June 30,

    

June 30,

    

June 30,

 

 

2015

 

2014

 

2015

 

2014

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Premiums earned

$

25,705

 

$

21,200

 

$

54,989

 

$

43,986

 

Commission income

 

364

 

 

345

 

 

734

 

 

762

 

Ceding fees

 

16,379

 

 

10,956

 

 

30,523

 

 

20,858

 

Net investment income

 

2,272

 

 

1,106

 

 

3,953

 

 

2,218

 

Realized net investment gains

 

1,186

 

 

495

 

 

1,451

 

 

895

 

Other income

 

462

 

 

1,301

 

 

847

 

 

2,211

 

Total revenues

 

46,368

 

 

35,403

 

 

92,497

 

 

70,930

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Losses and loss adjustment expenses

 

12,649

 

 

8,318

 

 

26,182

 

 

18,314

 

Commissions

 

1,260

 

 

393

 

 

2,757

 

 

1,229

 

Taxes, licenses, and fees

 

563

 

 

625

 

 

1,275

 

 

1,230

 

General and administrative

 

16,051

 

 

12,931

 

 

32,193

 

 

27,508

 

Founder special compensation

 

 —

 

 

6,711

 

 

 —

 

 

17,914

 

Offering-related expenses

 

 —

 

 

7,129

 

 

 —

 

 

7,129

 

Contract modification expense

 

 —

 

 

17,800

 

 

 —

 

 

17,800

 

Interest expense

 

505

 

 

574

 

 

1,005

 

 

1,148

 

Total expenses

 

31,028

 

 

54,481

 

 

63,412

 

 

92,272

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

15,340

 

 

(19,078)

 

 

29,085

 

 

(21,342)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income taxes:

 

 

 

 

 

 

 

 

 

 

 

 

Current tax expense

 

7,770

 

 

2,075

 

 

13,014

 

 

3,753

 

Deferred tax benefit

 

(2,112)

 

 

(21,760)

 

 

(2,285)

 

 

(22,302)

 

 

 

5,658

 

 

(19,685)

 

 

10,729

 

 

(18,549)

 

Net income (loss)

$

9,682

 

$

607

 

$

18,356

 

$

(2,793)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

$

0.22

 

$

0.02

 

$

0.41

 

$

(0.08)

 

Diluted earnings per share

 

0.22

 

 

0.02

 

 

0.41

 

 

(0.08)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends, per share

$

0.01

 

$

0.14

 

$

0.02

 

$

0.48

 

 

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

 

Six Months Ended

 

 

 

June 30,

    

June 30,

    

June 30,

    

June 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

 

    

 

 

    

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

9,682

 

$

607

 

$

18,356

 

$

(2,793)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains (losses) on securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding gains (losses) during the period

 

 

(4,709)

 

 

1,987

 

 

(1,763)

 

 

3,594

 

Tax effect on unrealized holding gains (losses) during the period

 

 

1,652

 

 

(700)

 

 

621

 

 

(1,245)

 

Less: reclassification adjustments for realized gains included in net income

 

 

(935)

 

 

(446)

 

 

(1,023)

 

 

(737)

 

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

 

 

323

 

 

157

 

 

354

 

 

257

 

Other comprehensive income (loss)

 

 

(3,669)

 

 

998

 

 

(1,811)

 

 

1,869

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total comprehensive income (loss)

 

$

6,013

 

$

1,605

 

$

16,545

 

$

(924)

 

 

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

 

 

 —

 

 

1,910

 

 

 —

 

 

 —

 

 

 —

 

 

1,910

 

Dividends declared

 

 

 —

 

 

 —

 

 

(887)

 

 

 —

 

 

 —

 

 

(887)

 

Net income

 

 

 —

 

 

 —

 

 

18,356

 

 

 —

 

 

 —

 

 

18,356

 

Other comprehensive loss, net of tax

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(1,811)

 

 

(1,811)

 

Balance at June 30, 2015

 

$

44

 

$

222,487

 

$

33,577

 

$

 —

 

$

2,332

 

$

258,440

 

 

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)

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

    

June 30,

    

June 30,

 

 

 

2015

 

2014

 

Operating activities

 

 

 

 

 

 

 

Net cash provided by (used in) operating activities

 

$

13,786

 

$

(18,141)

 

 

 

 

 

 

 

 

 

Investing activities

 

 

 

 

 

 

 

Purchase of investments

 

 

(37,437)

 

 

(27,865)

 

Proceeds from sale of investments

 

 

16,259

 

 

9,569

 

Proceeds from maturities and principal receipts

 

 

16,882

 

 

11,956

 

Proceeds from dispositions of property and equipment

 

 

448

 

 

910

 

Purchase of property and equipment

 

 

(601)

 

 

(1,542)

 

Net cash used in investing activities

 

 

(4,449)

 

 

(6,972)

 

 

 

 

 

 

 

 

 

Financing activities

 

 

 

 

 

 

 

Dividends paid

 

 

(442)

 

 

(16,240)

 

Proceeds from issuances of common stock

 

 

 —

 

 

289,322

 

Costs directly attributable to the issuance of common stock

 

 

 —

 

 

(1,257)

 

Redemption of existing common stock

 

 

 —

 

 

(190,595)

 

Net cash provided by (used in) financing activities

 

 

(442)

 

 

81,230

 

 

 

 

 

 

 

 

 

Net change in cash and cash equivalents

 

 

8,895

 

 

56,117

 

Cash and cash equivalents at beginning of period

 

 

38,348

 

 

69,431

 

Cash and cash equivalents at end of period

 

$

47,243

 

$

125,548

 

 

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 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 June 30, 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 June 30, 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

Prior to June 25, 2014, 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.  At that time, 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)

7


 

Table of Contents

STATE NATIONAL COMPANIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued)

 

to reflect 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.  Prior to June 25, 2014, 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.  On June 25, 2014, 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 June 30, 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 7 — “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 Company expects the impact of this pronouncement to be minimal.

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.  However, the FASB

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STATE NATIONAL COMPANIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued)

 

issued a proposed ASU to defer the effective date to December 15, 2017.  Early adoption is not 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.

In May 2015, the FASB issued an accounting standards update (ASU No. 2015-09), “Disclosures about Short-Duration Contracts” (Topic 944) intended to make targeted improvements to disclosure requirements for insurance companies that issue short-duration contracts.  The amendments in this update are expected to increase transparency of significant estimates made in measuring those liabilities, improve comparability by requiring consistent disclosure of information, and provide financial statement users with additional information to facilitate analysis of the amount, timing, and uncertainty of cash flows arising from contracts issued by insurance entities and the development of loss reserve estimates.  This ASU will be effective for annual periods beginning after December 15, 2015, and interim periods within annual periods beginning after December 15, 2016.  The Company is currently evaluating what impact this ASU will have on our disclosures.

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 

    

 

 

June 30, 2015

 

Amortized 

 

Unrealized 

 

Unrealized 

 

Fair

 

($ in thousands)

 

Cost

 

Gains

 

Losses

 

Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed-maturity securities

 

 

 

 

 

 

 

 

 

 

 

 

 

Government

 

$

13,812

 

$

174

 

$

(23)

 

$

13,963

 

Government agency

 

 

2,300

 

 

48

 

 

(4)

 

 

2,344

 

State and municipality

 

 

67,102

 

 

791

 

 

(274)

 

 

67,619

 

Industrial and miscellaneous

 

 

114,055

 

 

1,768

 

 

(921)

 

 

114,902

 

Residential mortgage-backed

 

 

87,827

 

 

1,506

 

 

(695)

 

 

88,638

 

Commercial mortgage-backed

 

 

22,992

 

 

159

 

 

(78)

 

 

23,073

 

Redeemable preferred stock

 

 

939

 

 

33

 

 

 —

 

 

972

 

Total fixed-maturity securities

 

 

309,027

 

 

4,479

 

 

(1,995)

 

 

311,511

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-redeemable preferred stock

 

 

2,091

 

 

729

 

 

(42)

 

 

2,778

 

Common stock

 

 

12

 

 

431

 

 

 —

 

 

443

 

Total equity securities

 

 

2,103

 

 

1,160

 

 

(42)

 

 

3,221

 

Total investments

 

$

311,130

 

$

5,639

 

$

(2,037)

 

$

314,732

 

 

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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

 

June 30, 2015

    

Fair

    

Unrealized

    

Fair

    

Unrealized

    

Fair

    

Unrealized

 

($ in thousands)

 

Value

 

Losses

 

Value

 

Losses

 

Value

 

Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed-maturity securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Government

 

$

1,643

 

$

(15)

 

$

1,201

 

$

(8)

 

$

2,844

 

$

(23)

 

Government agency

 

 

678

 

 

(4)

 

 

 —

 

 

 —

 

 

678

 

 

(4)

 

State and municipality

 

 

34,672

 

 

(264)

 

 

671

 

 

(10)

 

 

35,343

 

 

(274)

 

Industrial and miscellaneous

 

 

36,475

 

 

(838)

 

 

422

 

 

(83)

 

 

36,897

 

 

(921)

 

Residential mortgage-backed

 

 

22,073

 

 

(233)

 

 

11,908

 

 

(462)

 

 

33,981

 

 

(695)

 

Commercial mortgage-backed

 

 

11,099

 

 

(78)

 

 

 —

 

 

 —

 

 

11,099

 

 

(78)

 

Total fixed-maturity securities

 

$

106,640

 

$

(1,432)

 

$

14,202

 

$

(563)

 

$

120,842

 

$

(1,995)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-redeemable preferred stock

 

 

739

 

 

(42)

 

 

 —

 

 

 —

 

 

739

 

 

(42)

 

Total equity securities

 

 

739

 

 

(42)

 

 

 —

 

 

 —

 

 

739

 

 

(42)

 

 

 

$

107,379

 

$

(1,474)

 

$

14,202

 

$

(563)

 

$

121,581

 

$

(2,037)

 

 

 

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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