UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

	QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2015

 

	TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

For the transition period from ________________ to ________________

Commission file number 333-189686

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 (Section 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 definitions of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

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

The number of shares of the registrant's common stock, $0.0001 par value, outstanding as of November 11, 2015 was 16,400,125.

INDEX

All other items called for by the instructions to Form 10-Q have been omitted because the items are not applicable or the relevant information is not material.

Homeowners of America Holding Corporation

CONSOLIDATED BALANCE SHEETS

September 30, 2015 and December 31, 2014

 

 See accompanying notes to the consolidated financial statements.

Homeowners of America Holding Corporation

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

September 30, 2015 and 2014

 

 

See accompanying notes to the consolidated financial statements.

Homeowners of America Holding Corporation

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

September 30, 2015 and 2014

See accompanying notes to the consolidated financial statements.

Homeowners of America Holding Corporation

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)

For the Nine Months Ended

September 30, 2015

See accompanying notes to the consolidated financial statements.

Homeowners of America Holding Corporation

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)

For the Nine Months Ended

September 30, 2014

See accompanying notes to the consolidated financial statements.

Homeowners of America Holding Corporation

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

For the Nine Months Ended

September 30, 2015 and 2014

 

See accompanying notes to the consolidated financial statements.

1.	ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Homeowners of America Holding Corporation ("HAHC") is an insurance holding company established to hold insurance entities for the purpose of marketing personal lines insurance products on a national basis. HAHC owns 100% of Homeowners of America Insurance Company ("HAIC"). HAIC is domiciled in Texas, licensed in multiple states and is authorized to write various forms of homeowners and auto insurance. Coverage is concentrated in Texas. HAHC also owns 100% of Homeowners of America MGA, Inc. ("MGA"), a Texas Corporation, formed to provide marketing and claims administration services. HAHC, along with its subsidiaries HAIC and MGA, are collectively referred to as "the Company".

The accompanying consolidated financial statements include the accounts of Homeowners of America Holding Corporation and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America ("GAAP"). Certain reclassifications of prior year amounts have been made to conform to the current year presentation.

Cash and cash equivalents include cash and highly liquid short-term investments, with original maturities of three months or less. The amount is carried at cost, which approximates fair value. At September 30, 2015 and December 31, 2014, cash and cash equivalents consist of cash on deposit with financial institutions, as well as money market mutual funds.

General and other accrued expenses payable as of September 30, 2015 and December 31, 2014, include $3.6 million and $1.7 million, respectively, of both claim and general operating expense checks issued in excess of cash book balances, not yet presented for payment. The increase of $1.9 million is primarily attributable to increased claim activity.

The Company's investments are comprised of short-term, restricted, long-term investments and fixed-maturity securities classified as available-for-sale as of September 30, 2015 and December 31, 2014. Restricted investments and long-term investments are described below. Short-term investments include certificates of deposit with original maturities greater than three months and maturities of one year or less. Due to the short-term nature of these investments, significant changes in prevailing interest rates and economic conditions should not adversely affect the timing and amount of cash flows on such investments or their related values. Accordingly, certificates of deposit are carried at cost, which approximates fair value. Fixed-maturity securities are classified as available-for-sale when it is not management's intent to make profits by buying and selling the securities within a short period of time or when it is not management's intent to hold the securities to maturity.  Fixed-maturity securities classified as available-for-sale are carried at fair value. The unrealized holding gains and losses, net of applicable deferred income taxes, are shown as a separate component of stockholders' equity as a part of accumulated other comprehensive income (loss) and, as such, are not included in the determination of net income (loss).

As of September 30, 2015 and December 31, 2014, the Company has restricted cash and investments, in the amount of $3.3 million and $4.3 million, respectively, pledged to the Department of Insurance in certain states as a condition of its Certificate of Authority for the purpose of meeting obligations to policyholders and creditors. Restricted assets are shown separately in the accompanying consolidated balance sheets as "Restricted cash and investments" and include money market accounts and certificates of deposits. "Restricted fixed-maturity securities, classified as available-for-sale" are shown separately in the accompanying consolidated balance sheets and recorded at fair value. With the approval of the Departments of Insurance, the Company may exchange the investments with other funds or investments. In respect to certificates of deposit, management intends to hold the portion of these restricted investments to their maturity. As such, these restricted certificates of deposit are carried at cost, which approximates fair value. Interest earned on these investments inures to the benefit of the Company.

The following table provides the Company's restricted cash and investments as of September 30, 2015 and December 31, 2014.

As of September 30, 2015 and December 31, 2014, the Company's investments also included certificates of deposit that mature more than one year after the balance sheet date and are reflected on the consolidated balance sheets as Long-term investments. Based on management's intent to hold to maturity, these investments are carried at cost. Cost approximates fair value based on the rates currently offered for deposits of similar remaining maturities.

The Company's investments in certificates of deposits and money market accounts do not qualify as securities as defined in the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 320, Investment – Debt and Equity Securities. Accordingly, the fair value disclosures required by FASB ASC Topic 820, Fair Value Measurements and Disclosures are not provided. The Company's fixed-maturity securities classified as available-for-sale are "marked to market" as of the end of each calendar quarter.  As of that date, unrealized gains and losses are recorded to Accumulated Other Comprehensive Income, except where such securities are deemed to be other-than-temporarily impaired. Where applicable, the Company assesses investments of an issuer currently carrying a net unrealized loss. If in management's judgment, the decline in value is other than temporary, the cost of the investment is written down to fair value with a corresponding charge to earnings. Factors considered in determining whether an impairment exists include financial condition, business prospects and creditworthiness of the issuer, the length of time and magnitude that the asset value has been less than cost, and the ability and intent to hold such investments until the fair value recovers.

FASB ASC Topic 220 - Comprehensive Income, requires that recognized revenues, expenses, gains and losses be included in net income (loss). Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the consolidated balance sheet, these items, along with net income (loss), are components of comprehensive income. The Company characterizes their fixed income portfolio as available-for-sale securities when it is not management's intent to make profits by buying and selling the securities within a short period of time or when it is not management's intent to hold the securities to maturity, with appropriate adjustments to other comprehensive income. For the three and nine months ended September 30, 2015, the Company recorded unrealized gains of $11,753 and $12,896, respectively, on available-for-sale securities in other comprehensive income.  For the three and nine months ended September 30, 2014, the Company recorded $4,012 and $9,164 of unrealized gains on available-for-sale securities in other comprehensive income.

Premiums are recognized as revenue on a daily pro rata basis over the policy term. The portion of premiums related to the unexpired term of policies in force as of the end of the measurement period and to be earned over the remaining term of those polices, is deferred and reported as unearned premiums.

Ceding commissions represent acquisition costs associated with insurance risk ceded to reinsurers and is earned on a pro-rata basis over the life of the associated policy. Reinsurance profit share is additional ceding commissions payable to the Company based upon attaining specified loss ratios within individual treaty years.  Reinsurance profit share income is recognized when earned, which includes adjustments to earned reinsurance profit share based on changes in incurred losses and reserves for future loss development.

Policy fee income collected by the Company's MGA, includes application fees which are intended to reimburse the Company for a portion of the costs incurred in establishing the insurance. Policy fees on policies where premium is traditionally paid in full upon inception of the policy are recognized when written, while fees charged on policies where premiums are paid in installments, are recognized when collected.

 

Loss adjustment and other fee income is recognized as income when collected. There is no amount over 5% of total revenue on the consolidated statement of operations for the three months ended September 30, 2015 and 2014 and for the nine months ended September 30, 2014. Loss adjustment fee income for the nine months ended September 30, 2015 was in excess of 5% of total revenue on the consolidated statement of operations.

Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is calculated on the straight-line method over the estimated useful lives of the assets, which range from three to five years. The cost and related accumulated depreciation of assets sold or disposed are removed from the accounts and the resulting gain or loss is included in the consolidated statements of operations. Maintenance and repairs are expensed as incurred.

Software installation and development is stated at cost, net of accumulated amortization. Amortization is calculated on a straight-line basis method over three years.

Long-lived assets, such as property, equipment and software, are reviewed for impairment whenever business events or circumstances could lead to or indicate that the value of the asset may not be recoverable. The assessment of possible impairment is based on whether the carrying amount of the assets exceeds its fair value. The Company uses estimates of undiscounted future cash flows in determining the recoverability of long-lived assets. As of September 30, 2015 and December 31, 2014, no impairment has been recorded.

Deferred policy acquisitions costs ("DAC") as of September 30, 2015 and December 31, 2014, consist of commissions, premium taxes and policy underwriting and production expenses which are incurred through and vary directly with, the level of production of new and renewal insurance business and are amortized over the terms of the policies they relate to. The method used in calculating DAC limits the amount of the deferred cost to their estimated realizable value, which gives effect to allocating their expense along with other period costs associated with the insurance business, in relation to the amount of gross premium earned on policies to which they relate and investment income. DAC is reviewed to determine if it is recoverable from future income, including investment income. The amount of DAC considered recoverable could be reduced in the near term if management's estimates of future premium and investment income is reduced which could impair the Company's ability to recover these costs.

The liability for losses and loss adjustment expenses ("LAE") are estimates of the amounts required to cover known incurred losses and LAE, developed through the review and assessment of loss reports, along with the development of known claims. In addition, loss and loss adjustment expense reserves include management's estimate of an amount for losses incurred but not reported ("IBNR"), determined from reviewing overall loss reporting patterns as well as the loss development cycles of individual claim cases. Such liabilities are necessarily based on estimates and while management believes that the amount is adequate, the ultimate liability may be more or less than the amounts provided. The approach and methods for making such estimates and for establishing the resulting liability are continually reviewed and any adjustments are reflected in current earnings.

Due and deferred premiums consist of uncollateralized premiums and agents' balances in the course of collection as well as premiums booked but not yet due.

In the normal course of business, the Company seeks to reduce the overall exposure to losses that may arise from catastrophes or other events that cause unfavorable underwriting results by reinsuring certain levels of risk with other insurance enterprises or reinsurers. The Company uses only quality, financially rated reinsurers and continually monitors the financial ratings of these companies through its brokers. The amount and type of reinsurance purchased each year is based on management's analysis of liquidity and its estimate of its probable maximum loss and the conditions within the reinsurance market. The Company continually monitors its risk exposure through the use of the AIR modeling system and other modeling tools provided by its reinsurance brokers. Reinsurance premiums, expense reimbursements, and reserves related to reinsured business are accounted for on a basis consistent with those used in accounting for the original policies issued and the terms of the reinsurance contracts. Premiums paid for reinsurance are reported as reductions of earned premium income.

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets, including tax loss carryforwards, and liabilities are measured using enacted tax rates expected to be recovered or settled.

The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred income tax expense represents the change during the period in the deferred tax assets and deferred tax liabilities. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.  In assessing the realizable value of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment.

The Company recognizes uncertain tax positions in the consolidated financial statements when it is more-likely-than-not the position will be sustained upon examination by the tax authorities. Such tax positions are initially and subsequently measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the tax authority assuming full knowledge of the position and relevant facts. The Company believes that it has appropriate support for the income tax positions taken and to be taken on its tax returns, and that its accruals for tax liabilities are adequate for all open tax years based on an assessment of many factors including experience and interpretations of tax laws applied to the facts of each matter. At September 30, 2015, the Company's tax years from 2012 through 2014 remain subject to examination.

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 liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The Company's primary areas of estimate are for liabilities for unpaid losses and loss adjustment expenses, deferred policy acquisition costs, deferred tax asset valuation, and reinsurance. Actual results could differ significantly from those estimates.

The carrying value for the Company's cash and cash equivalents and short-term investments approximate fair values as of September 30, 2015 and December 31, 2014 due to their short-term nature. Fair value for securities are based on the framework for measuring fair value established by FASB ASC Topic 820, Fair Value Measurements and Disclosures.

The Company's fixed-maturity securities held as available-for-sale are carried at fair value as of September 30, 2015 and December 31, 2014. Fair value for securities are based on the framework for measuring fair value established by FASB ASC Topic 820, Fair Value Measurements and Disclosures.

The Company accounts for stock-based compensation under the fair value recognition provisions of FASB ASC Topic 718 – Compensation – Stock Compensation, which requires the measurement and recognition of compensation for all stock-based awards made to employees and directors including stock options and restricted stock issuances based on estimated fair values. In accordance with FASB ASC Topic 718, the Company recognizes stock-based compensation, if any, in the consolidated statements of operations on a straight line basis over the vesting period of the stock award.  For those stock awards vesting 100% at the issue date, the Company recognizes stock-based compensation immediately.

Basic earnings (loss) per share of common stock is computed by dividing net income or loss, less cumulative preferred stock dividends for the period whether or not earned or paid, by the weighted-average number of common shares during the period.

Diluted earnings (loss) per share of common stock is computed by dividing net income or loss attributable to common stockholders, adjusted for the effect of potentially dilutive securities, by the weighted-average number of shares of common stock outstanding during the period increased to include the number of additional shares of common stock that would have been outstanding if the potentially dilutive securities had been issued. Potentially dilutive securities include convertible notes payable, outstanding convertible preferred stock and common stock options.

2.	RECENT ACCOUNTING PRONOUNCEMENTS

On May 21, 2015, the FASB issued Accounting Standards Update No. 2015-09 ("ASU 2015-09"), Financial Services - Insurance (Topic 944), Disclosures about Short-Duration Contracts. ASU 2015-09 provides enhanced disclosures related to the reserve for losses and loss expenses. The enhanced disclosures required by ASU 2015-09 include (1) net incurred and paid claims development by accident year, (2) a reconciliation of incurred and paid claims development information to the aggregate carrying amount of the reserve for losses and loss expenses, (3) for each accident year presented of incurred claims development information, the total of reserves for incurred but not reported (IBNR), including expected development on reported claims, included in the reserve for losses and loss expenses and a description of the reserving methodologies and changes to the reserving methodologies, and (4) for each accident year presented of incurred claims development information, quantitative information about claims frequency, as well as a description of methodologies used for determining claim frequency information.  ASU 2015-09 is effective for annual periods beginning after December 15, 2015, and interim periods within annual periods beginning after December 15, 2016. The amendments in ASU 2015-09 should be applied retrospectively by providing comparative disclosures for each period presented, except for those requirements that apply only to the current period. The Company is currently assessing the impact the adoption of ASU 2015-09 will have on future disclosures.

3.	RELATED PARTY TRANSACTIONS

For the three and nine months ended September 30, 2015, the Company incurred an expense of $75,000 and $375,000 (of which $150,000 is represented by the issuance of 227,273 shares of common stock), respectively, for services performed under the Advisory Agreement.

For the three and nine months ended September 30, 2014, the Company incurred an expense of $75,000 and $375,000 (of which $150,000 is represented by the issuance of 288,462 shares of common stock), respectively, for services performed under the Advisory Agreement.

4.	INVESTMENTS

Investment income, net of investment expenses totaled $37,760 and $10,647 for the three months ended September 30, 2015 and 2014, respectively.

Investment income, net of investment expenses totaled $85,726 and $19,888 for the nine months ended September 30, 2015 and 2014, respectively.

For the three months ended September 30, 2015 and 2014, there were $11,753 and $4,012, respectively, in unrealized gains/(losses) on fixed-maturity securities held as available-for-sale.

For the nine months ended September 30, 2015 and 2014, there were $12,896 and $9,164, respectively, in unrealized gains/(losses) on fixed-maturity securities held as available-for-sale.

For the three months ended September 30, 2015 there were no realized gains recognized and $4,833 of realized losses recognized for the period. For the nine months ended September 30, 2015 there were $1,000 of realized gains recognized and $4,833 of realized losses recognized for the period. For the three and nine months ended September 30, 2014 there were no realized gains or losses recognized.  The intent is to hold to maturity certificates of deposit carried at amortized cost.

The following table provides the Company's short-term, restricted and long-term investment holdings by type of financial instruments that were used to estimate the fair value disclosures for financial instruments as of September 30, 2015 and December 31, 2014, respectively:

 

The following table provides the Company's fixed-maturity securities classified as available-for-sale which are carried at fair value as of September 30, 2015 and December 31, 2014:

The amortized cost and fair value of available-for-sale fixed-maturity securities at September 30, 2015 and December 31, 2014, by contractual maturity, are shown in the following table.  Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

Other-than-temporary Impairment ("OTTI")

The Company regularly reviews its individual investment securities for OTTI.  The Company considers various factors in determining whether each individual security is other-than-temporarily-impaired, including:

•	the financial condition and near-term prospects of the issuer, including any specific events that may affect its operations or earnings;

•	the length of time and the extent to which the market value of the security has been below its cost or amortized cost;

•	general market conditions and industry or sector specific factors;

•	nonpayment by the issuer of its contractually obligated interest and principal payments; and

•	the Company's intent and ability to hold the investment for a period of time sufficient to allow for the recovery of costs.

Securities with gross unrealized loss positions at September 30, 2015 and December 31, 2014, aggregated by investment category and length of time the individual securities have been in a continuous loss position, are as follows:

At September 30, 2015, there were 14 securities in an unrealized loss position. Of these securities, 3 securities had been in an unrealized loss position for 12 months or greater.

At December 31, 2014, there were 31 securities in an unrealized loss position. The Company began it's investment in these securities in June 2014, therefore none of these securities had been in an unrealized loss position for 12 months or greater at December 31, 2014.

The Company believes there were no fundamental issues such as credit losses or other factors with respect to any of its available-for-sale securities.  The unrealized losses on investments in fixed-maturity securities were caused primarily by interest rate changes.  It is expected that the securities would not be settled at a price less than par value of the investments.  Because the declines in fair value are attributable to changes in interest rates or market conditions and not credit quality, and because the Company has the ability and intent to hold its available-for-sale investments until a market price recovery or maturity, the Company does not consider any of its investments to be other-than-temporarily impaired at September 30, 2015 and at December 31, 2014.

5.	FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company's financial assets carried at fair value have been classified, for disclosure purposes, based on the hierarchy established within FASB ASC 820-10 – Fair Value Measurements and Disclosures. When market prices are not available, fair value is generally estimated utilizing valuation techniques that vary by asset class and incorporate available trade, bid and other market information, when available. The acceptable valuation techniques include (a) market approach, which uses prices or relevant information derived from market transactions for identical or comparable assets or liabilities, (b) the Income Approach, which converts future amounts such as cash flows or earnings to a single present value amount based on current market expectations about those future amounts, and (c) the Cost Approach, which is based on the amount that currently would be required to replace the service capacity of an asset. In certain circumstances, these valuation techniques may involve some level of management estimation and judgment which becomes significant with increasingly complex instruments or pricing models. Where appropriate, adjustments are included to reflect the risk premium inherent in a particular methodology, model or input used.

The fair value hierarchy is used to prioritize valuation inputs into three levels:

•

Level 1 - unadjusted quoted prices in active markets for identical assets or liabilities. These inputs are considered to be the most reliable evidence of fair value.

•

Level 2 – quoted prices for similar assets in active markets, quoted prices from those willing to trade in markets that are not active, or other inputs that are observable or can be corroborated by market data for the term of the investment. Such inputs include market interest rates and volatilities, spreads and yield curves.

•

Level 3 – termed unobservable inputs which are utilized in situations where there is little or no market activity for the asset or liability at the measurement date. The approach typically involves a significant subjective management judgment toward the pricing of the security.

The Company's short-term investments are comprised of certificates of deposit held at financial institutions which are not measured at fair value on a recurring basis. A portion of the Company's cash and cash equivalents include money market mutual fund accounts held at financial institutions which are measured at fair value on a recurring basis. Fixed-maturity securities held as available-for-sale are carried at fair value in our consolidated financial statements. The following tables provide information as of September 30, 2015 and December 31, 2014, about the Company's financial assets measured at fair value on a recurring basis:

The following methods and assumptions were used to estimate the fair value disclosures for financial instruments:

Money market mutual funds are valued at the closing price reported by the fund sponsor from an actively traded exchange. As the funds are generally maintained at a net asset value which does not fluctuate, cost approximates fair value. These are included as a Level 1 measurement in the table above. The fair values for available-for-sale fixed-maturity securities are based upon prices provided by an independent pricing service.  The Company has reviewed these prices for reasonableness and has not adjusted any prices received from the independent provider.  Level 2 securities represent assets whose fair value is determined using observable market information such as previous day trade prices, quotes from less active markets or quoted prices of securities with similar characteristics.  There were no transfers between Level 1 and Level 2 during the nine months ended September 30, 2015 or during the year ended December 31, 2014.

6.	PROPERTY, EQUIPMENT, AND SOFTWARE NET

Property, equipment, and software net consist of the following as of September 30, 2015 and December 31, 2014, respectively:

Depreciation and amortization expense for property, equipment and software totaled $37,312 and $35,187 for the three months ended September 30, 2015 and 2014, respectively.

Depreciation and amortization expense for property, equipment and software totaled $113,909 and $89,159 for the nine months ended September 30, 2015 and 2014, respectively.

7.	DEFERRED POLICY ACQUISITION COSTS

Total capitalized deferred policy acquisition costs as of September 30, 2015 and September 30, 2014, comprised of commissions, premium taxes and costs associated with underwriting and issuing policies were $10,055,007 and $7,768,160, respectively.

Changes in deferred policy acquisition costs for the three and nine months ended September 30, 2015 and September 30, 2014, are as follows:

8.	UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES

Losses and loss adjustment expenses (LAE), less related reinsurance and deductibles, are charged to operations as incurred. Unpaid losses and LAE are based on claims adjusters' estimates of the cost of settlement plus an estimate for losses that have been incurred, but not yet reported (IBNR) based upon historical experience, industry loss experience, and management's estimates.  Loss reserves reflect Company management's best estimate of the total cost of (i) claims that have been incurred but not yet paid, and (ii) IBNR.  Loss reserves that are established by Company management are not an exact calculation of our liability, but rather loss reserves represent management's best estimate for our Company's liability based on the application of actuarial techniques and other projection methodology, taking into consideration other facts and circumstances known as of the balance sheet date.  The process of setting reserves is complex and necessarily imprecise. The impact of both internal and external variables on ultimate loss and LAE costs is difficult to estimate.  To arrive at its best estimate for losses, the Company uses damage estimating software developed and owned by acknowledged industry leader, Insurance Service Office.  Reserve factors for IBNR are reviewed quarterly by an independent actuarial consultant.  In addition, our appointed independent actuary attests to the adequacy of our unpaid claim reserve, including IBNR, at calendar year end.

The following table provides the reconciliation of the beginning and ending reserve balances for losses and LAE, gross of reinsurance for the three and nine months ended September 30, 2015 and for September 30, 2014:

As a result of additional information on claims occurring in prior years becoming available to management, changes in estimates of provisions of claims and claim adjustment expenses were made resulting in a decrease of $91,559 and an increase of $396,500 for the three months ended September 30, 2015 and 2014, respectively. The changes in estimates of provisions of claims and claim adjustment expenses for the nine months ended September 30, 2015 and 2014, resulted in an increase of $574,179 and $697,405, respectively.

9.	STOCKHOLDERS' EQUITY

Preferred Stock

As of September 30, 2015 and December 31, 2014, the Company had 20,500,000 shares of preferred stock, convertible, 12.50% cumulative, $0.0001 par value per share, authorized and none issued and outstanding.

Common Stock

As of September 30, 2015, the Company had 40,000,000 shares authorized and 17,708,125 shares issued and 16,398,125 shares outstanding of $0.0001 par value common stock. Holders of common stock are entitled to one (1) vote for each share of common stock held at all meetings of stockholders.

On June 16, 2015, the Company issued 1,000 shares by way of common stock held in Treasury at $0.71 per share under the Company's 2013 Equity Compensation Plan as a stock award to an employee of the Company.

On February 1, 2015, the Company issued 227,273 shares of common stock at $0.66 per share, to Inter-Atlantic Management Inc.  Per the terms of the Advisory Agreement dated August 1, 2013, Inter-Atlantic Management Inc. will be issued annually on February 1st, a grant of the Company's common stock which in aggregate had a fair market value of $150,000 at the time of the grant.

As of December 31, 2014, the Company had 40,000,000 shares of authorized and 17,479,852 shares issued and 16,168,852 shares outstanding of $0.0001 par value common stock.  Holders of common stock are entitled to one (1) vote for each share of common stock held at all meetings of stockholders.

There were no common stock warrants issued during the three and nine months ended September 30, 2015 and September 30, 2014.

10.	EARNINGS (LOSS) PER SHARE

The following table represents the reconciliation of the Company's basic earnings per common share and diluted earnings per common share computations reported on the Consolidated Statements of Operations for the three and nine months ended September 30, 2015 and 2014:

11.	STOCK BASED COMPENSATION

The Company accounts for stock-based compensation under the fair value recognition provision of FASB ASC Topic 718 – Compensation – Stock Compensation.

Incentive Plans

The Company's 2005 Management Incentive Plan (the "2005 Plan") provides for granting of stock options to enable the Company to obtain and retain the services of selected persons, both employees and directors, considered to be essential to the long-range success of the Company.  Under the 2005 Plan, options may be granted to purchase a total not to exceed 789,475 shares of common stock in the aggregate, made up of original issue shares, treasury shares or a combination of the two.  At September 30, 2015 and 2014, options to purchase 783,750 shares of common stock had been granted under the 2005 Plan.

The Company's 2013 Equity Compensation Plan (the "2013 Plan") provides for granting of stock options, incentive stock options, stock awards, and restricted stock units to enable the Company to obtain and retain the services of selected persons, both employees and directors, considered to be essential to the long-range success of the Company. Under the 2013 Plan, options may be granted to purchase a total not to exceed 2,925,000 shares of common stock, made up of original issue shares, treasury shares or a combination of the two. At September 30, 2015, options to purchase 1,965,000 shares of common stock and 40,000 shares of common stock in the form of a stock award had been granted under the 2013 Plan. At September 30, 2014, options to purchase 1,965,000 shares of common stock and 39,000 shares of common stock in the form of a stock award have been granted under the 2013 Plan.

A summary of the activity of the Company's stock option plan for the three and nine months ended September 30, 2015 and September 30, 2014 is as follows:

The Company did not grant any stock options during the three and nine months ended September 30, 2015 and 2014.

The Company records stock-based compensation expense related to granting stock options in general and administrative expenses. The Company recognized compensation expense as follows for the three and nine months ended September 30, 2015 and 2014:

As of September 30, 2015, the Company expects to record compensation expense in the future as follows:

12.	INCOME TAXES

During the three and nine months ended September 30, 2015, the Company recorded $872,465 and $1,597,641, respectively, of income tax expense which resulted in estimated annual effective tax rate of 34.34 % and 34.47 %.  The effective tax rate was primarily impacted as a result of permanent tax differences on meals and entertainment and stock-based compensation.

During the three and nine months ended September 30, 2014, the Company recorded $530,513 and $1,052,687, respectively, of income tax expense which resulted in estimated annual effective tax rate of 34.22% and 34.25 %. The effective tax rate was primarily impacted as a result of permanent tax differences on meals and entertainment and stock-based compensation.

The Company's federal income tax return is consolidated with HAIC and MGA. Allocation of tax expense or refunds among the consolidated group is based on separate return calculations.

13.	REINSURANCE

Certain premiums and benefits are ceded to other insurance companies under various reinsurance agreements. The reinsurance agreements provide HAIC with increased capacity to write larger risks and maintain its exposure to loss within its capital resources. Ceded reinsurance contracts do not relieve HAIC from its obligations to policyholders. HAIC remains liable to its policyholders for the portion reinsured to the extent that any reinsurer does not meet the obligations assumed under the reinsurance agreements. To minimize its exposure to significant losses from reinsurer insolvencies, HAIC evaluates the financial condition of its reinsurers and monitors concentrations of credit risk arising from similar geographic regions, activities, or economic characteristics of the reinsurers.

Commencing April 1, 2015, the Company reinsured its property and casualty risk under multiple quota share reinsurance treaties with third party reinsurers.  The treaties cover 40 % of its risk under property coverage on any one loss occurrence not to exceed $90,000,000; 50 % of its risk under property coverage on any one loss occurrence not to exceed $175,000,000 and approximately 35 % of its risk under casualty coverages.

The Company also purchased per risk reinsurance covering non-weather losses (ten occurrences) in excess of a gross loss of $500,000 per occurrence for all coverage lines (a net loss of $50,000). This coverage is obtained principally to protect the Company in the event of a large fire loss.

Due to the Company's increased exposure to casualty risk as previously mentioned, the Company entered into a per risk casualty excess of loss reinsurance program, beginning April 1, 2015. The program allows for 10 reinstatements during the treaty period, with an annual loss limit of $7,150,000 and a per occurrence limit of $650,000.

Property catastrophe treaties, which went into effect on the same day as the quota share program, develop over four layers with a gross loss of $175,000,000 excess of $5,000,000 per occurrence. The Company's net retention is $500,000 per loss occurrence. The Company entered into a mixture of 12 and 24 month treaty periods to take advantage of low catastrophe reinsurance pricing in the marketplace. The Company's higher limit catastrophe coverage is placed for 12 months, as the Company believes this level of coverage has less price volatility than lower limits and feels it can acquire this type of coverage at competitive prices going forward.

Finally, in support of the Company's expansion in the Houston metropolitan area, commencing June 1, 2015, the Company entered into a property quota share reinsurance treaty with a third party reinsurer, specifically to mitigate named tropical cyclone storm risk. The treaty covers 90 % of the Company's risk under property coverage on any named hurricane or tropical storm system which affects certain geographical areas in the Houston metropolitan area, not to exceed the lesser of $75,000,000 or a 250 year return period. This reinsurance coverage is in addition to the reinsurance programs described above.

Commencing April 1, 2014 and ending March 31, 2015, the Company reinsured its property and casualty risk under quota share reinsurance treaties with third party reinsurers.  The treaties cover 80% of its risk under property coverage on any one loss occurrence not to exceed $110 million; 10% of its risk under property coverage on any one loss occurrence not to exceed $4 million and approximately 64% of its risk under casualty coverages.

Property catastrophe treaties, which went into effect on the same day and having the same term as the quota share treaties, develop over four layers and 20% of our risk on property coverage on a gross loss of $110 million excess of $4 million per occurrence. The Company's net retention is $400,000 per loss occurrence.

The Company also purchased reinsurance covering non-weather losses (two occurrences) in excess of a gross loss of $500,000 per occurrence for all coverage lines (a net loss of $50,000). This coverage which was in force during 2014 had been obtained principally to protect the Company in the event of a large fire loss.

The effects of reinsurance on premiums written and earned were as follows, for the three and nine months ended September 30, 2015 and September 30, 2014: