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EX-32.1 - EX-32.1 - State National Companies, Inc.snc-20150930ex32155f578.htm
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EX-31.1 - EX-31.1 - State National Companies, Inc.snc-20150930ex311bbdd4b.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

September 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

(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 November  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 –
September 30, 2015 (unaudited) and December 31, 2014

 

1

 

 

 

 

 

 

 

 

 

Unaudited Condensed Consolidated Statements of Income –
nine months ended September 30, 2015 and 2014

 

3

 

 

 

 

 

 

 

 

 

Unaudited Condensed Consolidated Statements of Comprehensive Income –
nine months ended September 30, 2015 and 2014

 

4

 

 

 

 

 

 

 

 

 

Unaudited Condensed Consolidated Statements of Shareholders’ Equity –
nine months ended September 30, 2015 and twelve months ended December 31, 2014

 

5

 

 

 

 

 

 

 

 

 

Unaudited Condensed Consolidated Statements of Cash Flows –
nine months ended September 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

 

22

 

 

 

 

 

 

 

Item 3: 

 

Quantitative and Qualitative Disclosures About Market Risk

 

42

 

 

 

 

 

 

 

Item 4: 

 

Controls and Procedures

 

44

 

 

 

 

 

 

 

Part II - Other Information 

 

 

 

 

 

 

 

Item 1: 

 

Legal Proceedings

 

44

 

 

 

 

 

 

 

Item 1A: 

 

Risk Factors

 

44

 

 

 

 

 

 

 

Item 2: 

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

44

 

 

 

 

 

 

 

Item 3: 

 

Defaults Upon Senior Securities

 

44

 

 

 

 

 

 

 

Item 4: 

 

Mine Safety Disclosures

 

44

 

 

 

 

 

 

 

Item 5: 

 

Other Information

 

44

 

 

 

 

 

 

 

Item 6: 

 

Exhibits

 

44

 

 

 

 

 

 


 

PART I - FINANCIAL INFORMATION

 

Item 1:  Unaudited Condensed Consolidated Financial Statements

 

STATE NATIONAL COMPANIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

($ in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

 

2015

 

2014

 

Assets

 

 

(Unaudited)

 

 

 

 

Investments:

 

 

 

 

 

 

 

Fixed-maturity securities – available-for-sale, at fair value (amortized cost – $328,271,  $305,019, respectively)

 

$

331,478

 

$

309,911

 

Equity securities – available-for-sale, at fair value (cost – $5,594,  $1,419, respectively)

 

 

6,443

 

 

2,642

 

Total investments

 

 

337,921

 

 

312,553

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

47,732

 

 

38,348

 

Restricted cash and investments

 

 

3,716

 

 

6,597

 

Accounts receivable from agents, net

 

 

25,988

 

 

18,528

 

Reinsurance recoverable on paid losses

 

 

1,046

 

 

1,200

 

Deferred acquisition costs

 

 

957

 

 

1,036

 

Reinsurance recoverables

 

 

1,842,427

 

 

1,656,534

 

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

 

 

17,367

 

 

18,397

 

Interest receivable

 

 

1,985

 

 

1,795

 

Deferred income taxes, net

 

 

28,822

 

 

23,864

 

Goodwill and intangible assets, net

 

 

6,139

 

 

6,683

 

Other assets

 

 

4,522

 

 

6,229

 

Total assets

 

$

2,318,622

 

$

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)

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

    

2015

    

2014

 

Liabilities

 

 

(Unaudited)

 

 

 

 

Unpaid losses and loss adjustment expenses

 

$

1,301,173

 

$

1,209,905

 

Unearned premiums

 

 

575,935

 

 

480,124

 

Allowance for policy cancellations

 

 

56,927

 

 

55,500

 

Deferred ceding fees

 

 

29,446

 

 

23,612

 

Accounts payable to agents

 

 

2,124

 

 

2,448

 

Accounts payable to insurance companies

 

 

4,437

 

 

4,399

 

Subordinated debentures

 

 

44,500

 

 

44,500

 

Income taxes payable

 

 

2,920

 

 

1,762

 

Other liabilities

 

 

31,556

 

 

28,642

 

Total liabilities

 

 

2,049,018

 

 

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 September 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 September 30, 2015 and December 31, 2014)

 

 

 —

 

 

 —

 

Additional paid-in capital

 

 

223,429

 

 

220,577

 

Retained earnings

 

 

43,303

 

 

16,108

 

Accumulated other comprehensive income

 

 

2,828

 

 

4,143

 

Total shareholders’ equity

 

 

269,604

 

 

240,872

 

Total liabilities and shareholders’ equity

 

$

2,318,622

 

$

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

 

Nine Months Ended

 

 

September 30,

    

September 30,

    

September 30,

    

September 30,

 

 

2015

 

2014

 

2015

 

2014

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Premiums earned

$

30,156

 

$

25,599

 

$

85,145

 

$

69,585

 

Commission income

 

340

 

 

405

 

 

1,074

 

 

1,167

 

Ceding fees

 

18,837

 

 

12,167

 

 

49,360

 

 

33,025

 

Net investment income

 

2,008

 

 

1,183

 

 

5,961

 

 

3,401

 

Realized net investment gains (losses)

 

(571)

 

 

291

 

 

880

 

 

1,186

 

Other income

 

381

 

 

926

 

 

1,228

 

 

3,137

 

Total revenues

 

51,151

 

 

40,571

 

 

143,648

 

 

111,501

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Losses and loss adjustment expenses

 

14,773

 

 

10,695

 

 

40,955

 

 

29,009

 

Commissions

 

1,207

 

 

1,209

 

 

3,964

 

 

2,438

 

Taxes, licenses, and fees

 

910

 

 

823

 

 

2,185

 

 

2,053

 

General and administrative

 

14,456

 

 

14,813

 

 

46,649

 

 

42,321

 

Founder special compensation

 

 —

 

 

 —

 

 

 —

 

 

17,914

 

Offering-related expenses

 

 —

 

 

1,101

 

 

 —

 

 

8,230

 

Contract modification expense

 

 —

 

 

 —

 

 

 —

 

 

17,800

 

Interest expense

 

510

 

 

580

 

 

1,515

 

 

1,728

 

Total expenses

 

31,856

 

 

29,221

 

 

95,268

 

 

121,493

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

19,295

 

 

11,350

 

 

48,380

 

 

(9,992)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income taxes:

 

 

 

 

 

 

 

 

 

 

 

 

Current tax expense (benefit)

 

8,864

 

 

752

 

 

21,878

 

 

4,505

 

Deferred tax expense (benefit)

 

(1,965)

 

 

3,639

 

 

(4,250)

 

 

(18,663)

 

 

 

6,899

 

 

4,391

 

 

17,628

 

 

(14,158)

 

Net income (loss)

$

12,396

 

$

6,959

 

$

30,752

 

$

4,166

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

$

0.28

 

$

0.16

 

$

0.70

 

$

0.11

 

Diluted earnings per share

 

0.28

 

 

0.16

 

 

0.70

 

 

0.11

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends, per share

$

0.06

 

$

 —

 

$

0.08

 

$

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

 

Nine Months Ended

 

 

 

September 30,

    

September 30,

    

September 30,

    

September 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

 

    

 

 

    

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

12,396

 

$

6,959

 

$

30,752

 

$

4,166

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains (losses) on securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding gains (losses) during the period

 

 

370

 

 

(1,236)

 

 

(1,393)

 

 

2,358

 

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

 

 

(130)

 

 

432

 

 

491

 

 

(813)

 

Less: reclassification adjustments for realized gains (losses) included in net income

 

 

393

 

 

(225)

 

 

(630)

 

 

(962)

 

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

 

 

(137)

 

 

80

 

 

217

 

 

337

 

Other comprehensive income (loss)

 

 

496

 

 

(949)

 

 

(1,315)

 

 

920

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total comprehensive income (loss)

 

$

12,892

 

$

6,010

 

$

29,437

 

$

5,086

 

 

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

 

 

 —

 

 

2,852

 

 

 —

 

 

 —

 

 

 —

 

 

2,852

 

Dividends declared

 

 

 —

 

 

 —

 

 

(3,557)

 

 

 —

 

 

 —

 

 

(3,557)

 

Net income

 

 

 —

 

 

 —

 

 

30,752

 

 

 —

 

 

 —

 

 

30,752

 

Other comprehensive loss, net of tax

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(1,315)

 

 

(1,315)

 

Balance at September 30, 2015

 

$

44

 

$

223,429

 

$

43,303

 

$

 —

 

$

2,828

 

$

269,604

 

 

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)

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

    

September 30,

    

September 30,

 

 

 

2015

 

2014

 

Operating activities

 

 

 

 

 

 

 

Net cash provided by (used in) operating activities

 

$

40,843

 

$

3,634

 

 

 

 

 

 

 

 

 

Investing activities

 

 

 

 

 

 

 

Purchase of investments

 

 

(73,598)

 

 

(101,619)

 

Proceeds from sale of investments

 

 

22,141

 

 

12,624

 

Proceeds from maturities and principal receipts

 

 

23,734

 

 

19,063

 

Proceeds from dispositions of property and equipment

 

 

448

 

 

987

 

Purchase of property and equipment

 

 

(644)

 

 

(1,715)

 

Net cash provided by (used in) investing activities

 

 

(27,919)

 

 

(70,660)

 

 

 

 

 

 

 

 

 

Financing activities

 

 

 

 

 

 

 

Dividends paid

 

 

(3,540)

 

 

(16,240)

 

Proceeds from issuances of common stock

 

 

 —

 

 

289,322

 

Costs directly attributable to the issuance of common stock

 

 

 —

 

 

(1,578)

 

Redemption of existing common stock

 

 

 —

 

 

(190,595)

 

Net cash provided by (used in) financing activities

 

 

(3,540)

 

 

80,909

 

 

 

 

 

 

 

 

 

Net change in cash and cash equivalents

 

 

9,384

 

 

13,883

 

Cash and cash equivalents at beginning of period

 

 

38,348

 

 

69,431

 

Cash and cash equivalents at end of period

 

$

47,732

 

$

83,314

 

 

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

The unaudited condensed consolidated financial statements included herein have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) and include the accounts of the Company and all subsidiaries.  All significant intercompany accounts and 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 the audited consolidated financial statements for the years ended December 31, 2014 and 2013.

The interim financial data as of September 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 to fairly state the results for the interim period.  The results of operations for the period ended September 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 the consolidated financial statements for the years ended December 31, 2014, 2013 and 2012 for information on accounting policies that we consider critical in preparing 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 September 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 the estimate of the number of awards to vest changes.  See Note 7 — “Stock-based Payments” for related disclosures.

Minimum Ceding Fees

Minimum ceding fees are fees the Company receives pursuant to contractual minimum premium requirements for certain programs where either significant premium capacity is reserved for that program or where the expected premium volume is not reasonably assured.  For those programs where a minimum applies, the ceding fees are considered as two distinct pieces:  1) “premium related fees,” which are earned as the associated gross written premium is earned, typically pro rata on an annual basis; and (2) “capacity fees,” which are determined based on the shortfall, if any, between the program’s contractual annual premium minimum and the amount of premium estimated to be written in the contract year, which fees are earned ratably in each quarter.

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.

Investments

The Company invests in convertible securities that have embedded derivatives.  Derivatives embedded within non-derivative instruments, such as options embedded in convertible fixed maturity securities, are bifurcated from the host instrument when the embedded derivative meets the criteria for bifurcation.  However, for reporting purposes, these embedded derivatives are presented together with the host contract and carried at estimated fair value.  Changes in the estimated fair value of the embedded derivatives are reflected in “Realized net investment gains” in the condensed consolidated statements of income, while changes in the estimated fair value of the underlying fixed maturity securities are reflected in “Unrealized holding gains (losses)” in the condensed consolidated statements of comprehensive income.

8

 


 

Table of Contents

STATE NATIONAL COMPANIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued)

 

Recent Accounting Pronouncements

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 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.  In August 2015, the FASB issued ASU 2015-14 to defer the effective date to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that period.  Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period.  As insurance contracts are excluded from this ASU, the Company is currently evaluating what impact, if any, this ASU will have on financial results and disclosures and which adoption method to apply.

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 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.  The guidance in ASU 2015-03 does not address presentation or subsequent measurement of debt issuance costs related to line-of-credit arrangements.  The FASB therefore issued ASU 2015-15 “Interest—Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements,” which clarified that the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement.  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 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 disclosures.

9

 


 

Table of Contents

STATE NATIONAL COMPANIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued)

 

In June 2015, the FASB issued an accounting standards update (ASU 2015-10), “Technical Corrections and Improvements.”  The amendments in this update represent changes to clarify the codification, correct unintended application of guidance, or make minor improvements to the codification that are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities.  Additionally, some of the amendments will make the codification easier to understand and easier to apply by eliminating inconsistencies, providing needed clarifications, and improving the presentation of guidance in the codification.  This ASU will be effective for fiscal years, and interim periods within those fiscal years, 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 

    

 

 

September 30, 2015

 

Amortized 

 

Unrealized 

 

Unrealized 

 

Fair

 

($ in thousands)

 

Cost

 

Gains

 

Losses

 

Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed-maturity securities

 

 

 

 

 

 

 

 

 

 

 

 

 

Government

 

$

13,044

 

$

256

 

$

 —

 

$

13,300

 

Government agency

 

 

2,287

 

 

48

 

 

(1)

 

 

2,334

 

State and municipality

 

 

68,137

 

 

1,470

 

 

(24)

 

 

69,583

 

Industrial and miscellaneous

 

 

131,774

 

 

1,644

 

 

(1,833)

 

 

131,585

 

Residential mortgage-backed

 

 

87,666

 

 

1,789

 

 

(445)

 

 

89,010

 

Commercial mortgage-backed

 

 

22,573

 

 

352

 

 

(25)

 

 

22,900

 

Redeemable preferred stock

 

 

2,790

 

 

16

 

 

(40)

 

 

2,766

 

Total fixed-maturity securities

 

 

328,271

 

 

5,575

 

 

(2,368)

 

 

331,478

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-redeemable preferred stock

 

 

5,556

 

 

522

 

 

(63)

 

 

6,015

 

Common stock

 

 

38

 

 

391

 

 

(1)

 

 

428

 

Total equity securities

 

 

5,594

 

 

913

 

 

(64)

 

 

6,443

 

Total investments

 

$

333,865

 

$

6,488

 

$

(2,432)

 

$

337,921

 

 

10

 


 

Table of Contents

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.

11

 


 

Table of Contents

STATE NATIONAL COMPANIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued)

 

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

 

September 30, 2015

    

Fair

    

Unrealized

    

Fair

    

Unrealized

    

Fair

    

Unrealized

 

($ in thousands)

 

Value

 

Losses

 

Value

 

Losses

 

Value

 

Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed-maturity securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Government agency

 

$

566

 

$

(1)

 

$

 —

 

$

 —

 

$

566

 

$

(1)

 

State and municipality

 

 

3,356

 

 

(13)

 

 

372

 

 

(11)

 

 

3,728

 

 

(24)

 

Industrial and miscellaneous

 

 

46,156

 

 

(1,673)

 

 

1,037

 

 

(160)

 

 

47,193

 

 

(1,833)

 

Residential mortgage-backed

 

 

6,724

 

 

(57)

 

 

13,852

 

 

(388)

 

 

20,576

 

 

(445)

 

Commercial mortgage-backed

 

 

1,913

 

 

(25)

 

 

210

 

 

 —

 

 

2,123

 

 

(25)

 

Redeemable preferred stock

 

 

1,183

 

 

(6)

 

 

201

 

 

(34)

 

 

1,384

 

 

(40)

 

Total fixed-maturity securities

 

$

59,898

 

$

(1,775)

 

$

15,672

 

$

(593)

 

$

75,570

 

$

(2,368)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-redeemable preferred stock

 

 

2,036

 

 

(63)

 

 

 —

 

 

 —

 

 

2,036

 

 

(63)

 

Common stock

 

 

24

 

 

(1)

 

 

 —

 

 

 —

 

 

24

 

 

(1)

 

Total equity securities

 

 

2,060

 

 

(64)

 

 

 —

 

 

 —

 

 

2,060