Attached files
| file | filename |
|---|---|
| EX-31.2 - EXHIBIT 31.2 - National Interstate CORP | exhibit312q1-16.htm |
| EX-32.1 - EXHIBIT 32.1 - National Interstate CORP | exhibit321q1-16.htm |
| EX-31.1 - EXHIBIT 31.1 - National Interstate CORP | exhibit311q1-16.htm |
| EX-32.2 - EXHIBIT 32.2 - National Interstate CORP | exhibit322q1-16.htm |
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
þ | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended March 31, 2016
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: 000-51130
National Interstate Corporation
(Exact name of registrant as specified in its charter)
Ohio | 34-1607394 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
3250 Interstate Drive, Richfield, OH | 44286-9000 | |
(Address of principal executives offices) | (Zip Code) | |
(330) 659-8900
(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. þ 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). þ 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.
Large Accelerated Filer | ¨ | Accelerated Filer | þ | |||
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 þ No
The number of shares outstanding of the registrant’s sole class of common shares as of April 29, 2016 was 19,925,875.
National Interstate Corporation and Subsidiaries
Table of Contents
Page | |
2
PART I—FINANCIAL INFORMATION
ITEM 1. Financial Statements
National Interstate Corporation and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands, except per share data)
March 31, 2016 | December 31, 2015 | |||||||
(Unaudited) | ||||||||
ASSETS | ||||||||
Investments: | ||||||||
Fixed maturities available-for-sale, at fair value (amortized cost – $1,080,793 and $1,038,230, respectively) | $ | 1,100,748 | $ | 1,050,988 | ||||
Equity securities available-for-sale, at fair value (amortized cost – $82,803 and $81,919, respectively) | 82,819 | 81,629 | ||||||
Other invested assets | 48,587 | 47,891 | ||||||
Total investments | 1,232,154 | 1,180,508 | ||||||
Cash and cash equivalents | 50,400 | 71,944 | ||||||
Accrued investment income | 8,950 | 9,227 | ||||||
Premiums receivable, net of allowance for doubtful accounts of $2,184 and $2,127, respectively | 283,294 | 294,812 | ||||||
Reinsurance recoverable on paid and unpaid losses | 237,006 | 230,346 | ||||||
Prepaid reinsurance premiums | 55,276 | 51,176 | ||||||
Deferred policy acquisition costs | 22,541 | 22,265 | ||||||
Deferred federal income taxes | 30,893 | 33,835 | ||||||
Property and equipment, net | 22,077 | 22,562 | ||||||
Funds held by reinsurer | 6,271 | 7,850 | ||||||
Intangible assets, net | 7,650 | 7,650 | ||||||
Prepaid expenses and other assets | 2,068 | 3,707 | ||||||
Total assets | $ | 1,958,580 | $ | 1,935,882 | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
Liabilities: | ||||||||
Unpaid losses and loss adjustment expenses | $ | 1,032,252 | $ | 1,014,195 | ||||
Unearned premiums and service fees | 321,500 | 336,934 | ||||||
Long-term debt | 12,000 | 12,000 | ||||||
Amounts withheld or retained for accounts of others | 119,955 | 115,174 | ||||||
Reinsurance balances payable | 36,805 | 37,097 | ||||||
Accounts payable and other liabilities | 47,786 | 41,277 | ||||||
Commissions payable | 15,390 | 15,307 | ||||||
Assessments and fees payable | 5,115 | 5,001 | ||||||
Total liabilities | 1,590,803 | 1,576,985 | ||||||
Shareholders’ equity: | ||||||||
Preferred shares – no par value | ||||||||
Authorized – 10,000 shares | ||||||||
Issued – 0 shares | — | — | ||||||
Common shares – $0.01 par value | ||||||||
Authorized – 50,000 shares | ||||||||
Issued – 23,350 shares, including 3,426 and 3,441 shares, respectively, in treasury | 234 | 234 | ||||||
Additional paid-in capital | 61,867 | 61,926 | ||||||
Retained earnings | 297,558 | 293,516 | ||||||
Accumulated other comprehensive income | 12,981 | 8,105 | ||||||
Treasury shares | (4,863 | ) | (4,884 | ) | ||||
Total shareholders’ equity | 367,777 | 358,897 | ||||||
Total liabilities and shareholders’ equity | $ | 1,958,580 | $ | 1,935,882 | ||||
See notes to consolidated financial statements.
3
National Interstate Corporation and Subsidiaries
Consolidated Statements of Income
(Unaudited)
(In thousands, except per share data)
Three Months Ended March 31, | ||||||||
2016 | 2015 | |||||||
Revenues: | ||||||||
Premiums earned | $ | 149,414 | $ | 137,823 | ||||
Net investment income | 10,415 | 9,656 | ||||||
Net realized (losses) gains on investments (*) | (1,145 | ) | 1,069 | |||||
Other | 673 | 830 | ||||||
Total revenues | 159,357 | 149,378 | ||||||
Expenses: | ||||||||
Losses and loss adjustment expenses | 115,473 | 108,781 | ||||||
Commissions and other underwriting expenses | 24,523 | 22,983 | ||||||
Other operating and general expenses | 7,550 | 6,243 | ||||||
Expense on amounts withheld | 1,894 | 1,501 | ||||||
Interest expense | 53 | 47 | ||||||
Total expenses | 149,493 | 139,555 | ||||||
Income before income taxes | 9,864 | 9,823 | ||||||
Provision for income taxes | 3,024 | 2,714 | ||||||
Net income | $ | 6,840 | $ | 7,109 | ||||
Net income per share – basic | $ | 0.34 | $ | 0.36 | ||||
Net income per share – diluted | $ | 0.34 | $ | 0.36 | ||||
Weighted average of common shares outstanding – basic | 19,921 | 19,834 | ||||||
Weighted average of common shares outstanding – diluted | 19,953 | 19,881 | ||||||
Cash dividends per common share | $ | 0.14 | $ | 0.13 | ||||
(*) Consists of the following: | ||||||||
Net realized gains before impairment losses | $ | 2,653 | $ | 1,084 | ||||
Total losses on securities with impairment charges | (3,798 | ) | — | |||||
Non-credit portion recognized in other comprehensive income | — | (15 | ) | |||||
Net impairment charges recognized in earnings | (3,798 | ) | (15 | ) | ||||
Net realized (losses) gains on investments | $ | (1,145 | ) | $ | 1,069 | |||
See notes to consolidated financial statements.
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National Interstate Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income
(Unaudited)
(Dollars in thousands)
Three Months Ended March 31, | |||||||
2016 | 2015 | ||||||
Net income | $ | 6,840 | $ | 7,109 | |||
Other comprehensive income, before tax: | |||||||
Net unrealized gains on available-for-sale securities: | |||||||
Net unrealized holding gains on securities arising during the period | 4,454 | 5,025 | |||||
Reclassification adjustment for net realized losses (gains) included in net income | 3,049 | (563 | ) | ||||
Total other comprehensive income, before tax | 7,503 | 4,462 | |||||
Deferred income tax expense on other comprehensive income | 2,627 | 1,562 | |||||
Other comprehensive income, net of tax | 4,876 | 2,900 | |||||
Total comprehensive income | $ | 11,716 | $ | 10,009 | |||
See notes to consolidated financial statements.
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National Interstate Corporation and Subsidiaries
Consolidated Statements of Shareholders’ Equity
(Unaudited)
(Dollars in thousands)
Common Shares | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Income | Treasury Shares | Total | ||||||||||||||||||
Balance at January 1, 2016 | $ | 234 | $ | 61,926 | $ | 293,516 | $ | 8,105 | $ | (4,884 | ) | $ | 358,897 | ||||||||||
Net income | 6,840 | 6,840 | |||||||||||||||||||||
Other comprehensive income, net of tax | 4,876 | 4,876 | |||||||||||||||||||||
Dividends on common shares | (2,798 | ) | (2,798 | ) | |||||||||||||||||||
Issuance of 15,121 treasury shares upon exercise of options and restricted shares issued, net of forfeitures and cancellations | (177 | ) | 21 | (156 | ) | ||||||||||||||||||
Net tax effect from exercise/vesting of share-based compensation | (107 | ) | (107 | ) | |||||||||||||||||||
Share-based compensation expense | 225 | 225 | |||||||||||||||||||||
Balance at March 31, 2016 | $ | 234 | $ | 61,867 | $ | 297,558 | $ | 12,981 | $ | (4,863 | ) | $ | 367,777 | ||||||||||
Balance at January 1, 2015 | $ | 234 | $ | 59,386 | $ | 283,031 | $ | 24,483 | $ | (5,045 | ) | $ | 362,089 | ||||||||||
Net income | 7,109 | 7,109 | |||||||||||||||||||||
Other comprehensive income, net of tax | 2,900 | 2,900 | |||||||||||||||||||||
Dividends on common shares | (2,588 | ) | (2,588 | ) | |||||||||||||||||||
Issuance of 44,371 treasury shares upon exercise of options and restricted shares issued, net of forfeitures and cancellations | 298 | 62 | 360 | ||||||||||||||||||||
Net tax effect from exercise/vesting of share-based compensation | (39 | ) | (39 | ) | |||||||||||||||||||
Share-based compensation expense | 212 | 212 | |||||||||||||||||||||
Balance at March 31, 2015 | $ | 234 | $ | 59,857 | $ | 287,552 | $ | 27,383 | $ | (4,983 | ) | $ | 370,043 | ||||||||||
See notes to consolidated financial statements.
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National Interstate Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
Three Months Ended March 31, | ||||||||
2016 | 2015 | |||||||
Operating activities | ||||||||
Net income | $ | 6,840 | $ | 7,109 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Net amortization of bond premiums and discounts | 682 | 699 | ||||||
Provision for depreciation and amortization | 1,050 | 1,392 | ||||||
Net realized losses (gains) on investment securities | 1,145 | (1,069 | ) | |||||
Deferred federal income taxes | 315 | 865 | ||||||
Share-based compensation expense | 225 | 212 | ||||||
Change in: | ||||||||
Deferred policy acquisition costs, net | (276 | ) | 198 | |||||
Reserves for losses and loss adjustment expenses | 18,057 | 24,734 | ||||||
Premiums receivable | 11,518 | 11,421 | ||||||
Unearned premiums and service fees | (15,434 | ) | (11,130 | ) | ||||
Interest receivable and other assets | 3,495 | 2,547 | ||||||
Prepaid reinsurance premiums | (4,100 | ) | (2,660 | ) | ||||
Accounts payable, commissions and other liabilities and assessments and fees payable | 3,841 | (65 | ) | |||||
Amounts withheld or retained for accounts of others | 4,781 | 2,145 | ||||||
Reinsurance recoverable | (6,660 | ) | (9,757 | ) | ||||
Reinsurance balances payable | (292 | ) | 3,879 | |||||
Other operating activities, net | 34 | (13 | ) | |||||
Net cash provided by operating activities | 25,221 | 30,507 | ||||||
Investing activities | ||||||||
Purchases of fixed maturities | (89,178 | ) | (59,048 | ) | ||||
Purchases of equity securities | (3,978 | ) | (4,371 | ) | ||||
Proceeds from sale of fixed maturities | 2,366 | 2,925 | ||||||
Proceeds from sale of equity securities | 1,063 | 1,857 | ||||||
Proceeds from maturities and redemptions of investments | 45,413 | 42,411 | ||||||
Change in other investments, net | 1,208 | 125 | ||||||
Capital expenditures | (598 | ) | (1,196 | ) | ||||
Net cash used in investing activities | (43,704 | ) | (17,297 | ) | ||||
Financing activities | ||||||||
Net tax effect from exercise/vesting of share-based compensation | (107 | ) | (39 | ) | ||||
Proceeds from the issuance of common shares from treasury | 40 | 493 | ||||||
Payments related to cancellation of shares for tax withholding obligations | (196 | ) | (133 | ) | ||||
Cash dividends paid on common shares | (2,798 | ) | (2,588 | ) | ||||
Net cash used in financing activities | (3,061 | ) | (2,267 | ) | ||||
Net (decrease) increase in cash and cash equivalents | (21,544 | ) | 10,943 | |||||
Cash and cash equivalents at beginning of period | 71,944 | 53,583 | ||||||
Cash and cash equivalents at end of period | $ | 50,400 | $ | 64,526 | ||||
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NATIONAL INTERSTATE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
INDEX TO NOTES | ||||
1. Basis of Presentation
The accompanying unaudited consolidated financial statements of National Interstate Corporation (the “Company”) and its subsidiaries have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and the instructions to Form 10-Q.
The unaudited consolidated financial statements include the accounts of the Company and its subsidiaries, National Interstate Insurance Company (“NIIC”), Vanliner Insurance Company (“VIC”), National Interstate Insurance Company of Hawaii, Inc. (“NIIC-HI”), Hudson Indemnity, Ltd. (“HIL”), Triumphe Casualty Company (“TCC”), Hudson Management Group, Ltd., National Interstate Insurance Agency, Inc. (“NIIA”), American Highways Insurance Agency, Inc., TransProtection Service Company, Explorer RV Insurance Agency, Inc. and Safety, Claims and Litigation Services, LLC. Significant intercompany transactions have been eliminated.
These interim unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015. The interim financial statements reflect all adjustments which are, in the opinion of management, necessary for the fair presentation of the results for the periods presented. Such adjustments are of a normal recurring nature. Operating results for the three months ended March 31, 2016 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2016.
The preparation of the financial statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Changes in circumstances could cause actual results to differ materially from those estimates.
2. Recent Accounting Pronouncements
Recent Accounting Standard, Adopted
In February 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis (“ASU 2015-02”). The new guidance changes the analysis a reporting entity performs to determine whether it should consolidate certain types of legal entities. The main provisions affect limited partnerships and similar legal entities, as being considered a variable interest entity (“VIE”) or voting interest entity; the evaluation of fees paid to a decision maker as a variable interest; the effect of fee arrangements on the primary beneficiary determination; and a scope exception for certain investment funds. The consolidation assessment depends on facts and circumstances surrounding each entity, but the Company’s investment funds qualify and are therefore evaluated for consolidation under the VIE model. The Company adopted this guidance effective January 1, 2016. The adoption of ASU 2015-02 did not have an impact on the Company’s results of operations or financial position. Refer to Note 13 - “Variable Interest Entities” for further discussion and related disclosures.
Recent Account Standards, Not Yet Adopted
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”) to clarify the principles for recognizing revenue. This standard is intended to help reduce diversity in practice and enhance comparability between entities related to revenue recognition. While insurance contracts are not within the scope of this updated guidance, the Company's fee
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income related to claim and loss prevention services will be subject to this updated guidance. ASU 2014-09 is effective for the quarter ending March 31, 2018. The Company is in the process of assessing the impact the adoption of this guidance will have on its consolidated financial statements and related disclosures.
In May 2015, the FASB issued ASU No. 2015-09, Financial Services - Insurance (Topic 944): Disclosures about Short-Duration Contracts (“ASU 2015-09”). The FASB issued ASU 2015-09 to enhance disclosure requirements for short-duration insurance contracts and to increase transparency regarding significant estimates made in measuring liabilities for unpaid claims and claim adjustment expenses. The ASU is also intended to improve comparability by requiring consistent disclosure information as well as provide financial statement users with additional information to facilitate analysis of the amount, timing, and uncertainty of claims cash flows. The new disclosures will be effective for fiscal years beginning after December 15, 2015 and interim periods within annual periods beginning after December 15, 2016. The Company will incorporate the required disclosures upon adoption with its annual financial statements as of December 31, 2016 and interim statements beginning with the first quarter of 2017. The new guidance does not affect the existing recognition or measurement guidance, and therefore will have no impact on the Company's financial condition or results of operations.
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall (Topic 825) (“ASU 2016-01”), which, among other things, will require all equity securities currently classified as “available-for-sale” to be reported at fair value, with holding gains and losses recognized in net income instead of accumulated other comprehensive income (“AOCI”). The Company will be required to adopt this guidance effective January 1, 2018. The Company is in the process of assessing the potential impact the adoption of this guidance will have on its consolidated financial statements.
In February 2016, FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). The ASU will require organizations that lease assets, referred to as “lessees,” to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. Under the new guidance, a lessee will be required to recognize assets and liabilities for leases with lease terms of more than 12 months. Consistent with current GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. The new guidance will require both types of leases to be recognized on the balance sheet. The Company will be required to adopt this guidance effective January 1, 2019. The Company is in the process of assessing the potential impact the adoption of this guidance will have on its consolidated financial statements.
In March 2016, FASB issued ASU No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU No. 2016-09”), which is designed to make accounting for share-based payment transactions less complex for public and private companies. ASU No. 2016-09 affects all organizations that issue share-based payment awards to their employees and simplifies several aspects of the accounting for share-based payment award transactions, including, income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. The Company will be required to adopt this guidance effective January 1, 2017. The updated guidance is not expected to have a material effect on the Company's results of operations or financial position.
3. Fair Value Measurements
The Company must determine the appropriate level in the fair value hierarchy for each applicable measurement. The fair value hierarchy prioritizes the inputs, which refer broadly to assumptions market participants would use in pricing an asset or liability, into three levels. It gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The level in the fair value hierarchy within which a fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s management is responsible for the valuation process and uses data from outside sources (including nationally recognized pricing services and broker/dealers) in establishing fair value.
Pricing services use a variety of observable inputs to estimate the fair value of fixed maturities that do not trade on a daily basis. These inputs include, but are not limited to, recent reported trades, benchmark yields, issuer spreads, bids or offers, reference data and measures of volatility. Included in the pricing of mortgage-backed securities are estimates of the rate of future prepayments and defaults of principal over the remaining life of the underlying collateral. Inputs from brokers and independent financial institutions include, but are not limited to, yields or spreads of comparable investments which have recent trading activity, credit quality, duration, credit enhancements, collateral value and estimated cash flows based on inputs including delinquency rates, estimated defaults and losses and estimates of the rate of future prepayments. Valuation techniques utilized by pricing services and prices obtained from external sources are reviewed by the Company’s internal and affiliated investment professionals who are familiar with the securities being priced and the markets in which they trade to ensure the fair value determination is representative of an exit price. To validate the appropriateness of the prices obtained, the Company’s internal investment professionals, who report to the Chief Investment Officer, compare the valuation received to independent third party pricing sources and consider widely published indices (as benchmarks), recent trades, changes in interest rates, general economic conditions and the credit
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quality of the specific issuers. If the Company believes that significant discrepancies exist, the Company will perform additional procedures, which may include specific inquiry of the pricing source, to resolve the discrepancies.
Level 1 inputs are quoted prices (unadjusted) in active markets for identical securities that the reporting entity has the ability to access at the measurement date. Level 2 inputs are inputs other than quoted prices within Level 1 that are observable for the security, either directly or indirectly. Level 2 inputs include quoted prices for similar securities in active markets, quoted prices for identical or similar securities that are not active and observable inputs other than quoted prices, such as interest rate and yield curves. Level 3 inputs are unobservable inputs for the asset or liability.
Level 1 primarily consists of publicly traded equity securities and highly liquid, direct obligations of the U.S. Government whose fair value is based on quoted prices that are readily and regularly available in an active market. Level 2 primarily consists of financial instruments whose fair value is based on quoted prices in markets that are not active and include U.S. government agency securities, fixed maturity investments and nonredeemable preferred stocks that are not actively traded. At March 31, 2016, Level 2 included $227.0 million of securities, which are valued based upon a non-binding broker quote and validated with other observable market data by management. Level 3 consists of financial instruments that are not traded in an active market, whose fair value is estimated by management based on inputs from independent financial institutions, which include non-binding broker quotes. The Company believes these estimates reflect fair value, but the Company is unable to verify inputs to the valuation methodology. The Company obtained at least one quote or price per instrument from its brokers and pricing services for all Level 3 securities and did not adjust any quotes or prices that it obtained. The Company’s internal and affiliated investment professionals review these broker quotes using any recent trades, if such information is available, or market prices of similar investments. The Company primarily uses the market approach valuation technique for all investments.
The following table presents the Company’s investment portfolio, categorized by the level within the fair value hierarchy in which the fair value measurements fell as of March 31, 2016.
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Fixed maturities: | ||||||||||||||||
U.S. Government and government agency obligations | $ | 4,229 | $ | 173,927 | $ | — | $ | 178,156 | ||||||||
State and local government obligations | — | 307,030 | 5,106 | 312,136 | ||||||||||||
Residential mortgage-backed securities | — | 167,872 | — | 167,872 | ||||||||||||
Commercial mortgage-backed securities | — | 16,219 | — | 16,219 | ||||||||||||
Corporate obligations | — | 202,502 | 9,659 | 212,161 | ||||||||||||
Other debt obligations | — | 194,639 | 14,873 | 209,512 | ||||||||||||
Redeemable preferred stocks | 4,192 | — | 500 | 4,692 | ||||||||||||
Total fixed maturities | 8,421 | 1,062,189 | 30,138 | 1,100,748 | ||||||||||||
Equity securities: | ||||||||||||||||
Common stocks | 55,797 | 185 | 2,123 | 58,105 | ||||||||||||
Nonredeemable preferred stocks | 20,538 | 4,176 | — | 24,714 | ||||||||||||
Total equity securities | 76,335 | 4,361 | 2,123 | 82,819 | ||||||||||||
Total fixed maturities and equity securities | 84,756 | 1,066,550 | 32,261 | 1,183,567 | ||||||||||||
Cash and cash equivalents | 50,400 | — | — | 50,400 | ||||||||||||
Total fixed maturities, equity securities and cash and cash equivalents at fair value | $ | 135,156 | $ | 1,066,550 | $ | 32,261 | $ | 1,233,967 | ||||||||
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The following table presents the Company’s investment portfolio, categorized by the level within the fair value hierarchy in which the fair value measurements fell as of December 31, 2015.
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Fixed maturities: | ||||||||||||||||
U.S. Government and government agency obligations | $ | 4,179 | $ | 147,124 | $ | — | $ | 151,303 | ||||||||
State and local government obligations | — | 311,351 | 5,021 | 316,372 | ||||||||||||
Residential mortgage-backed securities | — | 157,403 | — | 157,403 | ||||||||||||
Commercial mortgage-backed securities | — | 14,368 | — | 14,368 | ||||||||||||
Corporate obligations | — | 194,045 | 7,476 | 201,521 | ||||||||||||
Other debt obligations | — | 190,515 | 14,846 | 205,361 | ||||||||||||
Redeemable preferred stocks | 4,162 | — | 498 | 4,660 | ||||||||||||
Total fixed maturities | 8,341 | 1,014,806 | 27,841 | 1,050,988 | ||||||||||||
Equity securities: | ||||||||||||||||
Common stocks | 53,584 | 806 | 2,302 | 56,692 | ||||||||||||
Nonredeemable preferred stocks | 20,868 | 4,069 | — | 24,937 | ||||||||||||
Total equity securities | 74,452 | 4,875 | 2,302 | 81,629 | ||||||||||||
Total fixed maturities and equity securities | 82,793 | 1,019,681 | 30,143 | 1,132,617 | ||||||||||||
Cash and cash equivalents | 71,944 | — | — | 71,944 | ||||||||||||
Total fixed maturities, equity securities and cash and cash equivalents at fair value | $ | 154,737 | $ | 1,019,681 | $ | 30,143 | $ | 1,204,561 | ||||||||
The tables above exclude other invested assets of $48.6 million and $47.9 million at March 31, 2016 and December 31, 2015, respectively. Other invested assets include investments in limited partnerships, which are accounted for under the equity method. Equity method investments are not reported at fair value.
The Company uses the end of the reporting period as its policy for determining transfers into and out of each level. During the three months ended March 31, 2016, the Company transferred three nonredeemable preferred stocks with a total fair value of $1.2 million from Level 1 to Level 2 due to decreases in trading activity. Conversely, during the same period, the Company transferred one nonredeemable preferred stock and one common stock with fair values of $1.1 million and $0.6 million, respectively, from Level 2 to Level 1 due to increases in trading activity.
During the three months ended March 31, 2015, the Company transferred two nonredeemable preferred stocks, with a total fair value of $0.5 million from Level 2 to Level 1 due to increases in trading activity.
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The following tables present a reconciliation of the beginning and ending balances for all investments measured at fair value on a recurring basis using Level 3 inputs for the three months ended March 31, 2016 and 2015. The transfers out of Level 3 were due to increases in the availability of market observable inputs. All transfers are reflected in the table at fair value as of the end of the reporting period.
Three Months Ended March 31, 2016 | ||||||||||||||||||||
State and Local Government Obligations | Corporate Obligations | Other Debt Obligations | Redeemable Preferred Stocks | Common Stocks | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Beginning balance at January 1, 2016 | $ | 5,021 | $ | 7,476 | $ | 14,846 | $ | 498 | $ | 2,302 | ||||||||||
Total gains (losses): | ||||||||||||||||||||
Included in earnings | — | 31 | — | — | (625 | ) | ||||||||||||||
Included in other comprehensive income | 85 | 42 | (309 | ) | 2 | 446 | ||||||||||||||
Purchases and issuances | — | 2,150 | 389 | — | — | |||||||||||||||
Sales, settlements and redemptions | — | (40 | ) | (53 | ) | — | — | |||||||||||||
Transfers in and/or (out) of Level 3 | — | — | — | — | — | |||||||||||||||
Ending balance at March 31, 2016 | $ | 5,106 | $ | 9,659 | $ | 14,873 | $ | 500 | $ | 2,123 | ||||||||||
The amount of total gains (losses) for the period included in earnings and attributable to the change in unrealized gains (losses) relating to assets still held at the reporting date | $ | — | $ | — | $ | — | $ | — | $ | (625 | ) | |||||||||
Three Months Ended March 31, 2015 | ||||||||||||||||||||
State and Local Government Obligations | Corporate Obligations | Other Debt Obligations | Redeemable Preferred Stocks | Common Stocks | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Beginning balance at January 1, 2015 | $ | 2,887 | $ | 7,100 | $ | 3,995 | $ | 495 | $ | 3,988 | ||||||||||
Total gains (losses): | ||||||||||||||||||||
Included in earnings | — | — | — | — | — | |||||||||||||||
Included in other comprehensive income | 36 | 138 | (6 | ) | 2 | (183 | ) | |||||||||||||
Purchases and issuances | — | — | 1,000 | — | — | |||||||||||||||
Sales, settlements and redemptions | — | (88 | ) | (2,527 | ) | — | — | |||||||||||||
Transfers in and/or (out) of Level 3 | — | — | — | — | (966 | ) | ||||||||||||||
Ending balance at March 31, 2015 | $ | 2,923 | $ | 7,150 | $ | 2,462 | $ | 497 | $ | 2,839 | ||||||||||
The amount of total gains (losses) for the period included in earnings and attributable to the change in unrealized gains (losses) relating to assets still held at the reporting date | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||
At March 31, 2016, the Company had 30 securities with a fair value of $32.3 million that are included in Level 3, which represented 2.7% of its total investments reported at fair value. The significant unobservable inputs used by the brokers and pricing services in establishing fair values of the Company’s Level 3 securities are primarily spreads to U.S. Treasury rates and discounts to comparable securities. The specifics of such spreads and discounts were not reasonably obtainable or made available to the Company. Significant increases (decreases) on spreads to U.S. Treasury rates and discount spreads to comparable securities would result in lower (higher) fair value measurements. Generally, a change in the assumption used for determining a spread is accompanied by market factors that warrant an adjustment for the credit risk and liquidity premium of the security. As the total fair value of Level
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3 securities is 8.8% of the Company’s shareholders’ equity at March 31, 2016, reasonable changes in unobservable inputs would not have a material impact on the Company’s financial position.
4. Investments
The cost or amortized cost and fair value of investments in fixed maturities and equity securities are as follows:
Cost or Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
March 31, 2016 | ||||||||||||||||
Fixed maturities: | ||||||||||||||||
U.S. Government and government agency obligations | $ | 175,180 | $ | 2,980 | $ | (4 | ) | $ | 178,156 | |||||||
State and local government obligations | 299,432 | 12,766 | (62 | ) | 312,136 | |||||||||||
Residential mortgage-backed securities | 163,205 | 5,496 | (829 | ) | 167,872 | |||||||||||
Commercial mortgage-backed securities | 15,465 | 769 | (15 | ) | 16,219 | |||||||||||
Corporate obligations | 211,555 | 5,735 | (5,129 | ) | 212,161 | |||||||||||
Other debt obligations | 211,442 | 812 | (2,742 | ) | 209,512 | |||||||||||
Redeemable preferred stocks | 4,514 | 180 | (2 | ) | 4,692 | |||||||||||
Total fixed maturities | 1,080,793 | 28,738 | (8,783 | ) | 1,100,748 | |||||||||||
Equity securities: | ||||||||||||||||
Common stocks | 58,550 | 4,241 | (4,686 | ) | 58,105 | |||||||||||
Nonredeemable preferred stocks | 24,253 | 996 | (535 | ) | 24,714 | |||||||||||
Total equity securities | 82,803 | 5,237 | (5,221 | ) | 82,819 | |||||||||||
Total fixed maturities and equity securities | $ | 1,163,596 | $ | 33,975 | $ | (14,004 | ) | $ | 1,183,567 | |||||||
December 31, 2015 | ||||||||||||||||
Fixed maturities: | ||||||||||||||||
U.S. Government and government agency obligations | $ | 149,402 | $ | 2,197 | $ | (296 | ) | $ | 151,303 | |||||||
State and local government obligations | 305,625 | 10,927 | (180 | ) | 316,372 | |||||||||||
Residential mortgage-backed securities | 153,191 | 5,407 | (1,195 | ) | 157,403 | |||||||||||
Commercial mortgage-backed securities | 13,703 | 675 | (10 | ) | 14,368 | |||||||||||
Corporate obligations | 204,761 | 4,039 | (7,279 | ) | 201,521 | |||||||||||
Other debt obligations | 207,034 | 384 | (2,057 | ) | 205,361 | |||||||||||
Redeemable preferred stocks | 4,514 | 149 | (3 | ) | 4,660 | |||||||||||
Total fixed maturities | 1,038,230 | 23,778 | (11,020 | ) | 1,050,988 | |||||||||||
Equity securities: | ||||||||||||||||
Common stocks | 57,785 | 3,839 | (4,932 | ) | 56,692 | |||||||||||
Nonredeemable preferred stocks | 24,134 | 1,121 | (318 | ) | 24,937 | |||||||||||
Total equity securities | 81,919 | 4,960 | (5,250 | ) | 81,629 | |||||||||||
Total fixed maturities and equity securities | $ | 1,120,149 | $ | 28,738 | $ | (16,270 | ) | $ | 1,132,617 | |||||||
The table above excludes other invested assets of $48.6 million and $47.9 million at March 31, 2016 and December 31, 2015, respectively. Other invested assets include investments in limited partnerships which are accounted for under the equity method. Equity method investments are not reported at fair value.
State and local government obligations represented approximately 28.4% of the Company’s fixed maturity portfolio at March 31, 2016, with approximately $272.5 million, or 87.3%, of the Company’s state and local government obligations held in special revenue obligations, and the remaining amount held in general obligations. The Company’s state and local government obligations portfolio is high quality, with 98.5% of such securities rated investment grade (as determined by nationally recognized agencies) at March 31, 2016. The Company had no state and local government obligations for any state, municipality or political subdivision that comprised 10% or more of the total amortized cost or fair value of such obligations at March 31, 2016.
The non-credit portion of other-than-temporary impairment charges is included in other comprehensive income. Cumulative non-credit charges taken for securities still owned were $3.3 million at both March 31, 2016 and December 31, 2015.
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The amortized cost and fair value of fixed maturities at March 31, 2016, by contractual maturity, are shown below. Other debt obligations, which are primarily comprised of asset-backed securities other than mortgage-backed securities, and other securities with sinking funds, are categorized based on their average maturity. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. The average life of mortgage-backed securities is 3.8 years in the Company’s investment portfolio.
Amortized cost and fair value of the fixed maturities in the Company’s investment portfolio at March 31, 2016 were as follows:
Amortized Cost | Fair Value | |||||||
(Dollars in thousands) | ||||||||
Due in one year or less | $ | 48,897 | $ | 49,318 | ||||
Due after one year through five years | 425,437 | 428,642 | ||||||
Due after five years through ten years | 354,627 | 361,871 | ||||||
Due after ten years | 73,162 | 76,826 | ||||||
902,123 | 916,657 | |||||||
Mortgage-backed securities | 178,670 | 184,091 | ||||||
Total | $ | 1,080,793 | $ | 1,100,748 | ||||
Gains and losses on the sale of investments, including other-than-temporary impairment charges and other invested assets' gains or losses, were as follows:
Three Months Ended March 31, | ||||||||
2016 | 2015 | |||||||
(Dollars in thousands) | ||||||||
Fixed maturity gains | $ | 281 | $ | 82 | ||||
Fixed maturity losses | (1,289 | ) | (23 | ) | ||||
Equity security gains | 485 | 709 | ||||||
Equity security losses | (2,526 | ) | (93 | ) | ||||
Other invested assets, net gains | 1,904 | 394 | ||||||
Net realized (losses) gains on investments | $ | (1,145 | ) | $ | 1,069 | |||
Pre-tax net realized losses on investments of $1.1 million for the three months ended March 31, 2016 were driven by $3.8 million in other-than-temporary impairment charges on both equity and fixed maturity securities, which were concentrated within the financial services and energy sectors. The other-than-temporary impairment charges occurred on securities where management is uncertain of the timing and the extent of ultimate recovery. Partially offsetting these losses for the first quarter of 2016 were net gains generated by other invested assets and the sales or redemptions of securities of $1.9 million and $0.8 million, respectively.
Pre-tax net realized gains on investments of $1.1 million for the three months ended March 31, 2015 were partially generated from net realized gains associated with the sales or redemptions of securities of $0.7 million and net realized gains associated with other invested assets of $0.4 million. The gains on equity and fixed maturity securities were primarily due to favorable market conditions that increased the value of securities over book value.
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Realized gains (losses) and changes in unrealized appreciation (depreciation) related to fixed maturities, equity securities and other invested assets are as follows:
Fixed Maturities | Equity Securities | Other Invested Assets | Tax Effects | Total | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Three Months Ended March 31, 2016: | ||||||||||||||||||||
Realized before impairments | $ | 264 | $ | 485 | $ | 1,904 | $ | (929 | ) | $ | 1,724 | |||||||||
Realized - impairments | (1,272 | ) | (2,526 | ) | — | 1,329 | (2,469 | ) | ||||||||||||
Change in unrealized | 7,197 | 306 | — | (2,627 | ) | 4,876 | ||||||||||||||
Three Months Ended March 31, 2015: | ||||||||||||||||||||
Realized before impairments | $ | 74 | $ | 616 | $ | 394 | $ | (379 | ) | $ | 705 | |||||||||
Realized - impairments | (15 | ) | — | — | 5 | (10 | ) | |||||||||||||
Change in unrealized | 4,202 | 260 | — | (1,562 | ) | 2,900 | ||||||||||||||
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The following table summarizes the Company’s gross unrealized losses on fixed maturities and equity securities and the length of time that individual securities have been in a continuous unrealized loss position.
Less than Twelve Months | Twelve Months or More | ||||||||||||||||||||||||||
Fair Value | Unrealized Losses | Fair Value as % of Cost | Number of Holdings | Fair Value | Unrealized Losses | Fair Value as % of Cost | Number of Holdings | ||||||||||||||||||||
(Dollars in thousands) | |||||||||||||||||||||||||||
March 31, 2016 | |||||||||||||||||||||||||||
Fixed maturities: | |||||||||||||||||||||||||||
U.S. Government and government agency obligations | $ | 15,993 | $ | (4 | ) | 100.0 | % | 6 | $ | — | $ | — | 0.0 | % | — | ||||||||||||
State and local government obligations | 3,200 | (31 | ) | 99.0 | % | 4 | 1,710 | (31 | ) | 98.2 | % | 2 | |||||||||||||||
Residential mortgage-backed securities | 27,595 | (372 | ) | 98.7 | % | 33 | 23,699 | (457 | ) | 98.1 | % | 30 | |||||||||||||||
Commercial mortgage-backed securities | 1,308 | (8 | ) | 99.4 | % | 2 | 388 | (7 | ) | 98.2 | % | 1 | |||||||||||||||
Corporate obligations | 45,579 | (3,522 | ) | 92.8 | % | 68 | 11,089 | (1,607 | ) | 87.3 | % | 9 | |||||||||||||||
Other debt obligations | 99,789 | (2,517 | ) | 97.5 | % | 105 | 8,134 | (225 | ) | 97.3 | % | 11 | |||||||||||||||
Redeemable preferred stocks | 345 | (1 | ) | 99.7 | % | 1 | 500 | (1 | ) | 99.8 | % | 1 | |||||||||||||||
Total fixed maturities | 193,809 | (6,455 | ) | 96.8 | % | 219 | 45,520 | (2,328 | ) | 95.1 | % | 54 | |||||||||||||||
Equity securities: | |||||||||||||||||||||||||||
Common stocks | 29,048 | (4,686 | ) | 86.1 | % | 46 | — | — | 0.0 | % | — | ||||||||||||||||
Nonredeemable preferred stocks | 7,286 | (230 | ) | 96.9 | % | 13 | 3,696 | (305 | ) | 92.4 | % | 4 | |||||||||||||||
Total equity securities | 36,334 | (4,916 | ) | 88.1 | % | 59 | 3,696 | (305 | ) | 92.4 | % | 4 | |||||||||||||||
Total fixed maturities and equity securities | $ | 230,143 | $ | (11,371 | ) | 95.3 | % | 278 | $ | 49,216 | $ | (2,633 | ) | 94.9 | % | 58 | |||||||||||
December 31, 2015 | |||||||||||||||||||||||||||
Fixed maturities: | |||||||||||||||||||||||||||
U.S. Government and government agency obligations | $ | 45,631 | $ | (296 | ) | 99.4 | % | 22 | $ | — | $ | — | 0.0 | % | — | ||||||||||||
State and local government obligations | 15,498 | (137 | ) | 99.1 | % | 15 | 1,627 | (43 | ) | 97.4 | % | 3 | |||||||||||||||
Residential mortgage-backed securities | 23,502 | (318 | ) | 98.7 | % | 28 | 28,426 | (877 | ) | 97.0 | % | 31 | |||||||||||||||
Commercial mortgage-backed securities | 440 | (1 | ) | 99.8 | % | 1 | 495 | (9 | ) | 98.2 | % | 1 | |||||||||||||||
Corporate obligations | 75,756 | (5,660 | ) | 93.0 | % | 99 | 3,658 | (1,619 | ) | 69.3 | % | 5 | |||||||||||||||
Other debt obligations | 138,531 | (1,860 | ) | 98.7 | % | 131 | 8,201 | (197 | ) | 97.7 | % | 11 | |||||||||||||||
Redeemable preferred stocks | 344 | (1 | ) | 99.7 | % | 1 | 498 | (2 | ) | 99.6 | % | 1 | |||||||||||||||
Total fixed maturities | 299,702 | (8,273 | ) | 97.3 | % | 297 | 42,905 | (2,747 | ) | 94.0 | % | 52 | |||||||||||||||
Equity securities: | |||||||||||||||||||||||||||
Common stocks | 26,993 | (4,932 | ) | 84.6 | % | 42 | — | — | 0.0 | % | — | ||||||||||||||||
Nonredeemable preferred stocks | 5,387 | (113 | ) | 97.9 | % | 11 | 2,795 | (205 | ) | 93.2 | % | 3 | |||||||||||||||
Total equity securities | 32,380 | (5,045 | ) | 86.5 | % | 53 | 2,795 | (205 | ) | 93.2 | % | 3 | |||||||||||||||
Total fixed maturities and equity securities | $ | 332,082 | $ | (13,318 | ) | 96.1 | % | 350 | $ | 45,700 | $ | (2,952 | ) | 93.9 | % | 55 | |||||||||||
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The gross unrealized losses on the Company’s fixed maturities and equity securities portfolios decreased from $16.3 million at December 31, 2015 to $14.0 million at March 31, 2016. The gross unrealized losses on fixed maturity securities at March 31, 2016 were $8.8 million and primarily consist of corporate obligations and to a lesser extent, other debt obligations and residential mortgage-backed securities. Investment grade securities represent 75.0% of all fixed maturity securities with unrealized losses. The gross unrealized losses on equity securities at March 31, 2016, consist of $4.7 million of common stocks that have been in an unrealized loss position for less than 12 months, as well as $0.5 million of investment grade nonredeemable preferred stocks, all of which are considered to be temporary.
At March 31, 2016, corporate obligations, with gross unrealized losses of $5.1 million, had 68 securities that were in an unrealized loss position of $3.5 million for less than 12 months and 9 securities with gross unrealized losses of $1.6 million for 12 months or more. At March 31, 2016, other debt obligations, with gross unrealized losses of $2.7 million, had 105 securities that were in an unrealized loss position of $2.5 million for less than 12 months and 11 securities with gross unrealized losses of $0.2 million for 12 months or more. Investment grade securities represented 82.9% of all corporate obligations and other debt obligations with unrealized losses.
At March 31, 2016, residential mortgage-backed securities, with gross unrealized losses of $0.8 million, included 33 securities that were in an unrealized loss position of $0.4 million for less than 12 months and 30 securities with gross unrealized losses of $0.4 million for 12 months or more. Based on historical payment data and analysis of expected future cash flows of the underlying collateral, independent credit ratings and other facts and analysis, management believes that, based upon information currently available, the Company will recover its cost basis in all of these securities.
Management concluded that no additional charges for other-than-temporary impairment were required on the fixed maturity and equity holdings at March 31, 2016 based on several factors, including the Company’s ability and current intent to hold these investments for a period of time sufficient to allow for anticipated recovery of its amortized cost, the length of time and the extent to which fair value has been below cost, analysis of company-specific financial data and the outlook for industry sectors and credit ratings. The Company believes these unrealized losses are primarily due to temporary market and sector-related factors and does not consider these securities to be other-than-temporarily impaired. If the Company’s strategy was to change or these securities were determined to be other-than-temporarily impaired, the Company would recognize a write-down in accordance with its stated policy.
The following table is a progression of the amount related to credit losses on fixed maturity securities for which the non-credit portion of an other-than-temporary impairment has been recognized in other comprehensive income.
Three Months Ended March 31, | ||||||||
2016 | 2015 | |||||||
(Dollars in thousands) | ||||||||
Beginning balance | $ | 2,391 | $ | 2,368 | ||||
Additional credit impairments on previously impaired securities | — | 15 | ||||||
Reductions - disposals | (6 | ) | (8 | ) | ||||
Ending balance | $ | 2,385 | $ | 2,375 | ||||
5. Income Taxes
The Company’s provision for income taxes in interim periods is computed by applying its estimated full-year effective tax rate against pre-tax income for the period. The effective tax rate was 30.7% and 27.6% for the three months ended March 31, 2016 and 2015, respectively. The effective tax rate for the three months ended March 31, 2016 is lower than the 35% statutory rate primarily due to the tax effect of tax-exempt income earned.
17
The tax effects of temporary differences that give rise to significant portions of the net deferred tax assets and liabilities in the Consolidated Balance Sheets were as follows:
March 31, 2016 | December 31, 2015 | |||||||
(Dollars in thousands) | ||||||||
Deferred tax assets: | ||||||||
Unearned premiums | $ | 18,625 | $ | 19,959 | ||||
Unpaid losses and loss adjustment expenses | 19,314 | 18,687 | ||||||
Assessments and fees payable | 1,612 | 1,576 | ||||||
Realized losses on investments, primarily impairments | 6,420 | 5,147 | ||||||
Accrued compensation | 1,972 | 1,959 | ||||||
Limited partnership investments | — | 61 | ||||||
Other, net | 1,996 | 2,185 | ||||||
Total deferred tax assets | 49,939 | 49,574 | ||||||
Deferred tax liabilities: | ||||||||
Deferred policy acquisition costs | (7,889 | ) | (7,793 | ) | ||||
Unrealized gains on investments | (6,990 | ) | (4,363 | ) | ||||
Intangible assets | (2,678 | ) | (2,678 | ) | ||||
Limited partnership investments | (597 | ) | — | |||||
Prepaid expenses | (308 | ) | (279 | ) | ||||
Other, net | (584 | ) | (626 | ) | ||||
Total deferred tax liabilities | (19,046 | ) | (15,739 | ) | ||||
Net deferred tax assets | $ | 30,893 | $ | 33,835 | ||||
Management has reviewed the recoverability of the deferred tax assets and believes that the amount will be recoverable against future earnings.
6. Share-Based Compensation
The Company grants options and other stock awards to officers and key employees of the Company under the amended and restated Long Term Incentive Plan (“LTIP”). At March 31, 2016, there were options for 180,000 shares outstanding and 729,319 of the Company’s common shares reserved for issuance under the LTIP. Options and restricted shares vest pursuant to the terms of a written grant agreement. Options must be exercised no later than the tenth anniversary of the date of grant. Restricted share awards generally cliff vest three years from the date of grant. As set forth in the LTIP, the Compensation Committee of the Board of Directors may accelerate vesting and exercisability of options. Treasury shares are used to fulfill the options exercised and other awards granted.
For both the three months ended March 31, 2016 and 2015, the Company recognized share-based compensation expense of $0.2 million with related income tax benefits of approximately $0.1 million.
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7. Earnings Per Common Share
The following table sets forth the computation of basic and diluted net income per share.
Three Months Ended March 31, | |||||||
2016 | 2015 | ||||||
(In thousands, except per share data) | |||||||
Net income | $ | 6,840 | $ | 7,109 | |||
Weighted average shares outstanding during period | 19,921 | 19,834 | |||||
Additional shares issuable under employee common stock option plans using treasury stock method | 32 | 47 | |||||
Weighted average shares outstanding assuming exercise of stock options | 19,953 | 19,881 | |||||
Net income per share: | |||||||
Basic | $ | 0.34 | $ | 0.36 | |||
Diluted | $ | 0.34 | $ | 0.36 | |||
For the three months ended March 31, 2016 and 2015, there were 88,440 and 105,975, respectively, outstanding options and restricted shares excluded from diluted earnings per share because they were anti-dilutive.
8. Transactions with Related Parties
The Company’s principal insurance subsidiary, NIIC, is involved in assumption of reinsurance. NIIC is a party to a reinsurance agreement, and NIIA is a party to an underwriting management agreement with Great American Insurance Company (“Great American”). As of March 31, 2016, Great American owned 51.0% of the outstanding shares of the Company. The reinsurance agreement calls for the assumption by NIIC of all of the risk on Great American’s net premiums written for public transportation and recreational vehicle risks underwritten pursuant to the reinsurance agreement. NIIA provides administrative services to Great American in connection with Great American’s underwriting of these risks. The Company was also previously involved in the cession of premium through reinsurance agreements with Great American to reduce exposure in certain of its property and casualty insurance programs. Effective November 2014, Great American no longer participates in such reinsurance agreements and settlement activity in 2016 is not expected to be material.
The table below summarizes the reinsurance balance and activity with Great American:
Three Months Ended March 31, | ||||||||
2016 | 2015 | |||||||
(Dollars in thousands) | ||||||||
Assumed premiums written | $ | 46 | $ | 107 | ||||
Assumed premiums earned | 64 | 135 | ||||||
Assumed losses and loss adjustment expense incurred | (21 | ) | 54 | |||||
Ceded premiums earned | — | 14 | ||||||
Ceded losses and loss adjustment expense recoveries | 162 | 100 | ||||||
March 31, 2016 | December 31, 2015 | |||||||
(Dollars in thousands) | ||||||||
Payable to Great American as of period end | $ | 4 | $ | 27 | ||||
The Company is not substantially dependent on any individual reinsurance agreements, including the expired reinsurance agreements with Great American. The Company does not depend on these specific reinsurers to a material extent, as other reinsurers could be obtained for those treaties or the business could be retained.
During 2015, Virginia, Washington and Connecticut recreational vehicle risks previously written through Great American were transitioned to TCC, resulting in a decline in assumed premiums written and earned from Great American.
The Company has an agreement with American Money Management Corporation (“AMMC”), a wholly-owned subsidiary of American Financial Group, Inc. (“AFG”), whereby AMMC manages approximately 56.0% of the Company’s investment portfolio
19
at an annual cost of 15 basis points of the portfolio's fair value. Fees for such services were approximately $0.3 million and $0.2 million for the three months ended March 31, 2016 and 2015, respectively.
On March 7, 2016, AFG announced that it had submitted a proposal to the Company to acquire all of the outstanding shares of Common Stock of the Company (“Common Stock”) not already owned by AFG’s wholly-owned subsidiary, Great American, at a purchase price of $30.00 per share in cash. As of March 7, 2016, Great American beneficially owned 10,200,000, or approximately 51.0%, of the outstanding shares of Common Stock.
Great American or its parent, AFG, has performed for many years certain services for the Company without charge including actuarial services and on a consultative basis, as needed and as the Company requests, internal audit, legal, accounting and other support services. If Great American no longer controlled a majority of the Company’s common shares, it is possible that many of these services would cease or, alternatively, be provided at an increased cost to the Company. This could impact the Company’s personnel resources, require the Company to hire additional professional staff and generally increase the Company’s operating expenses. Management believes, based on discussions with Great American, that these services will continue to be provided by the affiliated entity in future periods and the relative impact on operating results is not material.
9. Reinsurance
Premiums and reinsurance activity consisted of the following:
Three Months Ended March 31, | ||||||||
2016 | 2015 | |||||||
(Dollars in thousands) | ||||||||
Direct premiums written | $ | 160,669 | $ | 151,302 | ||||
Reinsurance assumed | 4,031 | 3,236 | ||||||
Reinsurance ceded | (34,742 | ) | (30,441 | ) | ||||
Net premiums written | $ | 129,958 | $ | 124,097 | ||||
Direct premiums earned | $ | 176,136 | $ | 162,489 | ||||
Reinsurance assumed | 3,920 | 3,113 | ||||||
Reinsurance ceded | (30,642 | ) | (27,779 | ) | ||||
Premiums earned | $ | 149,414 | $ | 137,823 | ||||
The Company cedes premiums through reinsurance agreements with reinsurers to reduce exposure in certain of its property and casualty insurance programs. Ceded losses and loss adjustment expense recoveries recorded for the three months ended March 31, 2016 and 2015 were $19.7 million and $14.3 million, respectively. The Company remains primarily liable as the direct insurer on all risks reinsured and a contingent liability exists to the extent that the reinsurance companies are unable to meet their obligations for losses assumed. To minimize its exposure to significant losses from reinsurer insolvencies, the Company seeks to do business with reinsurers rated “A-” or better by A.M. Best Company and regularly evaluates the financial condition of its reinsurers. If a reinsurer is not rated by A.M. Best Company or their rating falls below “A-”, the contract with them generally requires that they secure outstanding obligations with cash, a trust or a letter of credit that the Company deems acceptable.
10. Commitments and Contingencies
The Company and its subsidiaries are subject at times to various claims, lawsuits and legal proceedings arising in the ordinary course of business. All legal actions relating to claims made under insurance policies are considered in the establishment of the Company’s loss and loss adjustment expense (“LAE”) reserves. In addition, regulatory bodies, such as state insurance departments, the Securities and Exchange Commission, the Department of Labor and other regulatory bodies may make inquiries and conduct examinations or investigations concerning the Company’s compliance with insurance laws, securities laws, labor laws and the Employee Retirement Income Security Act of 1974, as amended.
The Company’s subsidiaries also have lawsuits pending in which the plaintiff seeks extra-contractual damages from the Company in addition to damages claimed or in excess of the available limits under an insurance policy. These lawsuits, which are in various stages, generally mirror similar lawsuits filed against other carriers in the industry. Although the Company is vigorously defending these lawsuits, the outcomes of these cases cannot be determined at this time. In accordance with current accounting standards for loss contingencies and based upon information currently known to the Company, reserves are established for litigation when it is probable that a loss associated with a claim or proceeding has been incurred and the amount of the loss or range of loss can be reasonably estimated. As such, the Company has established loss and LAE reserves for such lawsuits as to which the Company has determined that a loss is both probable and estimable. In addition to these case reserves, the Company also establishes reserves for claims incurred but not reported to cover unknown exposures and adverse development on known exposures. Based on currently
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available information, the Company believes that reserves for these lawsuits are reasonable and that the amounts reserved did not have a material effect on the Company’s financial condition or results of operations. However, if any one or more of these cases results in a judgment against or settlement by the Company for an amount that is significantly greater than the amount so reserved, the resulting liability could have a material effect on the Company’s financial condition, cash flows and results of operations.
As a direct writer of insurance, the Company receives assessments by state funds to cover losses to policyholders of insolvent or rehabilitated companies and other authorized fees. These mandatory assessments may be partially recovered through a reduction in future premium taxes in some states over several years. At March 31, 2016 and December 31, 2015, the liability for such assessments was $5.1 million and $5.0 million, respectively, and will be paid over several years as assessed by the various state funds.
The Company has investments in limited partnerships which are included in the “Other invested assets” line on the Consolidated Balance Sheets. Relative to such limited partnerships, the Company has contractual agreements to invest up to an additional $15.6 million. These limited partnership contractual agreements have expiration dates up to five years whereby the entire amounts or a portion thereof could be required to be funded at any time prior to the expiration dates.
11. Segment Information
The Company operates its business as one segment, property and casualty insurance. The Company manages this segment through a product management structure. The following table shows revenues summarized by the broader business component description, which were determined based primarily on similar economic characteristics, products and services.
Three Months Ended March 31, | ||||||||
2016 | 2015 | |||||||
(Dollars in thousands) | ||||||||
Revenue: | ||||||||
Premiums earned: | ||||||||
Alternative Risk Transfer | $ | 86,491 | $ | 74,002 | ||||
Transportation | 46,145 | 48,252 | ||||||
Specialty Personal Lines | 7,461 | 7,550 | ||||||
Hawaii and Alaska | 5,176 | 4,648 | ||||||
Other | 4,141 | 3,371 | ||||||
Total premiums earned | 149,414 | 137,823 | ||||||
Net investment income | 10,415 | 9,656 | ||||||
Net realized (losses) gains on investments | (1,145 | ) | 1,069 | |||||
Other | 673 | 830 | ||||||
Total revenues | $ | 159,357 | $ | 149,378 | ||||
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