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EX-31.1 - EX-31.1 - State National Companies, Inc.snc-20160630ex311375644.htm
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EX-31.2 - EX-31.2 - State National Companies, Inc.snc-20160630ex312e23a62.htm

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q

 

 

 

 

(Mark One)

 

 

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

 

 

 

 

For the quarterly period ended

June 30, 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

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 August 5, 2016

(Common stock, $.001 par value)

 

42,336,373 Shares

 

 

 

 


 

STATE NATIONAL COMPANIES, INC.

 

INDEX

 

 

 

 

 

 

 

 

    

    

    

Page No.

 

Part I - Financial Information 

 

 

 

 

 

 

 

Item 1: 

 

Unaudited Condensed Consolidated Financial Statements

 

 

 

 

 

Condensed Consolidated Balance Sheets –
June 30, 2016 (unaudited) and December 31, 2015

 

1

 

 

 

 

 

 

 

 

 

Unaudited Condensed Consolidated Statements of Income –
three months ended June 30, 2016 and 2015

 

3

 

 

 

 

 

 

 

 

 

Unaudited Condensed Consolidated Statements of Comprehensive Income –
three months ended June 30, 2016 and 2015

 

4

 

 

 

 

 

 

 

 

 

Unaudited Condensed Consolidated Statements of Shareholders’ Equity –
three months ended June 30, 2016 and twelve months ended December 31, 2015

 

5

 

 

 

 

 

 

 

 

 

Unaudited Condensed Consolidated Statements of Cash Flows –
three months ended June 30, 2016 and 2015

 

6

 

 

 

 

 

 

 

 

 

Notes to Unaudited Condensed Consolidated Financial Statements 

 

7

 

 

 

 

 

 

 

Item 2: 

 

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

 

23

 

 

 

 

 

 

 

Item 3: 

 

Quantitative and Qualitative Disclosures About Market Risk

 

38

 

 

 

 

 

 

 

Item 4: 

 

Controls and Procedures

 

39

 

 

 

 

 

 

 

Part II - Other Information 

 

 

 

 

 

 

 

Item 1: 

 

Legal Proceedings

 

40

 

 

 

 

 

 

 

Item 1A: 

 

Risk Factors

 

40

 

 

 

 

 

 

 

Item 2: 

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

40

 

 

 

 

 

 

 

Item 3: 

 

Defaults Upon Senior Securities

 

40

 

 

 

 

 

 

 

Item 4: 

 

Mine Safety Disclosures

 

40

 

 

 

 

 

 

 

Item 5: 

 

Other Information

 

40

 

 

 

 

 

 

 

Item 6: 

 

Exhibits

 

40

 

 

 

 

 

 


 

PART I - FINANCIAL INFORMATION

 

Item 1:  Unaudited Condensed Consolidated Financial Statements

 

STATE NATIONAL COMPANIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

($ in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

 

 

2016

 

2015

 

Assets

 

 

(Unaudited)

 

 

 

 

Investments:

 

 

 

 

 

 

 

Fixed-maturity securities – available-for-sale, at fair value (amortized cost – $339,383, $327,764, respectively)

 

$

349,236

 

$

329,522

 

Equity securities – available-for-sale, at fair value (cost – $3,790, $4,796, respectively)

 

 

4,165

 

 

5,544

 

Total investments

 

 

353,401

 

 

335,066

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

45,632

 

 

51,770

 

Restricted cash and investments

 

 

2,835

 

 

3,717

 

Accounts receivable from agents, net

 

 

30,461

 

 

23,913

 

Reinsurance recoverable on paid losses

 

 

1,026

 

 

1,187

 

Deferred acquisition costs

 

 

953

 

 

1,075

 

Reinsurance recoverables

 

 

2,044,228

 

 

1,911,660

 

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

 

 

16,758

 

 

17,163

 

Interest receivable

 

 

2,163

 

 

2,158

 

Income taxes receivable

 

 

610

 

 

3,330

 

Deferred income taxes, net

 

 

22,676

 

 

26,208

 

Goodwill and intangible assets, net

 

 

5,598

 

 

5,958

 

Other assets

 

 

6,109

 

 

4,353

 

Total assets

 

$

2,532,450

 

$

2,387,558

 

 

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

1


 

STATE NATIONAL COMPANIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (continued)

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

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

 

    

2016

    

2015

 

Liabilities

 

 

(Unaudited)

 

 

 

 

Unpaid losses and loss adjustment expenses

 

$

1,450,261

 

$

1,364,774

 

Unearned premiums

 

 

627,878

 

 

585,448

 

Allowance for policy cancellations

 

 

56,616

 

 

59,610

 

Deferred ceding fees

 

 

30,758

 

 

29,119

 

Accounts payable to agents

 

 

2,206

 

 

2,458

 

Accounts payable to insurance companies

 

 

9,709

 

 

3,801

 

Debt, net

 

 

43,761

 

 

43,740

 

Other liabilities

 

 

30,907

 

 

35,151

 

Total liabilities

 

 

2,252,096

 

 

2,124,101

 

 

 

 

 

 

 

 

 

Shareholders’ equity

 

 

 

 

 

 

 

Common stock, $.001 par value (150,000,000 shares authorized; 42,383,994 and 42,699,550 shares issued at June 30, 2016 and December 31, 2015, respectively)

 

 

42

 

 

43

 

Preferred stock, $.001 par value (10,000,000 shares authorized; no shares issued and outstanding at June 30, 2016 and December 31, 2015)

 

 

 —

 

 

 —

 

Additional paid-in capital

 

 

226,644

 

 

224,719

 

Retained earnings

 

 

46,725

 

 

37,322

 

Accumulated other comprehensive income

 

 

6,943

 

 

1,373

 

Total shareholders’ equity

 

 

280,354

 

 

263,457

 

Total liabilities and shareholders’ equity

 

$

2,532,450

 

$

2,387,558

 

 

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

 

 

 

 

 

 

 

 

 

 

 

2


 

STATE NATIONAL COMPANIES, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME

($ in thousands, except for per share information)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

    

June 30,

    

June 30,

    

June 30,

 

 

2016

 

2015

 

2016

 

2015

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Premiums earned

$

28,916

 

$

25,705

 

$

60,593

 

$

54,989

 

Commission income

 

305

 

 

364

 

 

626

 

 

734

 

Ceding fees

 

16,917

 

 

16,379

 

 

33,161

 

 

30,523

 

Net investment income

 

2,100

 

 

2,272

 

 

4,140

 

 

3,953

 

Realized net investment gains (losses)

 

282

 

 

1,186

 

 

(356)

 

 

1,451

 

Other income

 

459

 

 

462

 

 

915

 

 

847

 

Total revenues

 

48,979

 

 

46,368

 

 

99,079

 

 

92,497

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Losses and loss adjustment expenses

 

13,743

 

 

12,649

 

 

28,832

 

 

26,182

 

Commissions

 

1,130

 

 

1,260

 

 

2,827

 

 

2,757

 

Taxes, licenses, and fees

 

804

 

 

563

 

 

1,506

 

 

1,275

 

General and administrative

 

17,148

 

 

16,051

 

 

34,142

 

 

32,193

 

Interest expense

 

553

 

 

505

 

 

1,090

 

 

1,005

 

Total expenses

 

33,378

 

 

31,028

 

 

68,397

 

 

63,412

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

15,601

 

 

15,340

 

 

30,682

 

 

29,085

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income taxes:

 

 

 

 

 

 

 

 

 

 

 

 

Current tax expense (benefit)

 

6,137

 

 

7,770

 

 

10,491

 

 

13,014

 

Deferred tax expense (benefit)

 

(524)

 

 

(2,112)

 

 

533

 

 

(2,285)

 

 

 

5,613

 

 

5,658

 

 

11,024

 

 

10,729

 

Net income (loss)

$

9,988

 

$

9,682

 

$

19,658

 

$

18,356

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

$

0.24

 

$

0.22

 

$

0.46

 

$

0.41

 

Diluted earnings per share

 

0.24

 

 

0.22

 

 

0.46

 

 

0.41

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends, per share

$

0.06

 

$

0.01

 

$

0.12

 

$

0.02

 

 

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

3

 


 

STATE NATIONAL COMPANIES, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

($ in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

    

June 30,

    

June 30,

    

June 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

 

    

 

 

    

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

9,988

 

$

9,682

 

$

19,658

 

$

18,356

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains (losses) on securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding gains (losses) during the period

 

 

3,943

 

 

(4,709)

 

 

8,515

 

 

(1,763)

 

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

 

 

(1,380)

 

 

1,652

 

 

(2,980)

 

 

621

 

Less: reclassification adjustments for realized gains included in net income

 

 

(95)

 

 

(935)

 

 

54

 

 

(1,023)

 

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

 

 

33

 

 

323

 

 

(19)

 

 

354

 

Other comprehensive income (loss)

 

 

2,501

 

 

(3,669)

 

 

5,570

 

 

(1,811)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total comprehensive income (loss)

 

$

12,489

 

$

6,013

 

$

25,228

 

$

16,545

 

 

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

 

Comprehensive

 

 

 

 

 

 

Stock

 

Capital

 

Earnings

 

Income

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2014

 

$

44

 

$

220,577

 

$

16,108

 

$

4,143

 

$

240,872

 

Stock-based compensation expense

 

 

 —

 

 

4,142

 

 

 —

 

 

 —

 

 

4,142

 

Dividends declared

 

 

 —

 

 

 —

 

 

(6,196)

 

 

 —

 

 

(6,196)

 

Repurchase of common stock

 

 

(1)

 

 

 —

 

 

(17,256)

 

 

 —

 

 

(17,257)

 

Net income (loss)

 

 

 —

 

 

 —

 

 

44,666

 

 

 —

 

 

44,666

 

Other comprehensive income (loss), net of tax

 

 

 —

 

 

 —

 

 

 —

 

 

(2,770)

 

 

(2,770)

 

Balance at December 31, 2015

 

 

43

 

 

224,719

 

 

37,322

 

 

1,373

 

 

263,457

 

Stock-based compensation expense

 

 

 —

 

 

1,925

 

 

 —

 

 

 —

 

 

1,925

 

Dividends declared

 

 

 —

 

 

 —

 

 

(5,092)

 

 

 —

 

 

(5,092)

 

Repurchase of common stock

 

 

(1)

 

 

 —

 

 

(5,163)

 

 

 —

 

 

(5,164)

 

Net income (loss)

 

 

 —

 

 

 —

 

 

19,658

 

 

 —

 

 

19,658

 

Other comprehensive income (loss), net of tax

 

 

 —

 

 

 —

 

 

 —

 

 

5,570

 

 

5,570

 

Balance at June 30, 2016

 

$

42

 

$

226,644

 

$

46,725

 

$

6,943

 

$

280,354

 

 

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

 

5

 


 

STATE NATIONAL COMPANIES, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

($ in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

    

June 30,

    

June 30,

 

 

 

2016

 

2015

 

Operating activities

 

 

 

 

 

 

 

Net cash provided by (used in) operating activities

 

$

15,239

 

$

13,786

 

 

 

 

 

 

 

 

 

Investing activities

 

 

 

 

 

 

 

Purchase of investments

 

 

(47,010)

 

 

(37,437)

 

Proceeds from sale of investments

 

 

25,260

 

 

16,259

 

Proceeds from maturities and principal receipts

 

 

10,856

 

 

16,882

 

Proceeds from dispositions of property and equipment

 

 

48

 

 

448

 

Purchase of property and equipment

 

 

(555)

 

 

(601)

 

Net cash provided by (used in) investing activities

 

 

(11,401)

 

 

(4,449)

 

 

 

 

 

 

 

 

 

Financing activities

 

 

 

 

 

 

 

Dividends paid

 

 

(2,552)

 

 

(442)

 

Repurchase of common stock

 

 

(7,424)

 

 

 —

 

Net cash provided by (used in) financing activities

 

 

(9,976)

 

 

(442)

 

 

 

 

 

 

 

 

 

Net change in cash and cash equivalents

 

 

(6,138)

 

 

8,895

 

Cash and cash equivalents at beginning of period

 

 

51,770

 

 

38,348

 

Cash and cash equivalents at end of period

 

$

45,632

 

$

47,243

 

 

 

 

 

 

 

 

 

 

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 Services segment is ceded to unaffiliated, highly rated reinsurance companies or other reinsurers that provide collateral.  The Company’s Lender Services segment generates premiums primarily from the sale of collateral protection insurance (“CPI”), which insures automobiles or other vehicles held as collateral for loans made by credit unions, banks and specialty finance companies.

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, 2015 and 2014.

The interim financial data as of June 30, 2016 and 2015 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 June 30, 2016 and 2015 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, 2015, 2014 and 2013 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).

Income Taxes

For any uncertain tax positions not meeting the “more likely than not” recognition threshold, accounting standards require recognition, measurement, and disclosure in the financial statements.  There were no uncertain tax positions at June 30, 2016 and December 31, 2015.

7


 

Table of Contents

STATE NATIONAL COMPANIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued)

 

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.

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 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.  The Company adopted ASU 2015-03 for the current reporting period.

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.

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STATE NATIONAL COMPANIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued)

 

In January 2016, the FASB issued an accounting standards update (ASU 2016-01), “Recognition and Measurement of Financial Assets and Financial Liabilities” (Sub-Topic 825-10).  The amendments in this update supersede the guidance to classify equity securities with readily determinable fair values into different categories (that is, trading or available-for-sale) and require equity securities to be measured at fair value with changes in the fair value recognized through net income.  The amendments are expected to improve financial reporting by providing relevant information about an entity’s equity investments and reducing the number of items that are recognized in other comprehensive income.  This ASU is effective for annual and interim periods beginning after December 15, 2017.  The Company is currently evaluating what impact this ASU will have on financial results and disclosures.

In February 2016, the FASB issued an accounting standards update (ASU 2016-02), “Leases” (Topic 842) that requires lessees to put most leases on their balance sheets but recognize expenses on their income statements.  The FASB is issuing this update to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements.  This ASU is effective for annual and interim periods beginning after December 15, 2018.  Early adoption is permitted.  The Company does not plan to early adopt and is currently evaluating what impact this ASU will have on financial results and disclosures.

 

In March 2016, the FASB issued an accounting standards update (ASU 2016-08), “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net).”  The new standard requires an entity to determine whether it is a principal or an agent in a transaction in which another party is involved in providing goods or services to a customer by evaluating the nature of its promise to the customer.  An entity is a principal and therefore records revenue on a gross basis if it controls the promised good or service before transferring the good or service to the customer.  An entity is an agent and records as revenue the net amount it retains for its agency services if its role is to arrange for another entity to provide the goods or services.  The amendments clarify how an entity should identify the unit of accounting for the principal versus agent evaluation, and how it should apply the control principle to certain types of arrangements, such as service transactions, by explaining what a principal controls before the specified good or service is transferred to the customer.  This ASU’s effective date and transition requirements are the same as those of the new revenue recognition standard which is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that period.  The Company is currently evaluating what impact, if any, this ASU will have on financial results and disclosures.

In March 2016, the FASB issued an accounting standards update (ASU 2016-09), “Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.”  Under the new guidance, companies will no longer record excess tax benefits and certain tax deficiencies in additional paid-in capital (APIC).  Instead, companies will record all excess tax benefits and tax deficiencies as income tax expense or benefit in the income statement, and APIC pools will be eliminated.  For interim reporting purposes, companies will account for excess tax benefits and tax deficiencies as discrete items in the period in which they occur.  In addition, the guidance eliminates the requirement that excess tax benefits be realized before companies can recognize them.  The guidance requires companies to present excess tax benefits as an operating activity on the statement of cash flows rather than as a financing activity.  This ASU is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods.  Early adoption is permitted.  The Company prospectively adopted the provisions of this ASU for the current reporting period and the impact was immaterial to financial results.  There would have been no impact to prior periods.

In May 2016, the FASB issued an accounting standards update (ASU 2016-12), “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients.”  The amendments clarify that, for a contract to be considered completed at transition, all (or substantially all) of the revenue must have been recognized under legacy GAAP.  The amendments also clarify how an entity should evaluate the collectibility threshold and when

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STATE NATIONAL COMPANIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued)

 

an entity can recognize nonrefundable consideration received as revenue if an arrangement does not meet the standard’s contract criteria.  This ASU’s effective date and transition requirements are the same as those of the new revenue recognition standard which is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that period.  The Company will be evaluating what impact, if any, this ASU will have on financial results and disclosures.

In June 2016, the FASB issued an accounting standards update (ASU 2016-13), “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.”  The standard will replace today’s “incurred loss” approach with an “expected loss” model for instruments measured at amortized cost and require entities to record allowances for available-for-sale (AFS) debt securities rather than reduce the carrying amount, as they do today under the other-than-temporary impairment (OTTI) model. It also simplifies the accounting model for purchased credit-impaired debt securities and loans.  This ASU is effective for annual and interim periods beginning after December 15, 2019.  The Company will be evaluating what impact this ASU will have on financial results and disclosures. 

Reclassifications

The Company adopted ASU 2015-03, “Interest – Imputation of Interest” for the current reporting period.  Presentation of “Other Assets” and “Debt, net” on the prior year balance sheet have been retrospectively adjusted to reflect the adoption of this ASU.  The 2015 presentation of each line was adjusted by $760 thousand to reflect the netting of unamortized debt issuance costs.

2. Investments

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Cost or 

    

Gross 

    

Gross 

    

 

 

June 30, 2016

 

Amortized 

 

Unrealized 

 

Unrealized 

 

Fair

 

($ in thousands)

 

Cost

 

Gains

 

Losses

 

Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed-maturity securities

 

 

 

 

 

 

 

 

 

 

 

 

 

Government

 

$

21,116

 

$

686

 

$

 —

 

$

21,802

 

Government agency

 

 

1,903

 

 

45

 

 

 —

 

 

1,948

 

State and municipality

 

 

58,450

 

 

3,031

 

 

(16)

 

 

61,465

 

Industrial and miscellaneous

 

 

146,735

 

 

4,518

 

 

(1,959)

 

 

149,294

 

Residential mortgage-backed

 

 

68,121

 

 

1,924

 

 

(129)

 

 

69,916

 

Commercial mortgage-backed

 

 

40,133

 

 

1,471

 

 

(41)

 

 

41,563

 

Redeemable preferred stock

 

 

2,925

 

 

323

 

 

 —

 

 

3,248

 

Total fixed-maturity securities

 

 

339,383

 

 

11,998

 

 

(2,145)

 

 

349,236

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-redeemable preferred stock

 

 

3,778

 

 

184

 

 

(163)

 

 

3,799

 

Common stock

 

 

12

 

 

354

 

 

 —

 

 

366

 

Total equity securities

 

 

3,790

 

 

538

 

 

(163)

 

 

4,165

 

Total investments

 

$

343,173

 

$

12,536

 

$

(2,308)

 

$

353,401

 

 

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STATE NATIONAL COMPANIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Cost or 

    

Gross 

    

Gross 

    

 

 

December 31, 2015

 

Amortized 

 

Unrealized 

 

Unrealized 

 

Fair

 

($ in thousands)

 

Cost

 

Gains

 

Losses

 

Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed-maturity securities

 

 

 

 

 

 

 

 

 

 

 

 

 

Government

 

$

18,890

 

$

124

 

$

(35)

 

$

18,979

 

Government agency

 

 

2,025

 

 

31

 

 

(7)

 

 

2,049

 

State and municipality

 

 

68,461

 

 

1,895

 

 

(14)

 

 

70,342

 

Industrial and miscellaneous

 

 

132,797

 

 

2,139

 

 

(2,618)

 

 

132,318

 

Residential mortgage-backed

 

 

80,566

 

 

1,213

 

 

(793)

 

 

80,986

 

Commercial mortgage-backed

 

 

22,235

 

 

68

 

 

(150)

 

 

22,153

 

Redeemable preferred stock

 

 

2,790

 

 

16

 

 

(111)

 

 

2,695

 

Total fixed-maturity securities

 

 

327,764

 

 

5,486

 

 

(3,728)

 

 

329,522

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-redeemable preferred stock

 

 

4,012

 

 

422

 

 

(69)

 

 

4,365

 

Common stock

 

 

784

 

 

414

 

 

(19)

 

 

1,179

 

Total equity securities

 

 

4,796

 

 

836

 

 

(88)

 

 

5,544

 

Total investments

 

$

332,560

 

$

6,322

 

$

(3,816)

 

$

335,066

 

 

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

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less than 12 Months

 

12 Months or More

 

Total

 

June 30, 2016

    

Fair

    

Unrealized

    

Fair

    

Unrealized

    

Fair

    

Unrealized

 

($ in thousands)

 

Value

 

Losses

 

Value

 

Losses

 

Value

 

Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed-maturity securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

State and municipality

 

$

365

 

$

(16)

 

$

 —

 

$

 —

 

$

365

 

$

(16)

 

Industrial and miscellaneous

 

 

17,777

 

 

(1,422)

 

 

6,912

 

 

(537)

 

 

24,689

 

 

(1,959)

 

Residential mortgage-backed

 

 

255

 

 

(2)

 

 

6,357

 

 

(127)

 

 

6,612

 

 

(129)

 

Commercial mortgage-backed

 

 

953

 

 

 —

 

 

2,534

 

 

(41)

 

 

3,487

 

 

(41)

 

Total fixed-maturity securities

 

 

19,350

 

 

(1,440)

 

 

15,803

 

 

(705)

 

 

35,153

 

 

(2,145)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-redeemable preferred stock

 

 

1,203

 

 

(102)

 

 

290

 

 

(61)

 

 

1,493

 

 

(163)

 

Total equity securities

 

 

1,203

 

 

(102)

 

 

290

 

 

(61)

 

 

1,493

 

 

(163)

 

 

 

$

20,553

 

$

(1,542)

 

$

16,093

 

$

(766)

 

$

36,646

 

$

(2,308)

 

 

 

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STATE NATIONAL COMPANIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less than 12 Months

 

12 Months or More

 

Total

 

December 31, 2015

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

($ in thousands)

    

Value

    

Losses

    

Value

    

Losses

    

Value

    

Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed-maturity securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Government

 

$

2,757

 

$

(23)