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EX-32.1 - EX-32.1 - State National Companies, Inc.snc-20170630ex32109343a.htm
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EX-31.1 - EX-31.1 - State National Companies, Inc.snc-20170630ex311364351.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, 2017

 

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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth 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  ☐

 

Emerging growth company  ☒

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒

 

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

 

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 08, 2017

(Common stock, $.001 par value)

 

42,173,561 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, 2017 (unaudited) and December 31, 2016

 

1

 

 

 

 

 

 

 

 

 

Unaudited Condensed Consolidated Statements of Income –
six months ended June 30, 2017 and 2016

 

3

 

 

 

 

 

 

 

 

 

Unaudited Condensed Consolidated Statements of Comprehensive Income –
six months ended June 30, 2017 and 2016

 

4

 

 

 

 

 

 

 

 

 

Unaudited Condensed Consolidated Statements of Shareholders’ Equity –
six months ended June 30, 2017 and twelve months ended December 31, 2016

 

5

 

 

 

 

 

 

 

 

 

Unaudited Condensed Consolidated Statements of Cash Flows –
six months ended June 30, 2017 and 2016

 

6

 

 

 

 

 

 

 

 

 

Notes to Unaudited Condensed Consolidated Financial Statements 

 

7

 

 

 

 

 

 

 

Item 2 

 

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

 

22

 

 

 

 

 

 

 

Item 3 

 

Quantitative and Qualitative Disclosures About Market Risk

 

36

 

 

 

 

 

 

 

Item 4 

 

Controls and Procedures

 

38

 

 

 

 

 

 

 

Part II - Other Information 

 

 

 

 

 

 

 

Item 1 

 

Legal Proceedings

 

39

 

 

 

 

 

 

 

Item 1A 

 

Risk Factors

 

39

 

 

 

 

 

 

 

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,

 

 

 

2017

 

2016

 

 

 

 

(Unaudited)

 

 

 

 

Assets

 

 

 

 

 

 

 

Investments:

 

 

 

 

 

 

 

Fixed-maturity securities – available-for-sale, at fair value (amortized cost – $377,101, $329,994, respectively)

 

$

382,518

 

$

332,107

 

Equity securities – available-for-sale, at fair value (cost – $2,036, $3,271, respectively)

 

 

2,134

 

 

3,224

 

Total investments

 

 

384,652

 

 

335,331

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

47,979

 

 

91,698

 

Restricted cash and investments

 

 

16,746

 

 

2,958

 

Accounts receivable from agents, net

 

 

120,214

 

 

35,964

 

Reinsurance recoverable on paid losses

 

 

1,972

 

 

1,430

 

Deferred acquisition costs

 

 

1,106

 

 

1,194

 

Reinsurance recoverables

 

 

2,607,559

 

 

2,342,864

 

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

 

 

16,876

 

 

16,163

 

Interest receivable

 

 

2,333

 

 

2,112

 

Income taxes receivable

 

 

174

 

 

329

 

Deferred income taxes, net

 

 

28,202

 

 

28,858

 

Goodwill and intangible assets, net

 

 

14,539

 

 

12,588

 

Other assets

 

 

6,656

 

 

5,248

 

Total assets

 

$

3,249,008

 

$

2,876,737

 

 

 

 

 

 

 

 

 

 

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,

 

 

    

2017

    

2016

 

 

 

 

(Unaudited)

 

 

 

 

Liabilities

 

 

 

 

 

 

 

Unpaid losses and loss adjustment expenses

 

$

1,858,105

 

$

1,703,706

 

Unearned premiums

 

 

787,051

 

 

680,691

 

Allowance for policy cancellations

 

 

54,541

 

 

66,418

 

Deferred ceding fees

 

 

39,385

 

 

32,226

 

Accounts payable to agents

 

 

2,121

 

 

2,639

 

Accounts payable to insurance companies

 

 

94,259

 

 

14,871

 

Debt, net

 

 

43,804

 

 

43,783

 

Other liabilities

 

 

49,256

 

 

36,023

 

Total liabilities

 

 

2,928,522

 

 

2,580,357

 

 

 

 

 

 

 

 

 

Shareholders’ equity

 

 

 

 

 

 

 

Common stock, $.001 par value (150,000,000 shares authorized; 42,173,561 and 41,924,440 shares issued at June 30, 2017 and December 31, 2016, respectively)

 

 

42

 

 

42

 

Preferred stock, $.001 par value (10,000,000 shares authorized; no shares issued and outstanding at June 30, 2017 and December 31, 2016)

 

 

 —

 

 

 —

 

Additional paid-in capital

 

 

231,654

 

 

229,297

 

Retained earnings

 

 

85,910

 

 

66,230

 

Accumulated other comprehensive income

 

 

2,880

 

 

811

 

Total shareholders’ equity

 

 

320,486

 

 

296,380

 

Total liabilities and shareholders’ equity

 

$

3,249,008

 

$

2,876,737

 

 

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,

    

 

2017

 

2016

 

2017

 

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Premiums earned

$

33,934

 

$

28,916

 

$

70,442

 

$

60,593

 

Commission income

 

322

 

 

305

 

 

598

 

 

626

 

Ceding fees

 

20,998

 

 

16,917

 

 

38,643

 

 

33,161

 

Net investment income

 

2,288

 

 

2,100

 

 

4,439

 

 

4,140

 

Realized net investment gains (losses)

 

523

 

 

282

 

 

2,399

 

 

(356)

 

Other income

 

530

 

 

459

 

 

1,061

 

 

915

 

 

 

58,595

 

 

48,979

 

 

117,582

 

 

99,079

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Losses and loss adjustment expenses

 

16,135

 

 

13,743

 

 

34,966

 

 

28,832

 

Commissions

 

1,703

 

 

1,130

 

 

3,277

 

 

2,827

 

Taxes, licenses, and fees

 

914

 

 

804

 

 

1,866

 

 

1,506

 

General and administrative

 

18,618

 

 

17,148

 

 

37,746

 

 

34,142

 

Interest expense

 

612

 

 

553

 

 

1,200

 

 

1,090

 

Total expenses

 

37,982

 

 

33,378

 

 

79,055

 

 

68,397

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

20,613

 

 

15,601

 

 

38,527

 

 

30,682

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income taxes:

 

 

 

 

 

 

 

 

 

 

 

 

Current tax expense (benefit)

 

8,551

 

 

6,137

 

 

14,260

 

 

10,491

 

Deferred tax expense (benefit)

 

(1,173)

 

 

(524)

 

 

(458)

 

 

533

 

 

 

7,378

 

 

5,613

 

 

13,802

 

 

11,024

 

Net income (loss)

$

13,235

 

$

9,988

 

$

24,725

 

$

19,658

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

$

0.32

 

$

0.24

 

$

0.59

 

$

0.46

 

Diluted earnings per share

 

0.31

 

 

0.24

 

 

0.58

 

 

0.46

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends, per share

$

0.06

 

$

0.06

 

$

0.12

 

$

0.12

 

 

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,

 

 

 

2017

 

2016

 

2017

 

2016

 

 

    

 

 

    

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

13,235

 

$

9,988

 

$

24,725

 

$

19,658

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains (losses) on securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding gains (losses)

 

 

2,055

 

 

3,943

 

 

3,563

 

 

8,515

 

Tax effect on unrealized holding (gains) losses

 

 

(719)

 

 

(1,380)

 

 

(1,247)

 

 

(2,980)

 

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

 

 

(109)

 

 

(95)

 

 

(380)

 

 

54

 

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

 

 

38

 

 

33

 

 

133

 

 

(19)

 

Other comprehensive income (loss)

 

 

1,265

 

 

2,501

 

 

2,069

 

 

5,570

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total comprehensive income (loss)

 

$

14,500

 

$

12,489

 

$

26,794

 

$

25,228

 

 

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, 2015

 

$

43

 

$

224,719

 

$

37,322

 

$

1,373

 

$

263,457

 

Stock-based compensation expense

 

 

 —

 

 

4,578

 

 

 —

 

 

 —

 

 

4,578

 

Dividends declared

 

 

 —

 

 

 —

 

 

(10,139)

 

 

 —

 

 

(10,139)

 

Repurchase of common stock

 

 

(1)

 

 

 —

 

 

(10,030)

 

 

 —

 

 

(10,031)

 

Net income (loss)

 

 

 —

 

 

 —

 

 

49,077

 

 

 —

 

 

49,077

 

Other comprehensive income (loss), net of tax

 

 

 —

 

 

 —

 

 

 —

 

 

(562)

 

 

(562)

 

Balance at December 31, 2016

 

 

42

 

 

229,297

 

 

66,230

 

 

811

 

 

296,380

 

Stock-based compensation expense

 

 

 —

 

 

2,357

 

 

 —

 

 

 —

 

 

2,357

 

Dividends declared

 

 

 —

 

 

 —

 

 

(5,045)

 

 

 —

 

 

(5,045)

 

Net income (loss)

 

 

 —

 

 

 —

 

 

24,725

 

 

 —

 

 

24,725

 

Other comprehensive income (loss), net of tax

 

 

 —

 

 

 —

 

 

 —

 

 

2,069

 

 

2,069

 

Balance at June 30, 2017

 

$

42

 

$

231,654

 

$

85,910

 

$

2,880

 

$

320,486

 

 

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,

 

 

 

2017

 

2016

 

 

 

 

 

 

 

 

 

Operating activities

 

 

 

 

 

 

 

Net cash provided by (used in) operating activities

 

$

9,629

 

$

15,239

 

 

 

 

 

 

 

 

 

Investing activities

 

 

 

 

 

 

 

Purchase of investments

 

 

(68,796)

 

 

(47,010)

 

Proceeds from sale of investments

 

 

34,493

 

 

25,260

 

Proceeds from maturities and principal receipts

 

 

19,459

 

 

10,856

 

Proceeds from dispositions of property and equipment

 

 

18

 

 

48

 

Purchase of property and equipment

 

 

(1,509)

 

 

(555)

 

Acquisition of consolidated subsidiaries, net of cash obtained

 

 

(31,980)

 

 

 —

 

Net cash provided by (used in) investing activities

 

 

(48,315)

 

 

(11,401)

 

 

 

 

 

 

 

 

 

Financing activities

 

 

 

 

 

 

 

Dividends paid

 

 

(5,033)

 

 

(2,552)

 

Repurchase of common stock

 

 

 —

 

 

(7,424)

 

Net cash provided by (used in) financing activities

 

 

(5,033)

 

 

(9,976)

 

 

 

 

 

 

 

 

 

Net change in cash and cash equivalents

 

 

(43,719)

 

 

(6,138)

 

Cash and cash equivalents at beginning of period

 

 

91,698

 

 

51,770

 

Cash and cash equivalents at end of period

 

$

47,979

 

$

45,632

 

 

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

 

 

6

 


 

1. Summary of Significant Accounting Policies

Description of Business

State National Companies, Inc. (the “Company”) refers to a group of companies that conducts 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 underwriting 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.

 

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.  The Company includes the results of operations of an acquired business in its consolidated financial statements from the date of the acquisition.

Basis of Presentation

The unaudited condensed consolidated financial statements 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, 2016 and 2015.

The interim financial data as of June 30, 2017 and 2016 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, 2017 and 2016 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 three years in the period ended December 31, 2016 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).

7

 


 

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, 2017 and December 31, 2016.

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.  An estimation of future forfeitures of stock-based awards is incorporated into the determination of compensation expense.   See Note 8 — “Stock-based Payments” for related disclosures.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers (Topic 606)” which replaces most existing GAAP revenue recognition guidance to a five-step revenue recognition model.  The FASB has updated the guidance to include the following ASU’s:

 

·

ASU 2015-14—“Revenue from Contracts with Customers (Topic 606):  Deferral of the Effective Date”;

·

ASU 2016-08—“Revenue from Contracts with Customers (Topic 606):  Principal versus Agent Considerations (Reporting Revenue Gross versus Net)”;

·

ASU 2016-10—“Revenue from Contracts with Customers (Topic 606):  Identifying Performance Obligations and Licensing”;

·

ASU 2016-11—“Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815):  Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at March 3, 2016 EITF Meeting (SEC Update)”;

·

ASU 2016-12—“Revenue from Contracts with Customers (Topic 606):  Narrow-Scope Improvements and Practical Expedients”; and

·

ASU 2016-20—“Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers”

 

The new guidance excludes insurance contracts that are recognized under Topic 944 “Financial Services—Insurance”; however, income related to our agency operations will be recognized under the new guidance.  The model provides for an analysis of transactions to determine when or 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.  The Company has the option to choose to apply the guidance using either the full retrospective or a modified retrospective approach.  The standards are effective for annual periods beginning after December 15, 2017, including interim reporting periods within that period.  The Company has assessed its revenue streams to identify those contracts that are clearly excluded from the scope of the new standard and those that may be subject to the new standard.  The Company will continue to evaluate the impact these ASUs will have on our financial results and disclosures and which adoption option to apply, but does not anticipate such impact to be material to the Company’s financial position or cash flows. 

 

In January 2016, the FASB issued ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities” (Sub-Topic 825-10).  The amendment in this update supersedes the guidance to classify equity securities with readily determinable fair value into different categories (either trading or available-for-sale) and requires equity securities to be measured at fair value and changes in the fair value to be recognized through net income instead of other comprehensive income.  This ASU is effective for annual and interim reports beginning after December 15, 2017.  Since the Company’s current position in equities is less than 1% of our current investment portfolio as of June 30, 2017, the

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Company does not anticipate that the guidance will have a material impact to the Company’s financial statements or cash flows.

 

In February 2016, the FASB issued ASU 2016-02, “Leases” (Topic 842) that requires lessees to recognize the assets and liabilities related to leases on the balance sheet.  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 June 2016, the FASB issued 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. 

In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.”  This ASU amends guidance related to debt prepayment or extinguishment costs, settlement of zero-coupon debt instruments or other debt instruments with coupon rates that are insignificant in relation to the effective interest rate of the borrowing, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims and corporate-owned life insurance, distributions received from equity method investees and beneficial interests in securitization transactions.  The guidance will generally be applied retrospectively and is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those years.  The Company does not expect financial results and disclosures to be significantly impacted by this ASU.

 

In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash.”  The amendments require entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. As a result, entities will no longer present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows.  This ASU is effective for annual and interim periods beginning after December 15, 2017.  The Company will be evaluating what impact this ASU will have on disclosures.

 

In January 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business.”  Under the new guidance, if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets, then the transferred assets and activities do not constitute a business. The guidance also requires a business to include at least one substantive process and narrows the definition of outputs by more closely aligning it with how outputs are described in ASC 606.  The ASU is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those years. The ASU will be applied prospectively to any transactions occurring within the period of adoption. Early adoption is permitted, including for interim or annual periods in which the financial statements have not been issued or made available for issuance.  The Company does not plan to early adopt and will be evaluating what impact this ASU will have on financial results and disclosures.

In January 2017, the FASB issued ASU 2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.”  The new guidance eliminates the requirement to calculate the implied fair value of goodwill under step two of the current goodwill impairment test, to measure a goodwill impairment charge.  Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value based on step one of the current goodwill impairment test.  The standard will be applied prospectively and is effective for annual and interim impairment tests performed in periods beginning after December 15, 2019, for public business entities.  The Company will be evaluating what impact this ASU will have on disclosures.

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In March 2017, the FASB issued ASU 2017-08, “Premium Amortization on Purchased Callable Debt Securities.”  The amendments in this update shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date.  This ASU is effective for annual and interim periods beginning after December 15, 2018.  The Company will be evaluating what impact this ASU will have on disclosures.

In May 2017, the FASB issued ASU 2017-09, “Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting.”  The amendments in this update provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting.  Modification accounting is not needed if the fair value, vesting conditions and classification of the modified award are the same as the original award immediately before the original award is modified.  This ASU is effective for annual and interim periods beginning after December 15, 2017.  The Company does not expect financial results and disclosures to be significantly impacted by this ASU.

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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of June 30, 2017

 

 

    

Cost or 

    

Gross 

    

Gross 

    

 

 

 

 

Amortized 

 

Unrealized 

 

Unrealized 

 

Fair

 

($ in thousands)

 

Cost

 

Gains

 

Losses

 

Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed-maturity securities

 

 

 

 

 

 

 

 

 

 

 

 

 

Government

 

$

35,370

 

$

104

 

$

(92)

 

$

35,382

 

Government agency

 

 

870

 

 

16

 

 

(2)

 

 

884

 

State and municipality

 

 

58,602

 

 

1,501

 

 

(36)

 

 

60,067

 

Industrial and miscellaneous

 

 

173,526

 

 

4,735

 

 

(1,583)

 

 

176,678

 

Residential mortgage-backed

 

 

56,783

 

 

579

 

 

(454)

 

 

56,908

 

Commercial mortgage-backed

 

 

49,102

 

 

423

 

 

(245)

 

 

49,280

 

Redeemable preferred stock

 

 

2,848

 

 

560

 

 

(89)

 

 

3,319

 

Total fixed-maturity securities

 

 

377,101

 

 

7,918

 

 

(2,501)

 

 

382,518

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-redeemable preferred stock

 

 

2,032

 

 

348

 

 

(252)

 

 

2,128

 

Common stock

 

 

 4

 

 

 2

 

 

 —

 

 

 6

 

Total equity securities

 

 

2,036

 

 

350

 

 

(252)

 

 

2,134

 

Total investments

 

$

379,137

 

$

8,268

 

$

(2,753)

 

$

384,652

 

 

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As of December 31, 2016

 

 

    

Cost or 

    

Gross 

    

Gross 

    

 

 

 

 

Amortized 

 

Unrealized 

 

Unrealized 

 

Fair

 

($ in thousands)

 

Cost

 

Gains

 

Losses

 

Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed-maturity securities

 

 

 

 

 

 

 

 

 

 

 

 

 

Government

 

$

28,020

 

$

87

 

$

(102)

 

$

28,005

 

Government agency

 

 

1,522

 

 

18

 

 

(2)

 

 

1,538

 

State and municipality

 

 

57,885

 

 

508

 

 

(183)

 

 

58,210

 

Industrial and miscellaneous

 

 

147,761

 

 

3,765

 

 

(2,111)

 

 

149,415

 

Residential mortgage-backed

 

 

51,237

 

 

536

 

 

(697)

 

 

51,076

 

Commercial mortgage-backed

 

 

40,410

 

 

300

 

 

(327)

 

 

40,383

 

Redeemable preferred stock

 

 

3,159

 

 

503

 

 

(182)

 

 

3,480

 

Total fixed-maturity securities

 

 

329,994

 

 

5,717

 

 

(3,604)

 

 

332,107

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-redeemable preferred stock

 

 

3,267

 

 

304

 

 

(350)

 

 

3,221

 

Common stock

 

 

 4

 

 

 —

 

 

(1)

 

 

 3

 

Total equity securities

 

 

3,271

 

 

304

 

 

(351)

 

 

3,224

 

Total investments

 

$

333,265

 

$

6,021

 

$

(3,955)

 

$

335,331

 

 

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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of June 30, 2017

 

 

 

Less than 12 Months

 

12 Months or More

 

Total

 

 

    

Fair

    

Unrealized

    

Fair

    

Unrealized

    

Fair

    

Unrealized

 

($ in thousands)

 

Value

 

Losses

 

Value

 

Losses

 

Value

 

Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed-maturity securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Government

 

$

19,084

 

$

(92)

 

$

 —

 

$

 —

 

$

19,084

 

$

(92)

 

Government agency

 

 

527

 

 

(2)

 

 

 —