ITEM 7
.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Operating Results Overview
—
Year Ended
December 31, 2017
Compared to Year Ended
December 31, 2016
The following table sets forth results of operations for the periods presented:
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|
|
|
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|
|
|
|
Year Ended December 31,
|
|
2017
|
|
% Change
|
|
2016
|
Revenue:
|
(Dollars in thousands)
|
Gross premiums written
|
$
|
603,417
|
|
|
(0.3
|
)%
|
|
$
|
605,485
|
|
Increase in unearned premiums
|
(224
|
)
|
|
(99.4
|
)%
|
|
(40,062
|
)
|
Gross premiums earned
|
603,193
|
|
|
6.7
|
%
|
|
565,423
|
|
Ceded premiums earned
|
(269,712
|
)
|
|
(11.3
|
)%
|
|
(304,054
|
)
|
Net premiums earned
|
333,481
|
|
|
27.6
|
%
|
|
261,369
|
|
Net investment income
|
10,254
|
|
|
13.1
|
%
|
|
9,063
|
|
Net realized investment gains
|
8,548
|
|
|
180.7
|
%
|
|
3,045
|
|
Direct written policy fees
|
17,173
|
|
|
3.3
|
%
|
|
16,619
|
|
Other income
|
22,206
|
|
|
27.4
|
%
|
|
17,429
|
|
Total revenue
|
391,662
|
|
|
27.4
|
%
|
|
307,525
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
Losses and loss adjustment expenses
|
247,557
|
|
|
25.1
|
%
|
|
197,810
|
|
Commissions and other underwriting expenses
|
114,867
|
|
|
27.1
|
%
|
|
90,378
|
|
General and administrative expenses
|
19,963
|
|
|
16.2
|
%
|
|
17,186
|
|
Interest expense
|
348
|
|
|
—
|
%
|
|
348
|
|
Total costs and expenses
|
382,735
|
|
|
25.2
|
%
|
|
305,722
|
|
|
|
|
|
|
|
Income before income taxes
|
8,927
|
|
|
395.1
|
%
|
|
1,803
|
|
Income taxes
|
3,585
|
|
|
561.4
|
%
|
|
542
|
|
Net income
|
5,342
|
|
|
323.6
|
%
|
|
1,261
|
|
Net (loss) income attributable to non-controlling interest
|
(2,647
|
)
|
|
(1,176.0
|
)%
|
|
246
|
|
Net income attributable to Federated National Holding Company shareholders
|
$
|
7,989
|
|
|
687.1
|
%
|
|
$
|
1,015
|
|
|
|
|
|
|
|
Ratios to net premiums earned:
|
|
|
|
|
|
|
Net loss ratio (1)
|
74.2
|
%
|
|
|
|
75.7
|
%
|
Net expense ratio (2)
|
40.4
|
%
|
|
|
|
41.2
|
%
|
Combined ratio (3)
|
114.6
|
%
|
|
|
|
116.9
|
%
|
|
|
(1)
|
Net loss ratio is calculated as losses and loss adjustment expenses divided by net premiums earned.
|
|
|
(2)
|
Net expense ratio is calculated as all operating expenses less interest expense divided by net premiums earned.
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|
|
(3)
|
Combined ratio is calculated as the sum of losses and loss adjustment expenses and all operating expenses less interest expense divided by net premiums earned.
|
The following table summarizes our results of operations by line of business for the periods presented. Although we conduct our operations under a single reportable segment, we have provided line of business information as we believe it is useful to our shareholders and the investing public. “Homeowners” line of business consists of our homeowners and fire property and casualty insurance business. “Automobile” line of business consists of our nonstandard personal automobile insurance business. “Other” line of business primarily consists of our commercial general liability and federal flood businesses, along with corporate and investment operations.
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|
|
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|
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|
2017
|
|
2016
|
|
|
Homeowners
|
|
Automobile
|
|
Other
|
|
Consolidated
|
|
Homeowners
|
|
Automobile
|
|
Other
|
|
Consolidated
|
Revenue:
|
|
(Dollars in thousands)
|
Gross premiums written
|
|
$
|
536,755
|
|
|
$
|
43,505
|
|
|
$
|
23,157
|
|
|
$
|
603,417
|
|
|
$
|
512,737
|
|
|
$
|
69,479
|
|
|
$
|
23,269
|
|
|
$
|
605,485
|
|
(Increase) decrease in unearned premiums
|
|
(11,231
|
)
|
|
11,174
|
|
|
(167
|
)
|
|
(224
|
)
|
|
(28,384
|
)
|
|
(11,167
|
)
|
|
(511
|
)
|
|
(40,062
|
)
|
Gross premiums earned
|
|
525,524
|
|
|
54,679
|
|
|
22,990
|
|
|
603,193
|
|
|
484,353
|
|
|
58,312
|
|
|
22,758
|
|
|
565,423
|
|
Ceded premiums earned
|
|
(227,269
|
)
|
|
(31,037
|
)
|
|
(11,406
|
)
|
|
(269,712
|
)
|
|
(249,972
|
)
|
|
(44,291
|
)
|
|
(9,791
|
)
|
|
(304,054
|
)
|
Net premiums earned
|
|
298,255
|
|
|
23,642
|
|
|
11,584
|
|
|
333,481
|
|
|
234,381
|
|
|
14,021
|
|
|
12,967
|
|
|
261,369
|
|
Net investment income
|
|
—
|
|
|
—
|
|
|
10,254
|
|
|
10,254
|
|
|
—
|
|
|
—
|
|
|
9,063
|
|
|
9,063
|
|
Net realized investment gains
|
|
—
|
|
|
—
|
|
|
8,548
|
|
|
8,548
|
|
|
—
|
|
|
—
|
|
|
3,045
|
|
|
3,045
|
|
Direct written policy fees
|
|
8,715
|
|
|
7,846
|
|
|
612
|
|
|
17,173
|
|
|
7,844
|
|
|
8,171
|
|
|
604
|
|
|
16,619
|
|
Other income
|
|
13,662
|
|
|
3,277
|
|
|
5,267
|
|
|
22,206
|
|
|
9,106
|
|
|
5,479
|
|
|
2,844
|
|
|
17,429
|
|
Total revenue
|
|
320,632
|
|
|
34,765
|
|
|
36,265
|
|
|
391,662
|
|
|
251,331
|
|
|
27,671
|
|
|
28,523
|
|
|
307,525
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses
|
|
206,842
|
|
|
32,752
|
|
|
7,963
|
|
|
247,557
|
|
|
169,920
|
|
|
14,885
|
|
|
13,005
|
|
|
197,810
|
|
Commissions and other underwriting expenses
|
|
97,111
|
|
|
12,976
|
|
|
4,780
|
|
|
114,867
|
|
|
73,215
|
|
|
12,471
|
|
|
4,692
|
|
|
90,378
|
|
General and administrative expenses
|
|
15,403
|
|
|
650
|
|
|
3,910
|
|
|
19,963
|
|
|
13,079
|
|
|
600
|
|
|
3,507
|
|
|
17,186
|
|
Interest expense
|
|
348
|
|
|
—
|
|
|
—
|
|
|
348
|
|
|
348
|
|
|
—
|
|
|
—
|
|
|
348
|
|
Total costs and expenses
|
|
319,704
|
|
|
46,378
|
|
|
16,653
|
|
|
382,735
|
|
|
256,562
|
|
|
27,956
|
|
|
21,204
|
|
|
305,722
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
928
|
|
|
(11,613
|
)
|
|
19,612
|
|
|
8,927
|
|
|
(5,231
|
)
|
|
(285
|
)
|
|
7,319
|
|
|
1,803
|
|
Income taxes
|
|
360
|
|
|
(4,481
|
)
|
|
7,706
|
|
|
3,585
|
|
|
(2,015
|
)
|
|
(111
|
)
|
|
2,668
|
|
|
542
|
|
Net income (loss)
|
|
568
|
|
|
(7,132
|
)
|
|
11,906
|
|
|
5,342
|
|
|
(3,216
|
)
|
|
(174
|
)
|
|
4,651
|
|
|
1,261
|
|
Net (loss) income attributable to non-controlling interest
|
|
(2,647
|
)
|
|
—
|
|
|
—
|
|
|
(2,647
|
)
|
|
246
|
|
|
—
|
|
|
—
|
|
|
246
|
|
Net income (loss) attributable to Federated National Holding Company shareholders
|
|
$
|
3,215
|
|
|
$
|
(7,132
|
)
|
|
$
|
11,906
|
|
|
$
|
7,989
|
|
|
$
|
(3,462
|
)
|
|
$
|
(174
|
)
|
|
$
|
4,651
|
|
|
$
|
1,015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios to net premiums earned:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss ratio
|
|
69.4
|
%
|
|
138.5
|
%
|
|
68.7
|
%
|
|
74.2
|
%
|
|
72.5
|
%
|
|
106.2
|
%
|
|
100.3
|
%
|
|
75.7
|
%
|
Net expense ratio
|
|
37.7
|
%
|
|
|
|
|
|
|
|
40.4
|
%
|
|
36.8
|
%
|
|
|
|
|
|
|
|
41.2
|
%
|
Combined ratio
|
|
107.1
|
%
|
|
|
|
|
|
|
|
114.6
|
%
|
|
109.3
|
%
|
|
|
|
|
|
|
|
116.9
|
%
|
Revenue
Total revenue increased
$84.1 million
, or
27.4%
, to
$391.7 million
for the year ended
December 31, 2017
, as compared to
$307.5 million
for the year ended
December 31, 2016
. The increase in revenue was due to higher gross earned premiums and lower ceded premiums as described below.
Gross Premiums Written
The following table sets forth the gross premiums written for the periods presented:
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|
Year Ended December 31,
|
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|
2017
|
|
2016
|
Gross premiums written:
|
|
(In thousands)
|
Homeowners Florida
|
|
$
|
482,039
|
|
|
$
|
477,489
|
|
Homeowners non-Florida
|
|
54,716
|
|
|
35,248
|
|
Personal automobile
|
|
43,505
|
|
|
69,479
|
|
Commercial general liability
|
|
11,048
|
|
|
13,256
|
|
Federal flood
|
|
12,109
|
|
|
10,013
|
|
Total gross premiums written
|
|
$
|
603,417
|
|
|
$
|
605,485
|
|
Gross premiums written decreased
$2.1 million
, or
0.3%
, to
$603.4 million
for the year ended
December 31, 2017
, as compared to
$605.5 million
for the year ended
December 31, 2016
. Gross premiums written decreased due to the decline in gross premiums written in Automobile, offset by the growth in gross premiums written in Homeowners, both Florida and non-Florida.
The lower premiums in Automobile was due to our decision to select specific types and amounts of premiums to be underwritten with consideration and focus on profitability. Automobile was not profitable throughout the year 2017 and we announced in December 2017 that we were taking the appropriate steps, including the completion of all required regulatory filings and approvals, to withdraw from Automobile. The increase in gross premiums written in the homeowners non-Florida was due to the expansion of our operations outside of Florida, allowing us to leverage personnel and diversify insurance risk. The increase in homeowners Florida reflects our strategy to grow market share in a controlled manner with a renewed focus on risk profile and profitability.
Gross Premiums Earned
The following table sets forth the gross premiums earned for the periods presented:
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|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
Gross premiums earned:
|
|
(In thousands)
|
Homeowners Florida
|
|
$
|
481,541
|
|
|
$
|
455,252
|
|
Homeowners non-Florida
|
|
43,983
|
|
|
29,101
|
|
Personal automobile
|
|
54,679
|
|
|
58,312
|
|
Commercial general liability
|
|
12,216
|
|
|
13,675
|
|
Federal flood
|
|
10,774
|
|
|
9,083
|
|
Total gross premiums earned
|
|
$
|
603,193
|
|
|
$
|
565,423
|
|
Gross premiums earned increased
$37.8 million
, or
6.7%
, to
$603.2 million
for the year ended
December 31, 2017
, as compared to
$565.4 million
for the year ended
December 31, 2016
. Gross premiums earned increased due to higher premiums written in homeowners non-Florida and homeowners Florida over the past twelve to eighteen months, which resulted in higher earned premiums as the premiums written has earned in.
Ceded Premiums Earned
Ceded premiums earned decreased
$34.3 million
, or
11.3%
, to
$269.7 million
for the year ended
December 31, 2017
, as compared to
$304.1 million
for the year ended
December 31, 2016
. The decrease in ceded premiums earned was driven by the expiration of the 30% and 10% Florida-only property quota share treaties, which ended on July 1, 2016 and 2017, respectively. The effect of these expirations was partially offset by the new 10% Florida-only property quota share treaty, which became effective on July 1, 2017.
Net Investment Income
Net investment income increased
$1.2 million
, or
13.1%
, to
$10.3 million
for the year ended
December 31, 2017
, as compared to
$9.1 million
for the year ended
December 31, 2016
. The increase in net investment income was primarily due to the growth in our fixed income portfolio including a re-allocation of $30 million of equity investments into fixed income securities. The increase was also due to the improvement in the yield on our fixed income portfolio as a result of portfolio repositioning during the first quarter of 2017, particularly the sale of tax-free municipal bonds, the proceeds of which were reinvested in taxable municipal and corporate fixed income securities with higher coupon rates. A portion of the increase in net investment income will be offset by higher federal income taxes, given that a lower percentage of our investment income originates from tax-free securities.
Net Realized Investment Gains
Net realized investment gains increased $
5.5 million
, to
$8.5 million
for the year ended
December 31, 2017
, as compared to
$3.0 million
for the year ended
December 31, 2016
. This increase was driven by our decision to re-deploy approximately $30.6 million of equity securities into fixed-income securities during the year in order to reduce our exposure to the equity markets, which generated realized gains of $5.6 million. Additionally, during the first half of 2017, we redistributed a portion of our equity portfolio between our investment managers, which yielded $2.8 million of realized gains.
Direct Written Policy Fees
Direct written policy fees increased by
$0.6 million
, or
3.3%
, to
$17.2 million
for the year ended
December 31, 2017
, as compared to
$16.6 million
for the year ended
December 31, 2016
. The increase in direct written policy fees is correlated to the increase in gross premiums earned in Homeowners, offset by the decrease in gross premiums earned in Automobile, as compared to the prior year.
Other Income
Other income increased
$4.8 million
, or
27.4%
, to
$22.2 million
for the year ended
December 31, 2017
, as compared to
$17.4 million
for the year ended
December 31, 2016
. Other income included the following for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2017
|
|
% Change
|
|
2016
|
|
|
(Dollars in thousands)
|
Other income:
|
|
|
|
|
|
|
Commission income
|
|
$
|
6,227
|
|
|
(19.4
|
)%
|
|
$
|
7,730
|
|
Brokerage revenue
|
|
11,781
|
|
|
61.0
|
%
|
|
7,316
|
|
Partnership income
|
|
1,973
|
|
|
722.1
|
%
|
|
240
|
|
Financing revenue
|
|
2,225
|
|
|
3.8
|
%
|
|
2,143
|
|
Total other income
|
|
$
|
22,206
|
|
|
27.4
|
%
|
|
$
|
17,429
|
|
The increase in other income was due to the improvement in brokerage revenue and partnership income, partially offset by the decline in commission income. The improvement in brokerage revenue was due to the increase in the amount of our homeowners reinsurance placed, the type of reinsurance purchased and the commissions paid on these reinsurance agreements for the year ended
December 31, 2017
, as compared to the year ended
December 31, 2016
. The improvement in partnership income from our 33% investment in SECCC, was driven by the increased claims adjustment services provided by SECCC to its customers, primarily related to Hurricanes Irma and Harvey for the year ended
December 31, 2017
, as compared to the prior year. The decline in commission income was primarily due to the lower premiums in Automobile for the year ended
December 31, 2017
, as compared to the year ended
December 31, 2016
.
Expenses
Losses and Loss Adjustment Expenses
Losses and LAE increased
$49.7 million
, or
25.1%
, to
$247.6 million
for the year ended
December 31, 2017
, as compared to
$197.8 million
for the year ended
December 31, 2016
. Year over year premium volume growth from Homeowners primarily drove approximately $23.0 million of the increase. During 2017, we experienced losses, net of reinsurance from catastrophe claims of $30.4 million, of which $21.4 million related to Hurricane Irma and $14.6 million related to Hurricane Harvey and other severe weather events in the states of Florida, Louisiana and Texas in Homeowners and Automobile; offset by $5.6 million of income for catastrophe claims handling, which is a reduction to net losses. We experienced adverse development, net of reinsurance, of $13.9 million, primarily in Automobile and Homeowners. The adverse development for Automobile of approximately $8.0 million was primarily driven by adjustments to cession percentages. Homeowners’ adverse development of approximately $8.0 million was driven by the continued impact of AOB and related ligation costs. Unallocated loss adjustment expense also increased by $6.5 million for the year ended
December 31, 2017
, as compared to the year ended
December 31, 2016
. Approximately $15.0 million of the period over period increase stems from lower ceded losses for the year ended
December 31, 2017
, from the combination of the expiration of the retrospectively-rated 10% Florida-only property quota share treaty and the new 10% Florida-only property quota share treaty. These increased losses were offset by 2016 activity related to $33.3 million of catastrophe claims from Hurricane Matthew and other severe events and $11.0 million of adverse development.
Commissions and Other Underwriting Expenses
The following table sets forth the commissions and other underwriting expenses for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
Commissions and other underwriting expenses:
|
|
(In thousands)
|
Homeowners Florida
|
|
$
|
57,151
|
|
|
$
|
55,370
|
|
All others
|
|
32,105
|
|
|
28,720
|
|
Ceded commissions
|
|
(19,199
|
)
|
|
(36,445
|
)
|
Total commissions and other fees
|
|
70,057
|
|
|
47,645
|
|
Salaries and wages
|
|
14,521
|
|
|
13,748
|
|
Other underwriting expenses
|
|
30,289
|
|
|
28,985
|
|
Total commissions and other underwriting expenses
|
|
$
|
114,867
|
|
|
$
|
90,378
|
|
Commissions and other underwriting expenses increased
$24.5 million
, or
27.1%
, to
$114.9 million
for the year ended
December 31, 2017
, as compared to
$90.4 million
for the year ended
December 31, 2016
. The increase was due primarily to a reduction in ceding commissions as a result of the termination of our 30% Florida-only property quota share treaty on July 1, 2016. The remaining increase is due to higher gross premiums earned in Homeowners, as discussed above.
General and Administrative Expenses
General and administrative expenses increased
$2.8 million
, or
16.2%
, to
$20.0 million
for the year ended
December 31, 2017
, as compared to
$17.2 million
for the year ended
December 31, 2016
. The increase in general and administrative expenses was primarily due to higher legal and professional fees, including audit, tax and actuarial fees.
Interest Expense
Interest expense was unchanged at
$0.3 million
for the years ended
December 31, 2017
and
2016
. In late December 2017, the Company issued
$45.0 million
of senior notes. Refer to Note
7
. Long-Term Debt, in the Notes to Consolidated Financial Statements set forth in Part II, Item 8. Financial Statements and Supplementary Data of this Annual Report, for further information regarding the senior notes. As a result, interest expense will increase substantially in 2018 to approximately
$4.0 million
, based on the level of three-month LIBOR as of December 31, 2017.
Income Taxes
Income taxes increased
$3.0 million
, or
561.4%
, to
$3.6 million
for the year ended
December 31, 2017
, as compared to
$0.5 million
for the year ended
December 31, 2016
. The increase in income taxes was primarily due to an increase in taxable income. The revaluation of our net deferred tax asset as during the fourth quarter of 2017 pursuant to Tax Act added $0.3 million of expense to our 2017 tax provision. Due to the decrease in the federal corporate tax rate from 35% to 21%, effective January 1, 2018, we expect our effective tax to decline approximately 14 points in 2018, which will benefit our earnings in the coming year. Refer to Note
8
. Income Taxes, in the Notes to Consolidated Financial Statements set forth in Part II, Item 8. Financial Statements and Supplementary Data of this Annual Report, for additional information on federal income tax reform.
Operating Results Overview
—
Year Ended
December 31, 2016
Compared to Year Ended
December 31, 2015
The following table sets forth selected results of operations for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2016
|
|
% Change
|
|
2015
|
Revenue:
|
|
(Dollars in thousands)
|
Gross premiums written
|
|
$
|
605,485
|
|
|
22.6
|
%
|
|
$
|
493,770
|
|
Increase in unearned premiums
|
|
(40,062
|
)
|
|
(34.9
|
)%
|
|
(61,537
|
)
|
Gross premiums earned
|
|
565,423
|
|
|
30.8
|
%
|
|
432,233
|
|
Ceded premiums earned
|
|
(304,054
|
)
|
|
38.7
|
%
|
|
(219,213
|
)
|
Net premiums earned
|
|
261,369
|
|
|
22.7
|
%
|
|
213,020
|
|
Net investment income
|
|
9,063
|
|
|
25.4
|
%
|
|
7,226
|
|
Net realized investment gains
|
|
3,045
|
|
|
(15.8
|
)%
|
|
3,616
|
|
Direct written policy fees
|
|
16,619
|
|
|
70.6
|
%
|
|
9,740
|
|
Other income
|
|
17,429
|
|
|
76.6
|
%
|
|
9,869
|
|
Total revenue
|
|
307,525
|
|
|
26.3
|
%
|
|
243,471
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
Losses and loss adjustment expenses
|
|
197,810
|
|
|
75.5
|
%
|
|
112,710
|
|
Commissions and other underwriting expenses
|
|
90,378
|
|
|
71.0
|
%
|
|
52,862
|
|
General and administrative expenses
|
|
17,186
|
|
|
16.9
|
%
|
|
14,698
|
|
Interest expense
|
|
348
|
|
|
35.9
|
%
|
|
256
|
|
Total costs and expenses
|
|
305,722
|
|
|
69.4
|
%
|
|
180,526
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
1,803
|
|
|
(97.1
|
)%
|
|
62,945
|
|
Income taxes
|
|
542
|
|
|
(97.8
|
)%
|
|
24,089
|
|
Net income
|
|
1,261
|
|
|
(96.8
|
)%
|
|
38,856
|
|
Net income (loss) attributable to non-controlling interest
|
|
246
|
|
|
(155.3
|
)%
|
|
(445
|
)
|
Net income attributable to Federated National Holding Company shareholders
|
|
$
|
1,015
|
|
|
(97.4
|
)%
|
|
$
|
39,301
|
|
|
|
|
|
|
|
|
|
Ratios to net premiums earned:
|
|
|
|
|
|
|
|
|
|
Net loss ratio
|
|
75.7
|
%
|
|
|
|
|
52.9
|
%
|
Net expense ratio
|
|
41.2
|
%
|
|
|
|
|
31.7
|
%
|
Combined ratio
|
|
116.9
|
%
|
|
|
|
|
84.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
|
Homeowners
|
|
Automobile
|
|
Other
|
|
Consolidated
|
|
Homeowners
|
|
Automobile
|
|
Other
|
|
Consolidated
|
Revenue:
|
|
(Dollars in thousands)
|
Gross premiums written
|
|
$
|
512,737
|
|
|
$
|
69,479
|
|
|
$
|
23,269
|
|
|
$
|
605,485
|
|
|
$
|
449,766
|
|
|
$
|
21,912
|
|
|
$
|
22,092
|
|
|
$
|
493,770
|
|
Increase in unearned premiums
|
|
(28,384
|
)
|
|
(11,167
|
)
|
|
(511
|
)
|
|
(40,062
|
)
|
|
(52,940
|
)
|
|
(7,804
|
)
|
|
(793
|
)
|
|
(61,537
|
)
|
Gross premiums earned
|
|
484,353
|
|
|
58,312
|
|
|
22,758
|
|
|
565,423
|
|
|
396,826
|
|
|
14,108
|
|
|
21,299
|
|
|
432,233
|
|
Ceded premiums earned
|
|
(249,972
|
)
|
|
(44,291
|
)
|
|
(9,791
|
)
|
|
(304,054
|
)
|
|
(199,731
|
)
|
|
(11,101
|
)
|
|
(8,381
|
)
|
|
(219,213
|
)
|
Net premiums earned
|
|
234,381
|
|
|
14,021
|
|
|
12,967
|
|
|
261,369
|
|
|
197,095
|
|
|
3,007
|
|
|
12,918
|
|
|
213,020
|
|
Net investment income
|
|
—
|
|
|
—
|
|
|
9,063
|
|
|
9,063
|
|
|
—
|
|
|
—
|
|
|
7,226
|
|
|
7,226
|
|
Net realized investment gains
|
|
—
|
|
|
—
|
|
|
3,045
|
|
|
3,045
|
|
|
—
|
|
|
—
|
|
|
3,616
|
|
|
3,616
|
|
Direct written policy fees
|
|
7,844
|
|
|
8,171
|
|
|
604
|
|
|
16,619
|
|
|
7,020
|
|
|
2,115
|
|
|
605
|
|
|
9,740
|
|
Other income
|
|
9,106
|
|
|
5,479
|
|
|
2,844
|
|
|
17,429
|
|
|
6,567
|
|
|
1,657
|
|
|
1,645
|
|
|
9,869
|
|
Total revenue
|
|
251,331
|
|
|
27,671
|
|
|
28,523
|
|
|
307,525
|
|
|
210,682
|
|
|
6,779
|
|
|
26,010
|
|
|
243,471
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses
|
|
169,920
|
|
|
14,885
|
|
|
13,005
|
|
|
197,810
|
|
|
97,219
|
|
|
5,196
|
|
|
10,295
|
|
|
112,710
|
|
Commissions and other underwriting expenses
|
|
73,215
|
|
|
12,471
|
|
|
4,692
|
|
|
90,378
|
|
|
46,684
|
|
|
1,576
|
|
|
4,602
|
|
|
52,862
|
|
General and administrative expenses
|
|
13,079
|
|
|
600
|
|
|
3,507
|
|
|
17,186
|
|
|
11,956
|
|
|
100
|
|
|
2,642
|
|
|
14,698
|
|
Interest expense
|
|
348
|
|
|
—
|
|
|
—
|
|
|
348
|
|
|
256
|
|
|
—
|
|
|
—
|
|
|
256
|
|
Total costs and expenses
|
|
256,562
|
|
|
27,956
|
|
|
21,204
|
|
|
305,722
|
|
|
156,115
|
|
|
6,872
|
|
|
17,539
|
|
|
180,526
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
(5,231
|
)
|
|
(285
|
)
|
|
7,319
|
|
|
1,803
|
|
|
54,567
|
|
|
(93
|
)
|
|
8,471
|
|
|
62,945
|
|
Income taxes
|
|
(2,015
|
)
|
|
(111
|
)
|
|
2,668
|
|
|
542
|
|
|
21,049
|
|
|
(36
|
)
|
|
3,076
|
|
|
24,089
|
|
Net income
|
|
(3,216
|
)
|
|
(174
|
)
|
|
4,651
|
|
|
1,261
|
|
|
33,518
|
|
|
(57
|
)
|
|
5,395
|
|
|
38,856
|
|
Net income (loss) attributable to non-controlling interest
|
|
246
|
|
|
—
|
|
|
—
|
|
|
246
|
|
|
(445
|
)
|
|
—
|
|
|
—
|
|
|
(445
|
)
|
Net (loss) income attributable to Federated National Holding Company shareholders
|
|
$
|
(3,462
|
)
|
|
$
|
(174
|
)
|
|
$
|
4,651
|
|
|
$
|
1,015
|
|
|
$
|
33,963
|
|
|
$
|
(57
|
)
|
|
$
|
5,395
|
|
|
$
|
39,301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios to net premiums earned:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss ratio
|
|
72.5
|
%
|
|
106.2
|
%
|
|
100.3
|
%
|
|
75.7
|
%
|
|
49.3
|
%
|
|
172.8
|
%
|
|
79.7
|
%
|
|
52.9
|
%
|
Net expense ratio
|
|
36.8
|
%
|
|
|
|
|
|
|
|
41.2
|
%
|
|
29.8
|
%
|
|
|
|
|
|
|
31.7
|
%
|
Combined ratio
|
|
109.3
|
%
|
|
|
|
|
|
|
|
116.9
|
%
|
|
79.1
|
%
|
|
|
|
|
|
|
84.6
|
%
|
Revenue
Total revenue for the year ended
December 31, 2016
of
$307.5 million
increased
$64.1 million
, or
26.3%
, compared to revenue of
$243.5 million
in
2015
.
Gross Premiums Written
The following table sets forth the gross premiums written for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2016
|
|
2015
|
Gross premiums written:
|
|
(In thousands)
|
Homeowners Florida
|
|
$
|
477,489
|
|
|
$
|
427,428
|
|
Homeowners non-Florida
|
|
35,248
|
|
|
22,338
|
|
Personal automobile
|
|
69,479
|
|
|
21,912
|
|
Commercial general liability
|
|
13,256
|
|
|
13,928
|
|
Federal flood
|
|
10,013
|
|
|
8,164
|
|
Total gross premiums written
|
|
$
|
605,485
|
|
|
$
|
493,770
|
|
Gross premiums written increased
$111.7 million
, or
22.6%
, to
$605.5 million
for the year ended
December 31, 2016
, as compared to
$493.8 million
for the same period in
2015
. The increase predominantly reflects market share growth in Homeowners and Automobile. Homeowners gross premiums written increased
$63.0 million
, or
14.0%
, to
$512.7 million
for the year ended
December 31, 2016
, as compared to
$449.8 million
in
2015
. Gross premiums written for Automobile increased by
$47.6 million
to
$69.5 million
in
2016
, compared to
$21.9 million
in
2015
. This increase is also reflected in the increase in our Homeowners in-force policy count to 279,109 as of
December 31, 2016
, as compared to 254,105 as of
2015
. These increases reflected management’s strategy in 2016 to grow in Homeowners and Automobile by expanding operations outside of Florida. With the expansion into areas outside of Florida, we were able to continue to leverage our personnel and, at the same time, diversify our insurance risk.
Gross Premiums Earned
The following table sets forth the gross premiums earned for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2016
|
|
2015
|
Gross premiums earned:
|
|
(In thousands)
|
Homeowners Florida
|
|
$
|
455,252
|
|
|
$
|
381,027
|
|
Homeowners non-Florida
|
|
29,101
|
|
|
15,799
|
|
Personal automobile
|
|
58,312
|
|
|
14,108
|
|
Commercial general liability
|
|
13,675
|
|
|
13,541
|
|
Federal flood
|
|
9,083
|
|
|
7,758
|
|
Total gross premiums earned
|
|
$
|
565,423
|
|
|
$
|
432,233
|
|
Gross premiums earned increased
$133.2 million
, or
30.8%
, to
$565.4 million
for the year ended
December 31, 2016
, as compared to
$432.2 million
for the same period in
2015
. Gross premiums earned increased due to higher premiums written in Homeowners, both in non-Florida and Florida, and Automobile over the past twelve to eighteen months, which resulted in higher earned premiums as the premiums written has earned in.
Ceded Premiums Earned
Ceded premiums earned increased by
$84.8 million
, or
38.7%
, to
$304.1 million
for the year ended
December 31, 2016
, as compared to
$219.2 million
in the same twelve-month period last year. This increase is driven by the additional excess-of-loss reinsurance costs recorded in
2016
as compared to
2015
related to Homeowners premium growth. Additionally, we recorded increased ceded premiums related to the premium growth in Automobile in
2016
, which is generally ceded at 75% through various quota share agreements. These increases were offset by lower ceded premiums in 2016 as compared to 2015 due to the expiration of the 30% Florida-only property quota share treaty, which ended on July 1, 2016.
Net Investment Income
Net investment income increased
$1.8 million
, or
25.4%
, to
$9.1 million
for the year ended
December 31, 2016
, as compared to $7.2 million for the year ended
December 31, 2015
. The improvement was mainly due to a year-over-year overall growth of our investment portfolio, specifically growth in the fixed income securities. Our debt securities investment yields, net, remained steady year over year at 2.3% for the years ended
December 31, 2016
and
2015
, respectively.
Net Realized Investment Gains
Net realized investment gains totaled
$3.0 million
for the year ended
December 31, 2016
, as compared to
$3.6 million
for the year ended
December 31, 2015
. From time to time, our portfolio managers, under our control, move out of positions due to both macro and micro conditions; these movements generate both realized gains and losses. The slight decrease is due to less favorable market conditions for the year ended
December 31, 2016
, as compared to the year ended
December 31, 2015
.
Direct Written Policy Fees
Direct written policy fees increased by
$6.9 million
, or
70.6%
, to
$16.6 million
for the year ended
December 31, 2016
, as compared to
$9.7 million
in
2015
. The increase in direct written policy fees is correlated to the increase in gross premiums earned in Homeowners and Automobile compared to the prior year.
Other Income
Other income increased
$7.6 million
, or
76.6%
, to
$17.4 million
for the year ended
December 31, 2016
, as compared to
$9.9 million
for the year ended
December 31, 2015
. Other income included the following for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2016
|
|
% Change
|
|
2015
|
|
|
(Dollars in thousands)
|
Other income:
|
|
|
|
|
|
|
Commission income
|
|
$
|
7,730
|
|
|
159.9
|
%
|
|
$
|
2,974
|
|
Brokerage revenue
|
|
7,316
|
|
|
46.6
|
%
|
|
4,989
|
|
Partnership income (loss)
|
|
240
|
|
|
(2,500.0
|
)%
|
|
(10
|
)
|
Finance revenue
|
|
2,143
|
|
|
11.8
|
%
|
|
1,916
|
|
Total other income
|
|
$
|
17,429
|
|
|
76.6
|
%
|
|
$
|
9,869
|
|
The increase in commission income is primarily a result of the premium growth in Automobile, which increases the fees we receive for managing that business. Additionally, the increase in brokerage revenue is driven by the increase in our homeowners reinsurance program, the type of reinsurance purchased, and the commissions paid on these reinsurance agreements in calendar year
2016
as compared to calendar year
2015
.
Expenses
Losses and Loss Adjustment Expenses
Losses and LAE increased
$85.1 million
, or
75.5%
, to
$197.8 million
for the year ended
December 31, 2016
, as compared to
$112.7 million
for the year ended
December 31, 2015
.
The increase in losses and LAE is driven by $40.0 million of losses due to increased earned premiums in Homeowners and Automobile, $33.3 million incurred in catastrophe losses resulting from a series of tornadoes and severe weather events that impacted the state of Florida and South Carolina (i.e., Hurricane Matthew, Hurricane Hermine, Tropical Storm Colin), and $16.0 million of losses related to increasing the Company’s Florida homeowners attritional loss ratio throughout
2016
. Additionally, losses and LAE were impacted by unfavorable development of $11.0 million for the
2015
accident year in our homeowners coverage in the state of Florida as a result of AOB and other related adjusting expenses. The factors listed above were partially offset by ceded losses pertaining to the Florida-only property quota-share treaties.
Commissions and Other Underwriting Expenses
The following table sets forth commissions and other underwriting expenses for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2016
|
|
2015
|
Commissions and other underwriting expenses:
|
|
(In thousands)
|
Homeowners Florida
|
|
$
|
55,370
|
|
|
$
|
37,799
|
|
All others
|
|
28,720
|
|
|
15,940
|
|
Ceded commissions
|
|
(36,445
|
)
|
|
(36,396
|
)
|
Total commissions and other fees
|
|
47,645
|
|
|
17,343
|
|
Salaries and wages
|
|
13,748
|
|
|
11,864
|
|
Other underwriting expenses
|
|
28,985
|
|
|
23,655
|
|
Total commissions and other underwriting expenses
|
|
$
|
90,378
|
|
|
$
|
52,862
|
|
Commissions and other underwriting expenses increased
$37.5 million
, or
71.0%
, to
$90.4 million
for the year ended
December 31, 2016
, as compared to
$52.9 million
for the year ended
December 31, 2015
. The increase is related to the premium growth in Homeowners and Automobile, with homeowners non-Florida and Automobile carrying higher acquisition costs as a result of the different distribution models we employ to market our insurance products.
General and Administrative Expenses
General and administrative expenses increased
$2.5 million
, or
16.9%
, to
$17.2 million
for the year ended
December 31, 2016
, as compared to
$14.7 million
for the year ended
December 31, 2015
. The increase primarily reflects expenses incurred of $1.9 million in connection with the resignation of our former Chief Financial Officer during 2016.
Income Taxes
Income taxes decreased
$23.5 million
, or
97.8%
, to
$0.5 million
for the year ended
December 31, 2016
, as compared to
$24.1 million
for the year ended
December 31, 2015
. The change was primarily due to a decrease in taxable income.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of funds are net premiums, fee income, commission income and investment income. Our primary uses of funds are the payment of claims and operating expenses. As of
December 31, 2017
, we had
$86.2 million
in cash and cash equivalents and
$444.0 million
in investments. As of
December 31, 2016
, we had
$74.6 million
in cash and cash equivalents and
$409.7 million
in investments. Total shareholders’ equity decreased $
7.0 million
, to $
227.5 million
as of
December 31, 2017
, as compared to $
234.5 million
as of
December 31, 2016
, driven by $10.6 million of share repurchases and $4.3 million of dividends declared.
Historically, we have met our liquidity requirements primarily through cash generated from operations. In December 2017, we received proceeds of $25.0 million principal amount of Senior Unsecured Floating Rate Notes due 2027 (the “2027 Notes”), pursuant to an indenture dated as of December 28, 2017 (the “Indenture”), as supplemented by a supplemental indenture dated as of December 28, 2017.
In December 2017, we also received proceeds of
$20.0 million of Senior Unsecured Fixed Rate Notes due 2022 (the “2022 Notes”), pursuant to the Indenture, as supplemented by a supplemental indenture dated as of December 29, 2017. A portion of the proceeds from the 2027 Notes and 2022 Notes was used on February 28, 2018 to infuse capital into FNIC. Refer to Note 17. Subsequent Events, in the Notes to Consolidated Financial Statements set forth set forth in Part II, Item 8. Financial Statements and Supplementary Data of this Annual Report, for additional information regarding the capital infusion. The remaining proceeds are available to repurchase shares of our common stock, and for general corporate purposes, including managing the capital needs of our subsidiaries.
Among other things, the Indenture limits the Company's ability to incur additional debt without the approval of the existing noteholders. The supplemental indentures limit the Company's debt to equity ratio to 35%. The Company's actual debt to equity ratio at December 31, 2017 was approximately 22%.
Statutory Capital and Surplus of our Insurance Subsidiaries
As described more fully in Part I, Item 1. Business, Regulation of this Annual Report, our insurance operations are subject to the laws and regulations of the states in which we operate. The Florida OIR and their regulatory counterparts in other states utilize the NAIC RBC requirements, and the resulting RBC ratio, as a key metric in the exercise of their regulatory oversight. The RBC ratio is a measure of the sufficiency of an insurer’s statutory capital and surplus. In addition, the RBC ratio is used by insurance industry ratings services in the determination of the financial strength ratings (i.e. claims paying ability) they assign to insurance companies. At
December 31, 2017
, FNIC’s statutory surplus was $162.2 million and its RBC ratio was
301.9%
.
Based upon the 2017 and 2016 statutory financial statements for FNIC and MNIC, statutory surplus exceeded the regulatory action levels established by the NAIC’s RBC requirements.
Based on RBC requirements, the extent of regulatory intervention and action increases as the ratio of an insurer’s statutory surplus to its ACL, as calculated under the NAIC’s requirements, decreases. The first action level, the Company Action Level, requires an insurer to submit a plan of corrective actions to the insurance regulators if statutory surplus falls below 200.0% of the ACL amount. The second action level, the Regulatory Action Level, requires an insurer to submit a plan containing corrective actions and permits the insurance regulators to perform an examination or other analysis and issue a corrective order if statutory surplus falls below 150.0% of the ACL amount. The third action level, ACL, allows the regulators to rehabilitate or liquidate an insurer in addition to the aforementioned actions if statutory surplus falls below the ACL amount. The fourth action level is the Mandatory Control Level, which requires the regulators to rehabilitate or liquidate the insurer if statutory surplus falls below 70.0% of the ACL amount. FNIC’s ratio of statutory surplus to its ACL was
301.9%
and
307.5%
as of
December 31, 2017
and
2016
, respectively. MNIC’s ratio of statutory surplus to its ACL was
1,070.1%
and
2,419.8%
as of
December 31, 2017
and
2016
, respectively.
Cash Flows Discussion
We believe that existing cash and investment balances, when combined with anticipated cash flows and the proceeds of our debt offering as described above, will be adequate to meet our expected liquidity needs in both the short-term and the reasonably foreseeable future. We believe the combined balances will be sufficient to meet our ongoing operating requirements and anticipated cash needs, and satisfy debt requirements. Future growth strategies may require additional external financing and we may from time to time seek to obtain external financing. We cannot assure that additional sources of financing will be available to us on favorable terms, or at all, or that any such financing would not negatively impact our results of operations. We expect to continue declaring and paying dividends at comparable levels, subject to our future liquidity needs and reserve requirements.
Subject to our compliance with capital requirements as described above, we may consider various opportunities to deploy our capital, including repurchases of our common stock if such repurchases represent a more favorable use of available capital.
Operating Activities
Net cash provided by operating activities was
$13.1 million
for the year ended
December 31, 2017
, as compared to
$69.8 million
for the year ended
December 31, 2016
. The change was primarily due to the decline in unearned premiums, reinsurance recoverable, net and reinsurance payable for the year ended
December 31, 2017
, as compared to prior year. The change was offset by an increase in premiums receivable, income taxes receivable, loss and LAE reserves and deferred acquisition costs for the year ended
December 31, 2017
, as compared to the prior year.
Net cash provided by operating activities of
$69.8 million
for the year ended
December 31, 2016
, as compared to net cash provided by operating activities of
$52.9 million
for the year ended
December 31, 2015
. The change was primarily due to the decrease in the prepaid reinsurance premium account and increase loss and LAE reserves for the year ended
December 31, 2016
, partly offset by decreases in reinsurance recoverables, unearned premiums, and deferred acquisition costs, as compared to the prior year.
Investing Activities
Net cash used in investing activities was
$31.7 million
for the year ended
December 31, 2017
, as compared to
$33.2 million
for the year ended
December 31, 2016
, representing net growth in our investment portfolio each year. The change was due to the higher purchases of debt and equity investment securities of $
375.5 million
for the year ended
December 31, 2017
, as compared to $
342.1 million
the year ended
December 31, 2016
, and the lower proceeds from sales of debt and equity investment securities of $
306.7 million
for the year ended
December 31, 2017
, as compared to $
311.1 million
for the prior year. The changes were offset by the maturities and redemptions of debt securities of $
38.0 million
for the year ended
December 31, 2017
, as compared to $
81.8 million
for the year ended
December 31, 2016
.
Net cash used in investing activities was
$33.2 million
for the year ended
December 31, 2016
, as compared to net cash used in investing activities of
$63.6 million
for the year ended
December 31, 2015
. The change was due to the decline in the net purchases of investment securities for the year ended
December 31, 2016
, as compared to prior year.
Financing Activities
Net cash from financing activities was net cash provided by financing activities of $
30.2 million
for the year ended
December 31, 2017
, as compared to net cash used of $
15.0 million
for the year ended
December 31, 2016
. The change was due to the proceeds from borrowings of notes payable in December 2017 of
$45.0 million
for the year ended
December 31, 2017
, as compared to the absence of any proceeds from borrowing in the prior year. The change was slightly offset by the lower repurchases of our common stock of $
10.6 million
for the year ended
December 31, 2017
, as compared to the common stock repurchases of $
11.3 million
for the year ended
December 31, 2016
, and the lower amount of dividends paid of $
4.3 million
for the year ended
December 31, 2017
, as compared to $
4.7 million
paid during the prior year.
Net cash provided by financing activities was
$21.6 million
for the year ended
December 31, 2016
, as compared to net cash provided of
$12.9 million
for the year ended
December 31, 2015
. The change was primarily due to proceeds from non-controlling interest equity investment of
$18.7 million
and the issuance of debt in our consolidated VIE of
$5.0 million
during the year ended
December 31, 2015
. The change was also due to the common stock repurchases and dividends paid during the year ended
December 31, 2016
, as compared to the prior year.
Impact of Inflation and Changing Prices
The consolidated financial statements and related data presented herein have been prepared in accordance with GAAP, which requires the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. Our primary assets and liabilities are monetary in nature. As a result, interest rates have a more significant impact on performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or with the same magnitude as the inflationary effect on the cost of paying loss and LAE.
Insurance premiums are established before we know the amount of loss and LAE and the extent to which inflation may affect such expenses. Consequently, we attempt to anticipate the future impact of inflation when establishing rate levels. While we attempt to charge adequate premiums, we may be limited in raising premium levels for competitive and regulatory reasons. Inflation may also affect the market value of our investment portfolio and the investment rate of return. Any future economic changes that result in prolonged and increasing levels of inflation could cause increases in the dollar amount of incurred loss and LAE and thereby materially adversely affect future liability requirements
.
CONTRACTUAL OBLIGATIONS
The table sets forth a summary of long-term contractual obligations as of
December 31, 2017
, and includes amounts that represent estimates of gross undiscounted amounts payable over time, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due By Period
|
|
|
|
|
Less
|
|
|
|
|
|
More
|
|
|
|
|
than
|
|
1 - 3
|
|
3 - 5
|
|
than
|
|
|
Total
|
|
1 Year
|
|
Years
|
|
Years
|
|
5 Years
|
|
|
(In thousands)
|
Loss and loss adjustment expense reserves (1)
|
|
$
|
230,515
|
|
|
$
|
136,004
|
|
|
$
|
80,680
|
|
|
$
|
11,526
|
|
|
$
|
2,305
|
|
Long-term debt (2)
|
|
50,000
|
|
|
—
|
|
|
5,000
|
|
|
20,000
|
|
|
25,000
|
|
Interest payments on long-term debt (3)
|
|
27,685
|
|
|
4,202
|
|
|
12,549
|
|
|
8,225
|
|
|
2,709
|
|
Operating leases
|
|
12,760
|
|
|
780
|
|
|
4,464
|
|
|
2,640
|
|
|
4,876
|
|
Total long-term contractual obligations
|
|
$
|
320,960
|
|
|
$
|
140,986
|
|
|
$
|
102,693
|
|
|
$
|
42,391
|
|
|
$
|
34,890
|
|
(1) Loss and loss adjustment expense reserves do not have contractual maturity dates; however, based on historical payment patterns, the amount presented is our estimate of the expected timing of these payments. The timing of payments is subject to significant uncertainty. We maintain a portfolio of marketable investments with varying maturities and a substantial amount of cash and cash equivalents intended to provide adequate cash flows for such payments.
(2) Long-term debt payments on notes payable, excludes deferred financing costs.
(3) One of the senior notes has a floating interest rate based on three-month LIBOR. These estimates reflect such rate as of December 31, 2017.
CRITICAL ACCOUNTING POLICIES
We prepare our consolidated financial statements in accordance with U.S. GAAP, which requires us to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Future events and their effects cannot be determined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results may materially differ from those estimates.
We believe our most critical accounting estimates inherent in the preparation of our financial statements are: (i) fair value measurements of our investments; (ii) accounting for investments; (iii) premium and unearned premium calculation; (iv) reinsurance contracts; (v) the amount and recoverability of deferred acquisition costs; (vi) reserve for loss and losses adjustment expenses; and, (vii) income taxes. The accounting estimates that result require the use of assumptions about certain matters that are highly uncertain at the time of estimation. To the extent actual experience differs from the assumptions used, our financial condition, results of operations, and cash flows would be affected.
Fair Value
Fair value is the price that would be received to sell an asset or paid to transfer a liability between market participants in the principal market or in the most advantageous market when no principal market exists. Adjustments to transaction prices or quoted market prices may be required in illiquid or disorderly markets in order to estimate fair value. Alternative valuation techniques may be appropriate under the circumstances to determine the value that would be received to sell an asset or pay to transfer a liability in an orderly transaction. Market participants are assumed to be independent, knowledgeable, able and willing to transact an exchange and not acting under duress. Our nonperformance or credit risk is considered in determining the fair value of liabilities. Considerable judgment may be required in interpreting market data used to develop the estimates of fair value. Accordingly, estimates of fair value presented herein are not necessarily indicative of the amounts that could be realized in a current or future market exchange.
Investments
Investments consist of debt and equity securities. Debt securities consist of securities with an initial fixed maturity of more than one year, including corporate bonds, municipal bonds and United States government bonds. Equity securities generally consist of securities that represent ownership interests in an enterprise. We determine the appropriate classification of investments in debt and equity securities at the acquisition date and re-evaluate the classification at each balance sheet date.
Held-to-maturity investments are recorded at the amortized cost, reflecting the ability and intent to hold the securities to maturity. All other securities were classified as available-for-sale and recorded at fair value. Unrealized gains and losses during the year, net of the related tax effect applicable to available-for-sale, are excluded from income and reflected in other comprehensive income, and the cumulative effect is reported as a separate component of shareholders’ equity until realized. If a decline in fair value is deemed to be other-than-temporary, the investment is written down to its fair value and the amount of the write-down is recorded as an OTTI loss on the statement of income. Any portion of such decline related to debt securities that is believed to arise from factors other than credit is recorded as a component of other comprehensive income rather than against income.
Net realized gains and losses on investments are determined in accordance with the specific identification method.
Net investment income consists primarily of interest income from debt securities, cash and cash equivalents, including any premium amortization or discount accretion and dividend income from equity securities; less expenses related to investments.
Premiums and Unearned Premiums
We recognize premiums as revenue on a pro-rata basis over the term of an insurance policy. Assumed reinsurance premiums written and earned are based on reports received from ceding companies for pro-rata treaty contracts and are generally recorded as written based on contract terms for excess-of-loss and quota share contracts. Premiums are earned ratably over the terms of the related coverage.
Unearned premiums and ceded unearned premiums represent the portion of gross premiums written and ceded premiums written, respectively, relating to the unexpired terms of such coverage.
Premium receivable balances are reported net of an allowance for estimated uncollectible premium amounts. Such allowance is based upon an ongoing review of amounts outstanding, length of collection periods, the creditworthiness of the insured and other relevant factors. Amounts deemed to be uncollectible are written off against the allowance.
Reinsurance
Reinsurance is used to mitigate the exposure to losses, manage capacity and protect capital resources. Reinsuring loss exposures does not relieve a ceding entity from its obligations to policyholders and cedants. Reinsurance recoverables (including amounts related to claims incurred but not reported) and ceded unearned premiums are reported as assets. To minimize exposure to losses from a reinsurer’s inability to pay, the financial condition of such reinsurer is evaluated initially upon placement of the reinsurance and periodically thereafter. In addition to considering the financial condition of the reinsurer, the collectability of the reinsurance recoverables is evaluated (and where appropriate, whether an allowance for estimated uncollectible reinsurance recoverables is to be established) based upon a number of other factors. Such factors include the amounts outstanding, length of collection periods, disputes, any collateral or letters of credit held and other relevant factors.
Ceded premiums written are recorded in accordance with applicable terms of the various reinsurance contracts and ceded premiums earned are charged against revenue over the period of the various reinsurance contracts. This also generally applies to reinstatement premiums paid to a reinsurer, which arise when contractually-specified ceded loss triggers have been breached. Ceded commissions reduce commissions, brokerage and other underwriting expenses and ceded losses incurred reduce net loss and LAE incurred over the applicable periods of the various reinsurance contracts with third party reinsurers. If premiums or commissions are subject to adjustment (for example, retrospectively-rated or experience-rated), the estimated ultimate premium or commission is recognized over the period of the contract.
Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured business and consistent with the terms of the underlying reinsurance contract.
Deferred Acquisition Costs
Deferred acquisition costs represent those costs that are incremental and directly related to the successful acquisition of new or renewal of existing insurance contracts. We defer incremental costs that result directly from, and are essential to, the acquisition or renewal of an insurance contract. Such deferred acquisition costs generally include agent or broker commissions, referral fees, premium taxes, medical and inspection fees that would not have been incurred if the insurance contract had not been acquired or renewed. Each cost is analyzed to assess whether it is fully deferrable.
We also defer a portion of the employee total compensation and payroll-related fringe benefits directly related to time spent performing specific acquisition or renewal activities, including costs associated with the time spent on underwriting, policy issuance and processing, and sales force contract selling.
The acquisition costs are deferred and amortized over the period in which the related premiums written are earned, generally 12 months. It is grouped consistent with the manner in which the insurance contracts are acquired, serviced and measured for profitability and is reviewed for recoverability based on the profitability of the underlying insurance contracts. Investment income is anticipated in assessing the recoverability of deferred acquisition costs. We assess the recoverability of deferred acquisition costs on an annual basis or more frequently if circumstances indicate impairment may have occurred.
Losses and Loss Adjustment Expenses
Overview
The estimation of the liability for unpaid loss and LAE is inherently difficult and subjective, especially in view of changing legal and economic environments that impact the development of loss reserves, and therefore, quantitative techniques frequently have to be supplemented by subjective considerations and managerial judgment. In addition, trends that have affected development of liabilities in the past may not necessarily occur or affect liability development to the same degree in the future.
Each of our insurance companies establishes reserves on its balance sheet for unpaid loss and LAE related to its property and casualty insurance and related reinsurance contracts. As of any balance sheet date, there are claims that have not yet been reported, and some claims may not be reported for many years after the date a loss occurs. As a result of this historical pattern, the liability for unpaid loss and LAE includes significant estimates for IBNR claims. Additionally, reported claims are in various stages of the settlement process. Each claim is settled individually based upon its merits, and certain claims may take years to settle, especially if legal action is involved. As a result, the liabilities for unpaid loss and LAE include significant judgments, assumptions and estimates made by management relating to the actual ultimate losses that will arise from the claims. Due to the inherent uncertainties in the process of establishing these liabilities, the actual ultimate loss from a claim is likely to differ, perhaps materially, from the liability initially recorded.
The time period between the occurrence of a loss and the time it is settled is referred to as the “claim tail.” In general, actuarial judgments for shorter-tailed lines of business generally have much less of an effect on the determination of the loss reserve amount than when those same judgments are made regarding longer-tailed lines of business. Reported losses for the shorter-tailed classes, such as property and certain marine, aviation and energy classes, generally reach the ultimate level of incurred losses in a relatively short period of time. Rather than having to rely on actuarial assumptions for many accident years, these assumptions are generally only relevant for the more recent accident years.
The process of recording quarterly and annual liabilities for unpaid loss and LAE for short-tail lines is primarily focused on maintaining an appropriate reserve level for reported claims and IBNR. Specifically, we assess the reserve adequacy of IBNR in light of such factors as the current levels of reserves for reported claims and expectations with respect to reporting lags, catastrophe events, historical data, legal developments, and economic conditions, including the effects of inflation.
Standard actuarial methodologies employed to estimate ultimate losses incorporate the inherent lag from the time claims occur to when they are reported to an insurer and, if applicable, to when an insurer reports the claims to a reinsurer. Certain actuarial methodologies may be more appropriate than others in instances where this lag may not be consistent from period to period. Consequently, additional actuarial judgment is employed in the selection of methodologies to best incorporate the potential impact of this situation.
Our insurance companies provide coverage on both a claims-made and occurrence basis. Claims-made policies generally require that claims occur and be reported during the coverage period of the policy. Occurrence policies allow claims which occur during a policy’s coverage period to be reported after the coverage period, and as a result, these claims can have a very long claim tail, occasionally extending for decades. Casualty claims can have a very long claim tail, in certain situations extending for many years. In addition, casualty claims are more susceptible to litigation and the legal environment and can be significantly affected by changing contract interpretations, all of which contribute to extending the claim tail. For long-tail casualty lines of business, estimating the ultimate liabilities for unpaid loss and LAE is a more complex process and depends on a number of factors, including the line and volume of the business involved. For these reasons, our insurance companies will generally use actuarial projections in setting reserves for all casualty lines of business.
In conformity with GAAP, our insurance companies are not permitted to establish reserves for catastrophe losses that have not occurred. Therefore, losses related to a significant catastrophe, or accumulation of catastrophes, in any reporting period could have a material adverse effect on our results of operations and financial condition during that period.
We believe that the reserves for unpaid loss and LAE established by our insurance companies are adequate as of December 31, 2017; however, additional reserves, which could have a material impact upon our financial condition, results of operations and cash flows, may be necessary in the future.
Methodologies and Assumptions
Our insurance companies use a variety of techniques that employ significant judgments and assumptions to establish the liabilities for unpaid loss and LAE recorded at the balance sheet date. These techniques include detailed statistical analyses of past claims reporting, settlement activity, claims frequency, internal loss experience, changes in pricing or coverages and severity data when sufficient information exists to lend statistical credibility to the analyses. More subjective techniques are used when statistical data is insufficient or unavailable. These liabilities also reflect implicit or explicit assumptions regarding the potential effects of future inflation, judicial decisions, changes in laws and recent trends in such factors, as well as a number of actuarial assumptions that vary across our reinsurance and insurance subsidiaries and across lines of business. This data is analyzed by line of business, coverage, accident year or underwriting year and reinsurance contract type, as appropriate.
Our loss reserve review processes use actuarial methods that vary by operating subsidiary and line of business and produce point estimates for each class of business. The actuarial methods used include the following methods:
|
|
•
|
Reported Loss Development Method
:
A reported loss development pattern is calculated based on historical loss development data, and this pattern is then used to project the latest evaluation of cumulative reported losses for each accident year or underwriting year, as appropriate, to ultimate levels;
|
|
|
•
|
Paid Development Method
:
A paid loss development pattern is calculated based on historical paid loss development data, and this pattern is then used to project the latest evaluation of cumulative paid losses for each accident year or underwriting year, as appropriate, to ultimate levels;
|
|
|
•
|
Expected Loss Ratio Method
:
Expected loss ratios are applied to premiums earned, based on historical company experience, or historical insurance industry results when company experience is deemed not to be sufficient; and
|
|
|
•
|
Bornhuetter-Ferguson Method
:
The results from the Expected Loss Ratio Method are essentially blended with either the Reported Loss Development Method or the Paid Development Method.
|
The primary actuarial assumptions used by insurance companies include the following:
|
|
•
|
Expected loss ratios
represent management’s expectation of losses, in relation to earned premium, at the time business is written, before any actual claims experience has emerged. This expectation is a significant determinant of the estimate of loss reserves for recently written business where there is little paid or incurred loss data to consider. Expected loss ratios are generally derived from historical loss ratios adjusted for the impact of rate changes, loss cost trends and known changes in the type of risks underwritten. For certain longer-tailed reinsurance business that are typically lower frequency, high severity classes, expected loss ratios are often used for the last several accident years or underwriting years, as appropriate.
|
|
|
•
|
Rate of loss
cost inflation (or deflation) represents management’s expectation of the inflation associated with the costs we may incur in the future to settle claims. Expected loss cost inflation is particularly important for longer-tailed classes.
|
|
|
•
|
Reported and paid loss
emergence patterns represent management’s expectation of how losses will be reported and ultimately paid in the future based on the historical emergence patterns of reported and paid losses and are derived from past experience of our subsidiaries, modified for current trends. These emergence patterns are used to project current reported or paid loss amounts to their ultimate settlement value.
|
In the absence of sufficiently credible internally-derived historical information, each of the above actuarial assumptions may also incorporate data from the insurance industries as a whole, or peer companies writing substantially similar coverages. Data from external sources may be used to set expectations, as well as assumptions regarding loss frequency or severity relative to an exposure unit or claim, among other actuarial parameters. Assumptions regarding the application or composition of peer group or industry reserving parameters require substantial judgment.
Loss Frequency and Severity
Loss frequency and severity are measures of loss activity that are considered in determining the key assumptions described above. Loss frequency is a measure of the number of claims per unit of insured exposure, and loss severity is a measure of the average size of claims. Factors affecting loss frequency include the effectiveness of loss controls and safety programs and changes in economic conditions or weather patterns. Factors affecting loss severity include changes in policy limits, retentions, rate of inflation and judicial interpretations. Another factor affecting estimates of loss frequency and severity is the loss reporting lag, which is the period of time between the occurrence of a loss and the date the loss is reported to our insurance companies. The length of the loss reporting lag affects their ability to accurately predict loss frequency (loss frequencies are more predictable for lines with short reporting lags), as well as the amount of reserves needed for IBNR. If the actual level of loss frequency and severity is higher or lower than expected, the ultimate losses will be different than management’s estimates.
Prior Year Development
Our insurance companies continually evaluate the potential for changes, both favorable and unfavorable, in their estimates of their loss and LAE liabilities and use the results of these evaluations to adjust both recorded liabilities and underwriting criteria. With respect to liabilities for unpaid loss and LAE established in prior years, these liabilities are periodically analyzed and their expected ultimate cost adjusted, where necessary, to reflect favorable or unfavorable development in loss experience and new information, including, for certain catastrophe events, revised industry estimates of the magnitude of a catastrophe. Adjustments to previously recorded liabilities for unpaid loss and LAE, both favorable and unfavorable, are reflected in our financial results in the periods in which these adjustments are made and are referred to as prior accident year reserve development. We adjusted our prior year loss and LAE reserve estimates based on current information that differed from previous assumptions made at the time such loss and LAE reserves were previously estimated.
Refer to Note
1
. Organization, Consolidation and Basis of Preparation and Note
6
. Loss and Loss Adjustment Reserves, in the Notes to Consolidated Financial Statements set forth in Part II, Item 8. Financial Statements and Supplementary Data of this Annual Report, for additional information regarding our loss and LAE.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and operating loss, capital loss and tax-credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income or expense in the period that includes the enactment date. Such a change occurred in the fourth quarter of 2017. Refer to Note
8
. Income Taxes, in the Notes to Consolidated Financial Statements set forth in Part II, Item 8. Financial Statements and Supplementary Data of this Annual Report, for additional information regarding our income taxes.
Recent Accounting Pronouncements
Refer to Note
2
. Summary of Significant Accounting Policies – Recent Accounting Pronouncements, in the Notes to Consolidated Financial Statements set forth in Part II, Item 8. Financial Statements and Supplementary Data of this Annual Report, for a discussion of recent accounting pronouncements and their effect, if any, on our company.
Off-Balance Sheet Transactions
For the years ended
December 31, 2017
and
2016
, we did not have any off balance sheet transactions.
ITEM 8
.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
The Shareholders and the Board of Directors of
Federated National Holding Company
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Federated National Holding Company and subsidiaries (the "Company") as of
December 31, 2017
and
2016
, the related consolidated statements of operations, comprehensive income (loss), changes in shareholders’ equity and cash flows for each of the three years in the period ended
December 31, 2017
, and the related notes and the financial statement schedules listed in the index at Item 15 (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at
December 31, 2017
and
2016
, and the results of its operations and its cash flows for each of the three years in the period ended
December 31, 2017
, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of
December 31, 2017
, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated
March 13, 2018
expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2015.
Charlotte, North Carolina
March 13, 2018
FEDERATED NATIONAL HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2017
|
|
2016
|
|
|
|
|
As Adjusted
|
ASSETS
|
|
|
|
|
Investments:
|
|
|
|
|
Debt securities, available-for-sale, at fair value (amortized cost of $422,300 and $376,644, respectively)
|
|
$
|
423,238
|
|
|
$
|
374,756
|
|
Debt securities, held-to-maturity, at amortized cost
|
|
5,349
|
|
|
5,551
|
|
Equity securities, available-for-sale, at fair value (cost of $14,085 and $24,163, respectively)
|
|
15,434
|
|
|
29,375
|
|
Total investments (including $26,284 and $28,704 related to the VIE, respectively)
|
|
444,021
|
|
|
409,682
|
|
|
|
|
|
|
Cash and cash equivalents (including $14,211 and $15,668 related to the VIE, respectively)
|
|
86,228
|
|
|
74,593
|
|
Prepaid reinsurance premiums
|
|
135,492
|
|
|
156,932
|
|
Premiums receivable, net of allowance of $70 and $55, respectively (including $1,184 and $1,584 related to the VIE, respectively)
|
|
46,393
|
|
|
54,854
|
|
Reinsurance recoverable, net
|
|
124,601
|
|
|
47,863
|
|
Deferred acquisition costs
|
|
40,893
|
|
|
41,892
|
|
Income taxes receivable
|
|
9,510
|
|
|
13,871
|
|
Deferred tax assets, net
|
|
307
|
|
|
—
|
|
Property and equipment, net
|
|
4,025
|
|
|
4,194
|
|
Other assets (including $2,322 and $371 related to the VIE, respectively)
|
|
13,403
|
|
|
11,509
|
|
TOTAL ASSETS
|
|
$
|
904,873
|
|
|
$
|
815,390
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
LIABILITIES:
|
|
|
|
|
Loss and loss adjustment expense reserves
|
|
$
|
230,515
|
|
|
$
|
158,110
|
|
Unearned premiums
|
|
294,423
|
|
|
294,022
|
|
Reinsurance payable
|
|
71,944
|
|
|
79,154
|
|
Long-term debt, net of deferred financing costs of $749 and $91, respectively
|
|
49,251
|
|
|
4,909
|
|
Deferred revenue
|
|
6,222
|
|
|
6,834
|
|
Deferred tax liabilities, net
|
|
—
|
|
|
253
|
|
Other liabilities
|
|
25,059
|
|
|
37,643
|
|
Total liabilities
|
|
677,414
|
|
|
580,925
|
|
SHAREHOLDERS’ EQUITY:
|
|
|
|
|
Preferred stock, $0.01 par value: 1,000,000 shares authorized
|
|
—
|
|
|
—
|
|
Common stock, $0.01 par value: 25,000,000 shares authorized; 12,988,247 and 13,473,120 shares issued
and outstanding, respectively
|
|
130
|
|
|
134
|
|
Additional paid-in capital
|
|
139,728
|
|
|
136,779
|
|
Accumulated other comprehensive income
|
|
1,770
|
|
|
1,941
|
|
Retained earnings
|
|
70,009
|
|
|
76,884
|
|
Total shareholders’ equity attributable to Federated National Holding Company shareholders
|
|
211,637
|
|
|
215,738
|
|
Non-controlling interest
|
|
15,822
|
|
|
18,727
|
|
Total shareholders’ equity
|
|
227,459
|
|
|
234,465
|
|
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
$
|
904,873
|
|
|
$
|
815,390
|
|
The accompanying notes are an integral part of the consolidated financial statements.
FEDERATED NATIONAL HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
|
|
As Adjusted
|
|
As Adjusted
|
Revenue:
|
|
|
|
|
|
|
Net premiums earned
|
|
$
|
333,481
|
|
|
$
|
261,369
|
|
|
$
|
213,020
|
|
Net investment income
|
|
10,254
|
|
|
9,063
|
|
|
7,226
|
|
Net realized investment gains
|
|
8,548
|
|
|
3,045
|
|
|
3,616
|
|
Direct written policy fees
|
|
17,173
|
|
|
16,619
|
|
|
9,740
|
|
Other income
|
|
22,206
|
|
|
17,429
|
|
|
9,869
|
|
Total revenue
|
|
391,662
|
|
|
307,525
|
|
|
243,471
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
Losses and loss adjustment expenses
|
|
247,557
|
|
|
197,810
|
|
|
112,710
|
|
Commissions and other underwriting expenses
|
|
114,867
|
|
|
90,378
|
|
|
52,862
|
|
General and administrative expenses
|
|
19,963
|
|
|
17,186
|
|
|
14,698
|
|
Interest expense
|
|
348
|
|
|
348
|
|
|
256
|
|
Total costs and expenses
|
|
382,735
|
|
|
305,722
|
|
|
180,526
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
8,927
|
|
|
1,803
|
|
|
62,945
|
|
Income taxes
|
|
3,585
|
|
|
542
|
|
|
24,089
|
|
Net income
|
|
5,342
|
|
|
1,261
|
|
|
38,856
|
|
Net (loss) income attributable to non-controlling interest
|
|
(2,647
|
)
|
|
246
|
|
|
(445
|
)
|
Net income attributable to Federated National Holding Company shareholders
|
|
$
|
7,989
|
|
|
$
|
1,015
|
|
|
$
|
39,301
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share attributable to Federated National Holding Company
|
|
|
|
|
|
|
|
|
|
shareholders:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.61
|
|
|
$
|
0.07
|
|
|
$
|
2.86
|
|
Diluted
|
|
$
|
0.60
|
|
|
$
|
0.07
|
|
|
$
|
2.81
|
|
|
|
|
|
|
|
|
Weighted average number of shares of common stock outstanding:
|
|
|
|
|
|
|
Basic
|
|
13,170
|
|
|
13,758
|
|
|
13,729
|
|
Diluted
|
|
13,250
|
|
|
13,922
|
|
|
13,997
|
|
|
|
|
|
|
|
|
Dividends declared per share of common stock
|
|
$
|
0.32
|
|
|
$
|
0.27
|
|
|
$
|
0.18
|
|
The accompanying notes are an integral part of the consolidated financial statements.
FEDERATED NATIONAL HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
|
|
As Adjusted
|
|
As Adjusted
|
|
|
|
|
|
|
|
Net income
|
|
$
|
5,342
|
|
|
$
|
1,261
|
|
|
$
|
38,856
|
|
Change in net unrealized losses on investments, available-for-sale
|
|
(1,037
|
)
|
|
(2,786
|
)
|
|
(6,308
|
)
|
Comprehensive income (loss) before income taxes
|
|
4,305
|
|
|
(1,525
|
)
|
|
32,548
|
|
|
|
|
|
|
|
|
Income tax benefit related to items of other comprehensive income (loss)
|
|
608
|
|
|
1,046
|
|
|
2,454
|
|
Comprehensive income (loss)
|
|
4,913
|
|
|
(479
|
)
|
|
35,002
|
|
|
|
|
|
|
|
|
Less: Comprehensive (loss) income attributable to non-controlling interest
|
|
(2,905
|
)
|
|
550
|
|
|
(566
|
)
|
Comprehensive income (loss) attributable to Federated National Holding
|
|
|
|
|
|
|
Company shareholders
|
|
$
|
7,818
|
|
|
$
|
(1,029
|
)
|
|
$
|
35,568
|
|
The accompanying notes are an integral part of the consolidated financial statements.
FEDERATED NATIONAL HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS
OF CHANGES IN SHAREHOLDERS’ EQUITY
(In thousands, except
per
share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
Total Shareholders’
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
Equity Attributable to
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Additional
|
|
Comprehensive
|
|
Retained
|
|
Federated National
|
|
Non-
|
|
Total
|
|
|
Preferred
|
|
Issued
|
|
|
|
Paid-in
|
|
Income
|
|
Earnings
|
|
Holding Company
|
|
controlling
|
|
Shareholders’
|
|
|
Stock
|
|
Shares
|
|
Amount
|
|
Capital
|
|
(Loss)
|
|
(Deficit)
|
|
Shareholders
|
|
Interest
|
|
Equity
|
Balance as of January 1, 2015 (As adjusted)
|
|
—
|
|
|
13,632,414
|
|
|
$
|
136
|
|
|
$
|
127,302
|
|
|
$
|
7,718
|
|
|
$
|
54,405
|
|
|
$
|
189,561
|
|
|
—
|
|
|
$
|
189,561
|
|
Net income (loss) (As adjusted)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
39,301
|
|
|
39,301
|
|
|
(445
|
)
|
|
38,856
|
|
Other comprehensive loss
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3,733
|
)
|
|
—
|
|
|
(3,733
|
)
|
|
(121
|
)
|
|
(3,854
|
)
|
Non-controlling interest capital contributions
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
18,743
|
|
|
18,743
|
|
Dividends
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,847
|
)
|
|
(1,847
|
)
|
|
—
|
|
|
(1,847
|
)
|
Shares issued under share-based compensation plans
|
|
—
|
|
|
166,359
|
|
|
2
|
|
|
169
|
|
|
—
|
|
|
—
|
|
|
171
|
|
|
—
|
|
|
171
|
|
Tax benefits from share-based compensation awards
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,564
|
|
|
—
|
|
|
—
|
|
|
1,564
|
|
|
—
|
|
|
1,564
|
|
Share-based compensation
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,963
|
|
|
—
|
|
|
—
|
|
|
2,963
|
|
|
—
|
|
|
2,963
|
|
Balance as of December 31, 2015 (As adjusted)
|
|
—
|
|
|
13,798,773
|
|
|
138
|
|
|
131,998
|
|
|
3,985
|
|
|
91,859
|
|
|
227,980
|
|
|
18,177
|
|
|
246,157
|
|
Net income (As adjusted)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,015
|
|
|
1,015
|
|
|
246
|
|
|
1,261
|
|
Other comprehensive (loss) income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,044
|
)
|
|
—
|
|
|
(2,044
|
)
|
|
304
|
|
|
(1,740
|
)
|
Dividends
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(4,677
|
)
|
|
(4,677
|
)
|
|
—
|
|
|
(4,677
|
)
|
Shares issued under share-based compensation plans
|
|
—
|
|
|
299,165
|
|
|
—
|
|
|
361
|
|
|
—
|
|
|
—
|
|
|
361
|
|
|
—
|
|
|
361
|
|
Tax benefits from share-based compensation awards
|
|
—
|
|
|
—
|
|
|
—
|
|
|
589
|
|
|
—
|
|
|
—
|
|
|
589
|
|
|
—
|
|
|
589
|
|
Repurchases of common stock
|
|
—
|
|
|
(624,818
|
)
|
|
(4
|
)
|
|
—
|
|
|
—
|
|
|
(11,313
|
)
|
|
(11,317
|
)
|
|
—
|
|
|
(11,317
|
)
|
Share-based compensation
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,831
|
|
|
—
|
|
|
—
|
|
|
3,831
|
|
|
—
|
|
|
3,831
|
|
Balance as of December 31, 2016 (As adjusted)
|
|
—
|
|
|
13,473,120
|
|
|
134
|
|
|
136,779
|
|
|
1,941
|
|
|
76,884
|
|
|
215,738
|
|
|
18,727
|
|
|
234,465
|
|
Net income (loss)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
7,989
|
|
|
7,989
|
|
|
(2,647
|
)
|
|
5,342
|
|
Other comprehensive loss
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(171
|
)
|
|
—
|
|
|
(171
|
)
|
|
(258
|
)
|
|
(429
|
)
|
Dividends
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(4,251
|
)
|
|
(4,251
|
)
|
|
—
|
|
|
(4,251
|
)
|
Shares issued under share-based compensation plans
|
|
—
|
|
|
169,647
|
|
|
—
|
|
|
103
|
|
|
—
|
|
|
—
|
|
|
103
|
|
|
—
|
|
|
103
|
|
Repurchases of common stock
|
|
—
|
|
|
(654,520
|
)
|
|
(4
|
)
|
|
—
|
|
|
—
|
|
|
(10,613
|
)
|
|
(10,617
|
)
|
|
—
|
|
|
(10,617
|
)
|
Share-based compensation
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,846
|
|
|
—
|
|
|
—
|
|
|
2,846
|
|
|
—
|
|
|
2,846
|
|
Balance as of December 31, 2017
|
|
$
|
—
|
|
|
12,988,247
|
|
|
$
|
130
|
|
|
$
|
139,728
|
|
|
$
|
1,770
|
|
|
$
|
70,009
|
|
|
$
|
211,637
|
|
|
$
|
15,822
|
|
|
$
|
227,459
|
|
The accompanying notes are an integral part of the consolidated financial statements.
FEDERATED NATIONAL HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
|
|
As Adjusted
|
|
As Adjusted
|
Cash flow from operating activities:
|
|
|
|
|
|
|
Net income
|
|
$
|
5,342
|
|
|
$
|
1,261
|
|
|
$
|
38,856
|
|
Adjustments to reconcile net income to net cash provided by
|
|
|
|
|
|
|
operating activities:
|
|
|
|
|
|
|
Net realized investment gains
|
|
(8,548
|
)
|
|
(3,045
|
)
|
|
(3,616
|
)
|
Amortization of investment premium or discount, net
|
|
3,909
|
|
|
5,346
|
|
|
5,645
|
|
Depreciation and amortization
|
|
1,166
|
|
|
869
|
|
|
624
|
|
Share-based compensation
|
|
2,846
|
|
|
4,420
|
|
|
4,527
|
|
Tax impact related to share-based compensation
|
|
(193
|
)
|
|
—
|
|
|
—
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
Prepaid reinsurance premiums
|
|
21,440
|
|
|
24,908
|
|
|
(84,875
|
)
|
Premiums receivable, net
|
|
8,461
|
|
|
(16,260
|
)
|
|
(11,319
|
)
|
Reinsurance recoverable, net
|
|
(76,738
|
)
|
|
(35,149
|
)
|
|
2,709
|
|
Deferred acquisition costs
|
|
999
|
|
|
(24,226
|
)
|
|
(3,748
|
)
|
Income taxes receivable, net
|
|
4,361
|
|
|
(11,769
|
)
|
|
(2,445
|
)
|
Deferred revenue
|
|
(612
|
)
|
|
1,074
|
|
|
2,220
|
|
Loss and loss adjustment expense reserves
|
|
72,405
|
|
|
60,404
|
|
|
19,119
|
|
Unearned premiums
|
|
401
|
|
|
40,062
|
|
|
61,535
|
|
Reinsurance payable
|
|
(7,210
|
)
|
|
18,085
|
|
|
18,606
|
|
Deferred income taxes, net of other comprehensive income
|
|
235
|
|
|
(4,716
|
)
|
|
6,077
|
|
Other, net
|
|
(15,158
|
)
|
|
8,486
|
|
|
(1,024
|
)
|
Net cash provided by operating activities
|
|
13,106
|
|
|
69,750
|
|
|
52,891
|
|
Cash flow from investing activities:
|
|
|
|
|
|
|
Proceeds from sales of debt securities
|
|
249,584
|
|
|
198,676
|
|
|
140,101
|
|
Proceeds from sales of equity securities
|
|
57,125
|
|
|
30,621
|
|
|
17,118
|
|
Maturities and redemptions of debt securities
|
|
38,038
|
|
|
81,812
|
|
|
12,760
|
|
Purchases of debt securities
|
|
(339,667
|
)
|
|
(325,397
|
)
|
|
(213,799
|
)
|
Purchases of equity securities
|
|
(35,811
|
)
|
|
(16,716
|
)
|
|
(18,085
|
)
|
Purchases of property and equipment
|
|
(976
|
)
|
|
(2,147
|
)
|
|
(1,736
|
)
|
Net cash used in investing activities
|
|
(31,707
|
)
|
|
(33,151
|
)
|
|
(63,641
|
)
|
Cash flow from financing activities:
|
|
|
|
|
|
|
Proceeds from issuance of long-term debt
|
|
45,000
|
|
|
—
|
|
|
5,000
|
|
Non-controlling interest equity investment
|
|
—
|
|
|
—
|
|
|
18,743
|
|
Purchases of Federated National Holding Company common stock
|
|
(10,616
|
)
|
|
(11,317
|
)
|
|
—
|
|
Issuance of common stock for share-based awards
|
|
103
|
|
|
361
|
|
|
171
|
|
Tax impact related to share-based compensation
|
|
—
|
|
|
589
|
|
|
1,564
|
|
Dividends paid
|
|
(4,251
|
)
|
|
(4,677
|
)
|
|
(1,847
|
)
|
Net cash provided by (used in) financing activities
|
|
30,236
|
|
|
(15,044
|
)
|
|
23,631
|
|
Net increase in cash and cash equivalents
|
|
11,635
|
|
|
21,555
|
|
|
12,881
|
|
Cash and cash equivalents at beginning of period
|
|
74,593
|
|
|
53,038
|
|
|
40,157
|
|
Cash and cash equivalents at end of period
|
|
$
|
86,228
|
|
|
$
|
74,593
|
|
|
$
|
53,038
|
|
The accompanying notes are an integral part of the consolidated financial statements.
FEDERATED NATIONAL HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
Cash (received) paid during the period for:
|
|
|
|
|
|
|
Income taxes
|
|
$
|
(354
|
)
|
|
$
|
14,360
|
|
|
$
|
15,662
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
Accrued dividends payable
|
|
$
|
1,055
|
|
|
$
|
1,115
|
|
|
$
|
712
|
|
The accompanying notes are an integral part of the consolidated financial statements.
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2017
1. ORGANIZATION, CONSOLIDATION AND BASIS OF PREPARATION
Organization
Federated National Holding Company (“FNHC,” the “Company,” “we,” “us,” or "our") is an insurance holding company that controls substantially all aspects of the insurance underwriting, distribution and claims processes through our subsidiaries and contractual relationships with independent agents and general agents. We, through our wholly owned subsidiaries, are authorized to underwrite, and/or place homeowners multi-peril (“homeowners”), personal automobile, commercial general liability, federal flood and other lines of insurance in Florida and other states. We market, distribute and service our own and third-party insurers’ products and other services through a network of independent and general agents.
Federated National Insurance Company (“FNIC”), one of our wholly owned insurance subsidiaries, is licensed as an admitted carrier, to write specific lines of insurance by the state’s insurance departments, in Florida, Louisiana, Texas, Georgia, South Carolina and Alabama. Monarch National Insurance Company (“MNIC”), our other insurance subsidiary, is licensed as an admitted carrier in Florida. Admitted carriers are bound by rate and form regulations, and are strictly regulated to protect policyholders from a variety of illegal and unethical practices. Admitted carriers are also required to financially contribute to the state guarantee fund used to pay for losses if an insurance carrier becomes insolvent or unable to pay loss amounts due to their policyholders.
Monarch National Insurance Company
The Company organized MNIC to obtain its certificate of authority to write homeowners property and casualty insurance in Florida from the Florida Office of Insurance Regulation (the “Florida OIR”). The Company’s joint venture partners are Crosswinds Investor Monarch LP (“Crosswinds Investor”), a wholly-owned subsidiary of Crosswinds Holdings Inc. (“Crosswinds Holdings”), a private equity firm and asset manager, and Transatlantic Reinsurance Company (“TransRe”), an international property and casualty reinsurance company. The Company and Crosswinds Investor each invested
$14.0 million
for a
42.4%
membership interest in Monarch Delaware Holdings LLC ("Monarch Delaware") (each holding
50.0%
of the voting interests in Monarch Delaware). TransRe invested
$5.0 million
for a
15.2%
non-voting membership interest in Monarch Delaware and advanced an additional
$5.0 million
in debt evidenced by a
six
-year promissory note bearing an annual interest rate of
6%
and payable by Monarch National Holding Company (“Monarch Holding”).
On November 27, 2017, the Company entered into a purchase and sale agreement with Crosswinds Investor and TransRe, whereby the Company agreed to purchase Crosswinds Investor’s
42.4%
Class A membership interest and
50.0%
voting interest for
$12.3 million
, and TransRe’s
15.2%
non-voting membership interest in Monarch Delaware for
$4.4 million
.
Also pursuant to the purchase and sale agreement, Crosswinds AUM LLC (“Crosswinds AUM”), a subsidiary of Crosswinds Holdings, will continue to serve as a consultant to FNHC for a quarterly fee of
$75,000
through December 31, 2018, and each of a subsidiary of Crosswinds Holdings and TransRe have a right of first refusal through December 31, 2018, to participate in FNIC’s catastrophe excess of loss reinsurance program, at market rates and terms, up to a placement of
$10.0 million
in reinsurance limit in the aggregate from Crosswinds Holdings and to a placement of
$10.0 million
in reinsurance limit in excess of its placement on FNIC’s current catastrophe excess of loss reinsurance program from TransRe.
On February 21, 2018, FNIC closed on the transaction contemplated by the purchase and sale agreement with Crosswinds Investor and TransRe. Refer to Note
17
. Subsequent Events, in these notes to consolidated financial statements, for additional information regarding the transaction.
Material Distribution Relationships
Ivantage Select Agency, Inc.
The Company is a party to an insurance agency master agreement with Ivantage Select Agency, Inc. (“ISA”), an affiliate of Allstate Insurance Company (“Allstate”), pursuant to which the Company has been authorized by ISA to appoint Allstate agents to offer the Company’s homeowners and commercial general liability insurance products to consumers in Florida. As a percentage of the total homeowners premiums we underwrote,
23.8%
,
24.1%
and
25.4%
, were from Allstate’s network of Florida agents, for the years ended
December 31, 2017
,
2016
and
2015
, respectively.
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2017
SageSure Insurance Managers, LLC
The Company is a party to a managing general underwriting agreement with SageSure Insurance Managers, LLC (“SageSure”) to facilitate growth in our FNIC homeowners business outside of Florida. As a percentage of the total homeowners premiums,
10.2%
,
6.9%
and
5.0%
respectively, of the Company’s premiums were underwritten by SageSure, for the years ended
December 31, 2017
,
2016
, and 2015 respectively.
Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”). The consolidated financial statements include the accounts of FNHC and its wholly-owned subsidiaries and all entities in which the Company has a controlling financial interest and any variable interest entity (“VIE”) of which the Company is the primary beneficiary. The Company’s management believes the consolidated financial statements reflect all material adjustments, including normal recurring adjustments, necessary to fairly state the financial position, results of operations and cash flows of the Company for the periods presented. All significant intercompany accounts and transactions have been eliminated in consolidation.
The Company identifies a VIE as an entity that does not have sufficient equity to finance its own activities without additional financial support or where the equity investors lack certain characteristics of a controlling financial interest. The Company assesses its contractual, ownership or other interests in a VIE to determine if the Company’s interest participates in the variability the VIE was designed to absorb and pass onto variable interest holders. The Company performs an ongoing qualitative assessment of its variable interests in a VIE to determine whether the Company has a controlling financial interest and would therefore be considered the primary beneficiary of the VIE. If the Company determines it is the primary beneficiary of a VIE, the Company consolidates the assets and liabilities of the VIE in its consolidated financial statements.
In connection with the investment in Monarch Delaware, the Company has determined that the Company possesses the power to direct the activities of the VIE that most significantly impact its economic performance and the Company is the primary beneficiary of the VIE. As such, the Company consolidates Monarch Delaware in its consolidated financial statements. Refer to Note
14
. Variable Interest Entity, in these notes to consolidated financial statements, for additional information regarding the VIE.
Revisions of Previously Issued Financial Statements
In connection with the preparation, review and audit of the Company’s consolidated financial statements required to be included in this Annual Report on Form 10-K (“Annual Report") for the year ended December 31, 2017, management identified certain errors in the Company’s historical financial statements, resulting in a conclusion that certain corrections need to be made to the Company’s previously audited consolidated financial statements for the fiscal years 2016 and 2015 as well as the previous unaudited consolidated financial statements for the first three quarters of fiscal year 2017.
The Company believes that these errors are not material to any of the Company’s previously-issued financial statements based on an analysis of quantitative and qualitative factors in accordance with the Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin (“SAB”) Nos. 99 and 108. However, correcting the errors in 2017 would be material to the Company’s consolidated financial statements for the year ended December 31, 2017. Accordingly, the Company has concluded that an amendment of previously-filed periodic reports is not required. Rather, the Company made revisions to the historical periods in the Company’s Annual Report for the fiscal year ended December 31, 2017, and to the historical periods that will be presented in the Company's prospective filings.
The revisions to correct the errors primarily relate to: (1) up-front recognition of direct written policy fees across all our lines of business and fee income generated through the Company’s personal automobile business, (2) the over-amortization of deferred acquisition costs and (3) the accounting for certain limits in our automobile reinsurance agreements, related to ceded premiums and other items. The Company has also included certain other adjustments that have been corrected.
The nature and description of each of these adjustments is as follows:
|
|
•
|
Direct written policy fees and other fee income:
The Company re-evaluated the accounting treatment for up-front recognition of direct written policy fees across all lines of business and fee income generated through the Company’s personal automobile business. As a result of the re-evaluation, the Company concluded that the direct written policy fees and fee income should be recognized over the life of the underlying policies, net of cancellations, and not be recognized
|
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2017
up-front. Additionally, with this change, the timing of revenue recognition of direct written policy fees and fee income will be consistent with the timing of recognition of the related insurance costs, including commissions and other acquisition related expenses. This correction resulted in an after-tax net loss impact of
$0.7 million
and
$1.4 million
for the years ended December 31, 2016 and 2015, respectively.
|
|
•
|
Deferred acquisition costs:
The Company corrected an error in the calculation of deferred acquisition costs related to the over-amortization of the costs, resulting in an overstatement of expenses. Consistent with above, the timing of expense recognition will be consistent with the timing of the recognition of the related premiums and policy fees and the underlying policy term. This correction resulted in an impact to commissions and other underwriting expenses for all periods presented. This correction resulted in an after-tax net income impact of
$0.5 million
and
$0.7 million
for the years ended December 31, 2016 and 2015, respectively.
|
|
|
•
|
Automobile reinsurance agreements:
The Company corrected errors on the accounting for certain terms in its reinsurance coverage related to the automobile line of business. This correction was related to limits on the amount of premiums that could be ceded and other terms. The primary impact of the correction resulted in a lower inception-to-date quota share percentage on the reinsurance treaties impacted, which resulted in an overstatement of ceded premiums earned, ceded loss and LAE and ceded commissions. This correction resulted in an after-tax net loss impact of
$0.4 million
for the year ended December 31, 2016.
|
|
|
•
|
Income taxes:
The Company corrected errors in its tax provision related to tax deductions on executive compensation, which resulted in an after-tax net loss of
$0.4 million
and
$0.2 million
for the years ended December 31, 2016 and 2015, respectively. Additionally, a portion of the revisions includes a
$2.2 million
deferred tax adjustment which is part of the retained earnings beginning balance adjustment, as the item related to periods in 2014 and prior. This error was previously recorded as an out-of-period adjustment and disclosed in the 2016 financial statements.
|
|
|
•
|
Income statement reclassifications:
As previously disclosed and reclassified in the Company’s Quarterly Report on Form 10-Q (“Quarterly Report”) for the period ended June 30, 2017, the Company re-assessed the income statement classification of ceded commission income and salaries and wages from our claims department. As a result, the Company adjusted ceded commission from other income to commissions and other underwriting expenses and salaries and wages from the Company’s claims department from commissions and other underwriting expenses to loss and LAE. Refer to the Company’s Quarterly Report for the period ended June 30, 2017, for more detailed information.
|
|
|
•
|
Homeowners quota share agreements:
As previously disclosed and corrected in the Company’s Quarterly Report for the period ended September 30, 2015, the Company re-evaluated the accounting treatment for quota share reinsurance contracts with retrospective rating provisions and other adjustments. As part of these revisions, the Company recorded these adjustments in the appropriate period. These adjustments resulted in an impact to revenue, loss and LAE, commissions and other underwriting expenses and general and administrative expenses, which had an after-tax net loss impact of
$0.8 million
for the year ended December 31, 2015.
|
The following table includes the effects of the adjustments on the retained earnings beginning balance as of January 1, 2015, which represents the cumulative impact of the revisions to periods prior to 2015.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of January 1, 2015
|
|
As Reported
|
|
Adjustments
|
|
As Adjusted
|
|
|
|
|
|
|
Retained earnings
|
$
|
57,423
|
|
|
$
|
(3,018
|
)
|
|
$
|
54,405
|
|
The following tables summarize the impact of the revisions to the Company’s previously reported consolidated balance sheet as of December 31, 2016, and the Company’s previously reported consolidated statements of operations for the years ended December 31, 2016 and 2015.
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
As Reported
|
|
Adjustments
|
|
As Adjusted
|
ASSETS
|
(In thousands, except share and per share data)
|
Investments:
|
|
|
|
|
|
Debt securities, available-for-sale, at fair value (amortized cost of $376,644)
|
$
|
374,756
|
|
|
$
|
—
|
|
|
$
|
374,756
|
|
Debt securities, held-to-maturity, at amortized cost
|
5,551
|
|
|
—
|
|
|
5,551
|
|
Equity securities, available-for-sale, at fair value (cost of $24,163)
|
29,375
|
|
|
—
|
|
|
29,375
|
|
Total investments (including $28,704 related to the VIE)
|
409,682
|
|
|
—
|
|
|
409,682
|
|
|
|
|
|
|
|
Cash and cash equivalents (including $15,668 related to the VIE)
|
74,593
|
|
|
—
|
|
|
74,593
|
|
Prepaid reinsurance premiums
|
156,932
|
|
|
—
|
|
|
156,932
|
|
Premiums receivable, net of allowance of $55 (including 1,584 related to the VIE)
|
54,854
|
|
|
—
|
|
|
54,854
|
|
Reinsurance recoverable, net
|
48,530
|
|
|
(667
|
)
|
|
47,863
|
|
Deferred acquisition costs
|
38,962
|
|
|
2,930
|
|
|
41,892
|
|
Income taxes receivable
|
13,871
|
|
|
—
|
|
|
13,871
|
|
Property and equipment, net
|
4,194
|
|
|
—
|
|
|
4,194
|
|
Other assets (including $371 related to the VIE)
|
11,509
|
|
|
—
|
|
|
11,509
|
|
TOTAL ASSETS
|
$
|
813,127
|
|
|
$
|
2,263
|
|
|
$
|
815,390
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
LIABILITIES:
|
|
|
|
|
|
Loss and loss adjustment expense reserves
|
$
|
158,110
|
|
|
$
|
—
|
|
|
$
|
158,110
|
|
Unearned premiums
|
294,022
|
|
|
—
|
|
|
294,022
|
|
Reinsurance payable
|
79,154
|
|
|
—
|
|
|
79,154
|
|
Long-term debt
|
4,909
|
|
|
—
|
|
|
4,909
|
|
Deferred revenue
|
—
|
|
|
6,834
|
|
|
6,834
|
|
Deferred tax liabilities, net
|
1,433
|
|
|
(1,180
|
)
|
|
253
|
|
Other liabilities
|
37,643
|
|
|
—
|
|
|
37,643
|
|
Total liabilities
|
575,271
|
|
|
5,654
|
|
|
580,925
|
|
SHAREHOLDERS’ EQUITY:
|
|
|
|
|
|
Preferred stock, $0.01 par value: 1,000,000 shares authorized
|
—
|
|
|
—
|
|
|
—
|
|
Common stock, $0.01 par value: 25,000,000 shares authorized; 13,473,120 shares
issued and outstanding
|
134
|
|
|
—
|
|
|
134
|
|
Additional paid-in capital
|
136,779
|
|
|
—
|
|
|
136,779
|
|
Accumulated other comprehensive income
|
1,941
|
|
|
—
|
|
|
1,941
|
|
Retained earnings
|
80,275
|
|
|
(3,391
|
)
|
|
76,884
|
|
Total shareholders’ equity attributable to
Federated National Holding Company shareholders
|
219,129
|
|
|
(3,391
|
)
|
|
215,738
|
|
Non-controlling interest
|
18,727
|
|
|
—
|
|
|
18,727
|
|
Total shareholders’ equity
|
237,856
|
|
|
(3,391
|
)
|
|
234,465
|
|
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
|
$
|
813,127
|
|
|
$
|
2,263
|
|
|
$
|
815,390
|
|
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
As Reported
|
|
Adjustments
|
|
As Adjusted
|
|
As Reported
|
|
Adjustments
|
|
As Adjusted
|
Revenue:
|
(In thousands, except share and per share data)
|
Net premiums earned
|
$
|
259,872
|
|
|
$
|
1,497
|
|
|
$
|
261,369
|
|
|
$
|
210,020
|
|
|
$
|
3,000
|
|
|
$
|
213,020
|
|
Net investment income
|
9,063
|
|
|
—
|
|
|
9,063
|
|
|
7,226
|
|
|
—
|
|
|
7,226
|
|
Net realized investment gains
|
3,045
|
|
|
—
|
|
|
3,045
|
|
|
3,616
|
|
|
—
|
|
|
3,616
|
|
Direct written policy fees
|
17,730
|
|
|
(1,111
|
)
|
|
16,619
|
|
|
11,248
|
|
|
(1,508
|
)
|
|
9,740
|
|
Other income (loss)
|
26,674
|
|
|
(9,245
|
)
|
|
17,429
|
|
|
17,783
|
|
|
(7,914
|
)
|
|
9,869
|
|
Total revenue
|
316,384
|
|
|
(8,859
|
)
|
|
307,525
|
|
|
249,893
|
|
|
(6,422
|
)
|
|
243,471
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses
|
187,341
|
|
|
10,469
|
|
|
197,810
|
|
|
104,353
|
|
|
8,357
|
|
|
112,710
|
|
Commissions and other underwriting expenses
|
108,776
|
|
|
(18,398
|
)
|
|
90,378
|
|
|
64,868
|
|
|
(12,006
|
)
|
|
52,862
|
|
General and administrative expenses
|
17,186
|
|
|
—
|
|
|
17,186
|
|
|
15,223
|
|
|
(525
|
)
|
|
14,698
|
|
Interest expense
|
348
|
|
|
—
|
|
|
348
|
|
|
256
|
|
|
—
|
|
|
256
|
|
Total costs and expenses
|
313,651
|
|
|
(7,929
|
)
|
|
305,722
|
|
|
184,700
|
|
|
(4,174
|
)
|
|
180,526
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
2,733
|
|
|
(930
|
)
|
|
1,803
|
|
|
65,193
|
|
|
(2,248
|
)
|
|
62,945
|
|
Income taxes
|
2,683
|
|
|
(2,141
|
)
|
|
542
|
|
|
24,753
|
|
|
(664
|
)
|
|
24,089
|
|
Net income
|
50
|
|
|
1,211
|
|
|
1,261
|
|
|
40,440
|
|
|
(1,584
|
)
|
|
38,856
|
|
Net income (loss) attributable to non-controlling interest
|
246
|
|
|
—
|
|
|
246
|
|
|
(445
|
)
|
|
—
|
|
|
(445
|
)
|
Net (loss) income attributable to Federated National
|
|
|
|
|
|
|
|
|
|
|
|
Holding Company shareholders
|
$
|
(196
|
)
|
|
$
|
1,211
|
|
|
$
|
1,015
|
|
|
$
|
40,885
|
|
|
$
|
(1,584
|
)
|
|
$
|
39,301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per share attributable to Federated
|
|
|
|
|
|
|
|
|
|
|
|
National Holding Company shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
(0.01
|
)
|
|
$
|
0.08
|
|
|
$
|
0.07
|
|
|
$
|
2.98
|
|
|
$
|
(0.12
|
)
|
|
$
|
2.86
|
|
Diluted
|
$
|
(0.01
|
)
|
|
$
|
0.08
|
|
|
$
|
0.07
|
|
|
$
|
2.92
|
|
|
$
|
(0.11
|
)
|
|
$
|
2.81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares of common stock
|
|
|
|
|
|
|
|
|
|
|
|
outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
13,758
|
|
|
—
|
|
|
13,758
|
|
|
13,729
|
|
|
—
|
|
|
13,729
|
|
Diluted
|
13,758
|
|
|
164
|
|
|
13,922
|
|
|
13,997
|
|
|
—
|
|
|
13,997
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per share of common stock
|
$
|
0.27
|
|
|
$
|
—
|
|
|
$
|
0.27
|
|
|
$
|
0.18
|
|
|
$
|
—
|
|
|
$
|
0.18
|
|
For the impacts of the revisions to the Company’s previously reported consolidated statements of operations for each of the quarterly periods ended March 31, 2017 to September 30, 2017, the six months ended June 30, 2017, and the nine months ended September 30, 2017, refer to Note 16. Quarterly Results of Operations (Unaudited), in these notes to the consolidated financial statements.
Certain prior period line items in the consolidated statements of comprehensive income, consolidated statements of changes in shareholders’ equity and consolidated statements of cash flows, were affected by the revisions of previously issued financial statements. All of the changes in the consolidated statements of cash flows were included in cash flows from operating activities and all of the changes in the consolidated statements of comprehensive income were isolated to the net income line, which has been addressed through the preceding disclosures.
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2017
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
Accounting Estimates and Assumptions
The Company prepares the accompanying consolidated financial statements in accordance with U.S. GAAP, which requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Future events and their effects cannot be determined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results may materially differ from those estimates.
Similar to other property and casualty insurers, the Company’s liability for loss and LAE reserves, although supported by actuarial projections and other data, is ultimately based on management’s reasoned expectations of future events. Although considerable variability is inherent in these estimates, the Company believes that the liability and LAE reserve is adequate. The Company reviews and evaluates its estimates and assumptions regularly and makes adjustments, reflected in current operations, as necessary, on an on-going basis.
Fair Value
Fair value is the price that would be received to sell an asset or paid to transfer a liability between market participants in the principal market or in the most advantageous market when no principal market exists. Adjustments to transaction prices or quoted market prices may be required in illiquid or disorderly markets in order to estimate fair value. Alternative valuation techniques may be appropriate under the circumstances to determine the value that would be received to sell an asset or pay to transfer a liability in an orderly transaction. Market participants are assumed to be independent, knowledgeable, able and willing to transact an exchange and not acting under duress. Our nonperformance or credit risk is considered in determining the fair value of liabilities. Considerable judgment may be required in interpreting market data used to develop the estimates of fair value. Accordingly, estimates of fair value presented herein are not necessarily indicative of the amounts that could be realized in a current or future market exchange.
Refer to Note
3
. Fair Value, in these notes to consolidated financial statements, for additional information regarding fair value.
Investments
Investments consist of debt and equity securities. Debt securities consist of securities with an initial fixed maturity of more than one year, including corporate bonds, municipal bonds and United States government bonds. Equity securities generally consist of securities that represent ownership interests in an enterprise. The Company determines the appropriate classification of investments in debt and equity securities at the acquisition date and re-evaluates the classification at each balance sheet date.
Held-to-maturity investments are recorded at the amortized cost, reflecting the ability and intent to hold the securities to maturity. All other securities are classified as available-for-sale and recorded at fair value. Unrealized gains and losses during the year, net of the related tax effect applicable to available-for-sale, are excluded from income and reflected in other comprehensive income, and the cumulative effect is reported as a separate component of shareholders’ equity until realized. If a decline in fair value is deemed to be other-than-temporary, the investment is written down to its fair value and the amount of the write-down is recorded as an other-than-temporary impairment (“OTTI”) loss on the statement of operations. Any portion of such decline related to debt securities that is believed to arise from factors other than credit is recorded as a component of other comprehensive income rather than against income.
Net realized gains and losses on investments are determined in accordance with the specific identification method.
Net investment income consists primarily of interest income from debt securities, cash and cash equivalents, including any premium amortization or discount accretion and dividend income from equity securities; less expenses related to investments.
Refer to Note
4
. Investments, in these notes to consolidated financial statements, for additional information regarding investments.
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2017
Cash and Cash Equivalents
Cash and cash equivalents consist of all deposit or deposit in transit balances with a bank that are available for withdrawal. The Company considers all highly liquid investments with an original maturity of three months or less at the date of the purchase to be cash equivalents.
Premiums and Unearned Premiums
The Company recognizes premiums as revenue on a pro-rata basis over the term of the insurance policy. Assumed reinsurance premiums written and earned are based on reports received from ceding companies for pro-rata treaty contracts and are generally recorded as written based on contract terms for excess-of-loss and quota share contracts. Premiums are earned ratably over the terms of the related coverage.
Unearned premiums represent the portion of gross premiums written, related to the unexpired terms of such coverage.
Premium receivable balances are reported net of an allowance for estimated uncollectible premium amounts. Such allowance is based upon an ongoing review of amounts outstanding, length of collection periods, the creditworthiness of the insured and other relevant factors. Amounts deemed to be uncollectible are written off against the allowance.
Reinsurance
Reinsurance is used to mitigate the exposure to losses, manage capacity and protect capital resources. Reinsuring loss exposures does not relieve a ceding entity from its obligations to policyholders and cedants. Reinsurance recoverables (including amounts related to claims incurred but not reported) and ceded unearned premiums are reported as assets. To minimize exposure to losses from a reinsurer’s inability to pay, the financial condition of such reinsurer is evaluated initially upon placement of the reinsurance and periodically thereafter. In addition to considering the financial condition of the reinsurer, the collectability of the reinsurance recoverables is evaluated (and where appropriate, whether an allowance for estimated uncollectible reinsurance recoverables is to be established) based upon a number of other factors. Such factors include the amounts outstanding, length of collection periods, disputes, any collateral or letters of credit held and other relevant factors. To the extent that an allowance for uncollectible reinsurance recoverable is established, amounts deemed to be uncollectible are written off against the allowance for estimated uncollectible reinsurance recoverables. As of
December 31, 2017
and
2016
, the Company did have any allowances for uncollectible reinsurance recoverables.
Ceded premiums written are recorded in accordance with applicable terms of the various reinsurance contracts and ceded premiums earned are charged against revenue over the period of the various reinsurance contracts. This also generally applies to reinstatement premiums paid to a reinsurer, which arise when contractually-specified ceded loss triggers have been breached.
Ceded commissions reduce commissions, brokerage and other underwriting expenses and ceded losses incurred reduce net loss and LAE incurred over the applicable periods of the various reinsurance contracts with third party reinsurers. If premiums or commissions are subject to adjustment (for example, retrospectively-rated or experience-rated), the Company records adjustments to the premiums or ceding commission revenue in the period that changes in the estimated losses are determined.
Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured business and consistent with the terms of the underlying reinsurance contract.
Deferred Acquisition Costs
Deferred acquisition costs represent those costs that are incremental and directly related to the successful acquisition of new or renewal of existing insurance contracts. The Company defers incremental costs that result directly from, and are essential to, the acquisition or renewal of an insurance contract. Such deferred acquisition costs generally include agent or broker commissions, referral fees, premium taxes, medical and inspection fees that would not have been incurred if the insurance contract had not been acquired or renewed. Each cost is analyzed to assess whether it is fully deferrable.
The Company also defers a portion of the employee total compensation and payroll-related fringe benefits directly related to time spent performing specific acquisition or renewal activities, including costs associated with the time spent on underwriting, policy issuance and processing, and sales force contract selling.
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2017
The acquisition costs are deferred and amortized over the period in which the related premiums written are earned, generally twelve months for homeowners and commercial general liability policies and six months for automobile policies. It is grouped consistent with the manner in which the insurance contracts are acquired, serviced and measured for profitability and is reviewed for recoverability based on the profitability of the underlying insurance contracts. Investment income is anticipated in assessing the recoverability of deferred acquisition costs. The Company assesses the recoverability of deferred acquisition costs on an annual basis or more frequently if circumstances indicate impairment may have occurred.
Property and Equipment
Property and equipment is stated at cost, net of accumulated depreciation and amortization. Depreciation is calculated using a straight-line method over the estimated useful lives, ranging from
3
to
15
years. Repairs and maintenance are charged to expense as incurred.
The Company accounts for internal-use software development costs in accordance with accounting guidelines which state that software costs, including internal payroll costs, incurred in connection with the development or acquisition of software for internal use is charged to expense as incurred until the project enters the application development phase. Costs incurred in the application development phase are capitalized and are depreciated using the straight-line method over an estimated useful life of
5
years, beginning when the software is ready for use.
Direct Written Policy Fees
Policy fees represent a non-refundable application fee for insurance coverage. These policy fees are deferred over the related policy term in a manner consistent with how the related premiums are earned.
Other Income
Other income represents brokerage, commission related income from the Company’s agency operations, partnership income as well as fees generated from the personal automobile line of business. Brokerage income is recognized over the term of the reinsurance period, typically one year. Commission income from its agency operations are recognized up-front upon policy inception. The partnership income is the Company’s share of its equity method investment. The fees associated with the personal automobile line of business are recognized ratably over the related policy term, generally six months.
The Company has a
33%
partnership interest in Southeast Catastrophe Consulting Company, LLC (“SECCC”), based in Mobile, Alabama. The Company has an agreement in which SECCC provides claims adjusting services for FNIC and MNIC, primarily in the event of catastrophes, such as Hurricane Irma and Matthew. We use the equity method of accounting for this investment as we do not have the ability to exercise significant influence nor control operating or financial decisions. In applying the equity method, the Company recorded its initial investment at cost, and subsequently increases or decreases the carrying amount of the investment by its proportionate share of the net earnings or losses. Any dividends or distributions received are recorded as a decrease in the carrying value of the investment. The Company’s proportionate share of net income (loss) is reported as other income in the consolidated statements of operations.
Losses and Loss Adjustment Expenses
The reserves for loss and LAE represent management’s best estimate of the ultimate cost of all reported and unreported losses incurred through the balance sheet date. Such liabilities are determined based upon the Company’s assessment of claims pending and the development of prior years’ loss liability, including liabilities based upon individual case estimates for reported loss and LAE and estimates of such amounts that are incurred but not yet reported (“IBNR”). Changes in the estimated liability are charged or credited to operations as the losses and LAE are settled.
The estimates of the liability for loss and LAE reserves are subject to the effect of trends in claims severity and frequency and are continually reviewed. As part of this process, the Company review historical data and consider various factors, including known and anticipated legal developments, inflation and economic conditions. As experience develops and other data become available, these estimates are revised, as required, resulting in increases or decreases to the existing liability for loss and LAE reserves. Adjustments are reflected in the results of operations in the period in which they are made and the liabilities may deviate substantially from prior estimates.
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2017
Long-Term Debt, Net of Deferred Financing Costs
The Company records long-term debt, net in the consolidated balance sheets at carrying value.
The Company incurs specific incremental costs, other than those paid to lenders, in connection with the issuance of the Company’s debt instruments. These deferred financing costs include loan origination costs, issue costs and other direct costs payable to third parties and are recorded as a direct deduction from the carrying value of the associated debt liability in the consolidated balance sheets, when the debt liability is recorded. The Company amortizes the deferred financing costs as interest expense over the term of the related debt using the effective interest method in the consolidated statements of operations.
Income Taxes
The Company applies the asset and liability method of accounting for income taxes. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and operating loss, capital loss and tax-credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income or expense in the period that includes the enactment date.
The Company will establish a valuation allowance if management determines, based on available information, that it is more likely than not that deferred income tax assets will not be realized. Significant judgment is required in determining whether valuation allowances should be established and the amount of such allowances.
The Company’s management makes assumptions, estimates and judgments, which are subject to change, in accounting for income taxes. The Company’s management also considers events and transactions on an on-going basis and the laws enacted as of the Company’s reporting date. The U.S. Tax Cuts and Jobs Act of 2017 (the “Tax Act”) was signed into law on December 22, 2017, and the effect of changes in federal tax law and applicable statutory rates is recorded in the consolidated financial statements in the period of enactment. The recent changes in the tax law have affected the Company’s income tax provision in the consolidated statement of operations for the year ended December 31, 2017 and the deferred income tax assets and liabilities balances in the consolidated balance sheet as of December 31, 2017. Refer to Note
8
. Income Taxes, in these notes to consolidated financial statements, for further information regarding income taxes.
Share-Based Compensation
The Company accounts for share-based compensation based on the estimated grant date fair value. The Company grants awards with service only conditions and generally amortizes them on a straight-line over the requisite service period of the award, which is the vesting term. The fair value of the restricted stock grants is determined based on the closing market price on the date of grant. Non-employee directors are treated as employees for accounting purposes.
Basic and Diluted Net Income per Share
Basic net income per share is computed by dividing net income available to common shareholders by the weighted average number of common shares, while diluted net income per share is computed by dividing net income available to common shareholders by the weighted average number of such common shares and dilutive share equivalents result from the assumed exercise of employee stock options and vesting of restricted common stock and are calculated using the treasury stock method.
Recently Issued Accounting Pronouncements, Adopted
In January 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-01,
Recognition and Measurement of Financial Assets and Financial Liabilities
(“ASU 2016-01”)
,
which addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Most notably, this new guidance requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. The effect of adopting this guidance was principally affected by the level of unrealized gains or losses associated with equity investments with readily determinable market values. Such unrealized gains or losses have been recognized upon adoption as a cumulative-effect adjustment with future unrealized gains or losses reflected in the statement of income and comprehensive income. ASU 2016-01 is effective for annual reporting periods beginning after December 15, 2017. The Company adopted the guidance effective January 1, 2018. The primary impact will be
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2017
based on the unrealized gains and losses on the Company’s equity securities, which will be recognized through net income instead of through other comprehensive income.
In March 2016, the FASB issued ASU 2016-09,
Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
.
The update simplifies several aspects of the accounting for share-based payment transactions, including, but not limited to, the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The Company adopted these amendments effective January 1, 2017, resulting in
$0.2 million
of discrete income tax deficiencies reflected as a component of the income tax provision in the Company’s consolidated statements of operations. The update also requires excess tax benefits be presented within the statement of cash flows as an operating activity, rather than as a financing activity. The Company adopted this change on a prospective basis, which resulted in a
$0.2 million
decrease in cash provided by operating activities for the year ended December 31, 2017. The update also requires excess tax benefits and deficiencies to be prospectively excluded from the assumed future proceeds in the calculation of diluted shares, which increased the Company’s weighted average number of diluted common shares outstanding by
11,839
shares for the year ended December 31, 2017.
Recently Issued Accounting Pronouncements, Not Yet Adopted
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers
(“ASU 2014-09”). ASU 2014-09 requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The update replaces all general and most industry specific revenue recognition guidance (excluding insurance) currently prescribed by U.S. GAAP. The core principle is that an entity recognizes revenue to reflect the transfer of a promised good or service to customers in an amount that reflects that consideration to which the entity expects to be entitled in exchange for that good or service. The update also provides clarification on when an entity is a principal or an agent in a transaction. The guidance may be applied using one of the two following methods: (1) retrospectively to each prior reporting period presented, or (2) retrospectively with the cumulative effect of initially applying the standard recognized at the date of initial application. The FASB issued additional updated clarifying certain implementation guidance within ASU 2014-09, subsequent to the initial issuance to provide guidance to improve the operability and understandability of the implementation guidance included in ASU 2014-09. The Company adopted this update and the other related revenue standard clarifications and technical guidance effective January 1, 2018, using the modified retrospective approach. The Company completed the analysis of its non-insurance revenues and has concluded that the implementation did not have any impact on the Company’s consolidated financial condition or results of operations.
In February 2016, the FASB issued ASU 2016-02,
Leases
(Topic 842)
. The update will supersede the current lease guidance in Topic 840,
Leases
and lessees will be required to recognize for all leases, with the exception of short-term leases, a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis. Concurrently, lessees will be required to recognize a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. The update is effective for interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted. The guidance is required to be applied using a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative periods presented in the financial statements. The guidance is required to be applied using a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative periods presented in the financial statements. All of the Company’s leases are classified as operating leases under current lease accounting guidance. The Company expects to elect all of the standard’s available practical expedients upon adoption. The update requires the Company to add the operating leases to the Company’s consolidated balance sheets. The Company does not expect this standard will have a material impact on the Company’s consolidated financial position or results of operations.
In June 2016, the FASB issued ASU 2016-13,
Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,
which significantly changes the measurement of credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The update requires entities to record allowances for available-for-sale debt securities rather than reduce the carrying amount, as currently performed under the OTTI model. The update also require enhanced disclosures for financial assets measured at amortized cost and available-for-sale debt securities to help the financial statement users better understand significant judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an entity’s portfolio. The update is effective for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted. The Company is in the early stage of evaluating the impact that the update will have on the Company’s consolidated financial position or results of operations.
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2017
In August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments a consensus of the Emerging Issues Task Force)
to improve the diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The update provides guidance on specific cash flow classification issues including the following: (1) debt prepayment or debt extinguishment costs; (2) settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; (3) contingent consideration payments made after a business combination; (4) proceeds from the settlement of insurance claims; (5) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; (6) distributions received from equity method investees; (7) beneficial interests in securitization transactions; and (8) separately identifiable cash flows and application of the predominance principle. Current GAAP does not include specific guidance on these eight cash flow classification issues. The update is effective for annual reporting periods beginning after December 15, 2017, with early adoption permitted. The Company adopted the guidance effective January 1, 2018. The provisions of this update is not expected to have a material impact on the Company’s consolidated statements of cash flows or results of operations.
In February 2018, the FASB issued ASU 2018-02,
Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.
The update allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Act. Current guidance requires the effect of a change in tax laws or rates on deferred tax balances to be reported in income from continuing operations in the accounting period that includes the period of enactment, even if the related income tax effects were originally charged or credited directly to accumulated other comprehensive income. The amount of the reclassification would include the effect of the change in the U.S. federal corporate income tax rate on the gross deferred tax amounts and related valuation allowances, if any, at the date of the enactment of the Tax Act related to items in accumulated other comprehensive income. The update is effective for reporting periods beginning after December 15, 2018, and is to be applied retrospectively to each period in which the effect of the Tax Act related to items remaining in accumulated other comprehensive income are recognized or at the beginning of the period of adoption, with early adoption permitted. The Company is in the early stage of evaluating the impact that the update will have on the Company’s consolidated financial position or results of operations.
In February 2018, the FASB issued ASU 2018-03,
Technical Corrections and Improvements to Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities
.
The update provides corrections and improvements and clarifies certain aspects of the guidance issued in ASU 2016-01. The update is effective for annual reporting periods beginning after December 15, 2017. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial position or results of operations.
3. FAIR VALUE
Fair Value Disclosures of Financial Instruments
The Company accounts for financial instruments at fair value or the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements are generally based upon observable and unobservable inputs. Observable inputs are based on market data from independent sources, while unobservable inputs reflect the Company’s view of market assumptions in the absence of observable market information. All assets and liabilities that are recorded at fair value are classified and disclosed in one of the following three categories:
|
|
•
|
Level 1
— Quoted market prices (unadjusted) for identical assets or liabilities in active markets is defined as a market where transactions for the financial statement occur with sufficient frequency and volume to provide pricing information on an ongoing basis, or observable inputs.
|
|
|
•
|
Level 2
— Quoted market prices for similar assets or liabilities and valuations, using models or other valuation techniques using observable market data. Significant other observable that can be corroborated by observable market data; and,
|
|
|
•
|
Level 3
— Instruments that use non-binding broker quotes or model driven valuations that do not have observable market data or those that are estimated based on an ownership interest to which a proportionate share of net assets is attributed.
|
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2017
The classification of assets and liabilities in the fair value hierarchy is based upon the lowest level input that is significant to the fair value inputs consisted of the following:
The Company’s financial instruments measured at fair value on a recurring basis and the level of the fair value hierarchy of inputs used consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
|
(In thousands)
|
Debt securities - available-for-sale, at fair value:
|
|
|
|
|
|
|
|
|
United States government obligations and authorities
|
|
$
|
51,219
|
|
|
$
|
46,918
|
|
|
$
|
—
|
|
|
$
|
98,137
|
|
Obligations of states and political subdivisions
|
|
—
|
|
|
66,266
|
|
|
—
|
|
|
66,266
|
|
Corporate securities
|
|
—
|
|
|
240,919
|
|
|
—
|
|
|
240,919
|
|
International securities
|
|
—
|
|
|
17,916
|
|
|
—
|
|
|
17,916
|
|
Debt securities, at fair value
|
|
51,219
|
|
|
372,019
|
|
|
—
|
|
|
423,238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities, at fair value
|
|
15,434
|
|
|
—
|
|
|
—
|
|
|
15,434
|
|
|
|
|
|
|
|
|
|
|
Total investments, at fair value
|
|
$
|
66,653
|
|
|
$
|
372,019
|
|
|
$
|
—
|
|
|
$
|
438,672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
|
(In thousands)
|
Debt securities - available-for-sale, at fair value:
|
|
|
|
|
|
|
|
|
United States government obligations and authorities
|
|
$
|
36,560
|
|
|
$
|
25,645
|
|
|
$
|
—
|
|
|
$
|
62,205
|
|
Obligations of states and political subdivisions
|
|
—
|
|
|
151,183
|
|
|
—
|
|
|
151,183
|
|
Corporate securities
|
|
—
|
|
|
149,505
|
|
|
—
|
|
|
149,505
|
|
International securities
|
|
—
|
|
|
11,863
|
|
|
—
|
|
|
11,863
|
|
Debt securities, at fair value
|
|
36,560
|
|
|
338,196
|
|
|
—
|
|
|
374,756
|
|
|
|
|
|
|
|
|
|
|
Equity securities, at fair value
|
|
28,960
|
|
|
415
|
|
|
—
|
|
|
29,375
|
|
|
|
|
|
|
|
|
|
|
Total investments, at fair value
|
|
$
|
65,520
|
|
|
$
|
338,611
|
|
|
$
|
—
|
|
|
$
|
404,131
|
|
The Company’s held-to-maturity debt securities are reported on the consolidated balance sheets at amortized cost and disclosed at fair value in Note
4
. Investments in these notes to consolidated financial statements. The fair values of these securities are classified within Level 1 and Level 2 of the fair value hierarchy and consist of United States government obligations and authorities, corporate securities and international securities. The fair value of the securities classified as Level 1 was $
4.0 million
as of
December 31, 2017
and
2016
. The fair value of the securities classified as Level 2 was $
1.3 million
and
$1.6 million
as of
December 31, 2017
and
2016
, respectively.
The Company has engaged a nationally recognized third party pricing service to provide the fair values of securities in Level 2. The Company reviews the third party pricing methodologies on a quarterly basis and tests for significant differences between the market price used to value the securities and the recent sales activities.
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2017
A summary of the significant valuation techniques and market inputs for each financial instrument carried at fair value includes the following:
|
|
•
|
United States Government Obligations and Authorities:
In determining the fair value for United States government securities in Level 1, the Company uses quoted prices (unadjusted) in active markets for identical or similar assets. In determining the fair value for United States government securities in Level 2, the Company uses the market approach utilizing primary valuation inputs including reported trades, dealer quotes for identical or similar assets in markets that are not active, benchmark yields, credit spreads, reference data and industry and economic events.
|
|
|
•
|
Obligations of States and Political Subdivisions:
In determining the fair value for state and municipal securities, the Company uses the market approach utilizing primary valuation inputs including reported trades, dealer quotes for identical or similar assets in markets that are not active, benchmark yields, credit spreads, reference data and industry and economic events.
|
|
|
•
|
Corporate and International Securities:
In determining the fair value for corporate securities the Company uses the market approach utilizing primary valuation inputs including reported trades, dealer quotes for identical or similar assets in markets that are not active, benchmark yields, credit spreads (for investment grade securities), observations of equity and credit default swap curves (for high-yield corporates), reference data and industry and economic events.
|
|
|
•
|
Equity Securities:
In determining the fair value for equity securities in Level 1, the Company uses quoted prices (unadjusted) in active markets for identical or similar assets. In determining the fair value for equity securities in Level 2, the Company uses the market approach utilizing primary valuation inputs including reported trades, dealer quotes for identical or similar assets in markets that are not active, benchmark yields, credit spreads, reference data and industry and economic events.
|
There were no changes to the Company’s valuation methodology and the Company is not aware of any events or circumstances that would have a significant adverse effect on the carrying value of its assets and liabilities measured at fair value as of
December 31, 2017
and
2016
. There were no transfers between the fair value hierarchy levels during the years ended
December 31, 2017
,
2016
and
2015
.
4. INVESTMENTS
Unrealized Gains and Losses
The difference between amortized cost or cost and estimated fair value and gross unrealized gains and losses, by major investment category, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
Gross
|
|
Gross
|
|
|
|
|
Cost
|
|
Unrealized
|
|
Unrealized
|
|
|
|
|
or Cost
|
|
Gains
|
|
Losses
|
|
Fair Value
|
|
|
(In thousands)
|
December 31, 2017
|
|
|
|
|
|
|
|
|
Debt securities - available-for-sale:
|
|
|
|
|
|
|
|
|
United States government obligations and authorities
|
|
$
|
98,739
|
|
|
$
|
244
|
|
|
$
|
846
|
|
|
$
|
98,137
|
|
Obligations of states and political subdivisions
|
|
66,319
|
|
|
325
|
|
|
378
|
|
|
66,266
|
|
Corporate securities
|
|
239,435
|
|
|
2,233
|
|
|
749
|
|
|
240,919
|
|
International securities
|
|
17,807
|
|
|
136
|
|
|
27
|
|
|
17,916
|
|
|
|
422,300
|
|
|
2,938
|
|
|
2,000
|
|
|
423,238
|
|
|
|
|
|
|
|
|
|
|
Debt securities - held-to-maturity:
|
|
|
|
|
|
|
|
|
United States government obligations and authorities
|
|
4,160
|
|
|
9
|
|
|
106
|
|
|
4,063
|
|
Corporate securities
|
|
1,123
|
|
|
21
|
|
|
—
|
|
|
1,144
|
|
International securities
|
|
66
|
|
|
1
|
|
|
—
|
|
|
67
|
|
|
|
5,349
|
|
|
31
|
|
|
106
|
|
|
5,274
|
|
Equity securities
|
|
14,085
|
|
|
1,628
|
|
|
279
|
|
|
15,434
|
|
Total investments
|
|
$
|
441,734
|
|
|
$
|
4,597
|
|
|
$
|
2,385
|
|
|
$
|
443,946
|
|
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
Gross
|
|
Gross
|
|
|
|
|
Cost
|
|
Unrealized
|
|
Unrealized
|
|
|
|
|
or Cost
|
|
Gains
|
|
Losses
|
|
Fair Value
|
|
|
(In thousands)
|
December 31, 2016
|
|
|
|
|
|
|
|
|
Debt securities - available-for-sale:
|
|
|
|
|
|
|
|
|
United States government obligations and authorities
|
|
$
|
62,881
|
|
|
$
|
177
|
|
|
$
|
853
|
|
|
$
|
62,205
|
|
Obligations of states and political subdivisions
|
|
152,823
|
|
|
427
|
|
|
2,067
|
|
|
151,183
|
|
Corporate
|
|
149,053
|
|
|
1,347
|
|
|
895
|
|
|
149,505
|
|
International
|
|
11,887
|
|
|
95
|
|
|
119
|
|
|
11,863
|
|
|
|
376,644
|
|
|
2,046
|
|
|
3,934
|
|
|
374,756
|
|
|
|
|
|
|
|
|
|
|
Debt securities - held-to-maturity:
|
|
|
|
|
|
|
|
|
United States government obligations and authorities
|
|
$
|
4,163
|
|
|
$
|
22
|
|
|
$
|
118
|
|
|
$
|
4,067
|
|
Corporate
|
|
1,317
|
|
|
20
|
|
|
2
|
|
|
1,335
|
|
International
|
|
71
|
|
|
—
|
|
|
—
|
|
|
71
|
|
|
|
5,551
|
|
|
42
|
|
|
120
|
|
|
5,473
|
|
Equity securities
|
|
24,163
|
|
|
5,500
|
|
|
288
|
|
|
29,375
|
|
Total investments
|
|
$
|
406,358
|
|
|
$
|
7,588
|
|
|
$
|
4,342
|
|
|
$
|
409,604
|
|
Net Realized Gains and Losses
The Company calculates the gain or loss realized on the sale of investments by comparing the sales price (fair value) to the cost or amortized cost of the security sold. Net realized gains and losses on investments are determined in accordance with the specific identification method.
Net realized gains, by major investment category, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
(In thousands)
|
Gross realized gains:
|
|
|
|
|
|
|
Debt securities
|
|
$
|
1,814
|
|
|
$
|
3,208
|
|
|
$
|
1,272
|
|
Equity securities
|
|
9,944
|
|
|
4,264
|
|
|
4,959
|
|
Total gross realized gains
|
|
11,758
|
|
|
7,472
|
|
|
6,231
|
|
|
|
|
|
|
|
|
Gross realized losses:
|
|
|
|
|
|
|
Debt securities
|
|
(1,671
|
)
|
|
(1,614
|
)
|
|
(805
|
)
|
Equity securities
|
|
(1,539
|
)
|
|
(2,813
|
)
|
|
(1,810
|
)
|
Total gross realized losses
|
|
(3,210
|
)
|
|
(4,427
|
)
|
|
(2,615
|
)
|
Net realized gains on investments
|
|
$
|
8,548
|
|
|
$
|
3,045
|
|
|
$
|
3,616
|
|
Proceeds from sale of investment securities were
$306.7 million
,
$229.3 million
and
$157.2 million
for the years ended
December 31, 2017
,
2016
and
2015
, respectively.
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2017
Contractual Maturity
Expected maturities and contractual maturities may differ because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Amortized cost and estimated fair value of debt securities, by contractual maturity, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
Amortized
|
|
|
|
|
Cost
|
|
Fair Value
|
Securities with maturity dates:
|
|
(In thousands)
|
Debt securities, available-for-sale:
|
|
|
|
|
One year or less
|
|
$
|
45,949
|
|
|
$
|
45,879
|
|
Over one through five years
|
|
194,427
|
|
|
194,463
|
|
Over five through ten years
|
|
177,657
|
|
|
178,664
|
|
Over ten years
|
|
4,267
|
|
|
4,232
|
|
|
|
422,300
|
|
|
423,238
|
|
Debt securities, held-to-maturity:
|
|
|
|
|
One year or less
|
|
180
|
|
|
180
|
|
Over one through five years
|
|
4,097
|
|
|
4,028
|
|
Over five through ten years
|
|
1,072
|
|
|
1,066
|
|
|
|
5,349
|
|
|
5,274
|
|
Total
|
|
$
|
427,649
|
|
|
$
|
428,512
|
|
Net Investment Income
Net investment income consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
(In thousands)
|
Interest income
|
|
$
|
9,776
|
|
|
$
|
7,920
|
|
|
$
|
6,638
|
|
Dividends income
|
|
478
|
|
|
1,143
|
|
|
588
|
|
Net investment income
|
|
$
|
10,254
|
|
|
$
|
9,063
|
|
|
$
|
7,226
|
|
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2017
Aging of Gross Unrealized Losses
Gross unrealized losses and related fair values for debt and equity securities, grouped by duration of time in a continuous unrealized loss position, consisted of the following:
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|
|
|
|
|
|
|
|
|
|
|
|
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Less than 12 months
|
|
12 months or longer
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Total
|
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|
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Gross
|
|
|
|
Gross
|
|
|
|
Gross
|
|
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Fair
|
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Unrealized
|
|
Fair
|
|
Unrealized
|
|
Fair
|
|
Unrealized
|
|
|
Value
|
|
Losses
|
|
Value
|
|
Losses
|
|
Value
|
|
Losses
|
December 31, 2017
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|
|
|
|
(In thousands)
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|
|
|
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Debt securities - available-for-sale:
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|
|
|
|
|
|
|
|
|
|
|
United States government obligations
|
|
|
|
|
|
|
|
|
|
|
|
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and authorities
|
|
$
|
52,368
|
|
|
$
|
517
|
|
|
$
|
19,287
|
|
|
$
|
329
|
|
|
$
|
71,655
|
|
|
$
|
846
|
|
Obligations of states and political subdivisions
|
|
32,030
|
|
|
221
|
|
|
5,676
|
|
|
157
|
|
|
37,706
|
|
|
378
|
|
Corporate
|
|
109,780
|
|
|
625
|
|
|
6,452
|
|
|
124
|
|
|
116,232
|
|
|
749
|
|
International
|
|
8,935
|
|
|
27
|
|
|
25
|
|
|
—
|
|
|
8,960
|
|
|
27
|
|
|
|
203,113
|
|
|
1,390
|
|
|
31,440
|
|
|
610
|
|
|
234,553
|
|
|
2,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
4,312
|
|
|
279
|
|
|
—
|
|
|
—
|
|
|
4,312
|
|
|
279
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
207,425
|
|
|
$
|
1,669
|
|
|
$
|
31,440
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|
|
$
|
610
|
|
|
$
|
238,865
|
|
|
$
|
2,279
|
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|
|
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|
|
|
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|
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|
|
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months
|
|
12 months or longer
|
|
Total
|
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|
|
Gross
|
|
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|
Gross
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Gross
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|
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Fair
|
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Unrealized
|
|
Fair
|
|
Unrealized
|
|
Fair
|
|
Unrealized
|
|
|
Value
|
|
Losses
|
|
Value
|
|
Losses
|
|
Value
|
|
Losses
|
December 31, 2016
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|
|
|
|
|
(In thousands)
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|
|
|
|
Debt securities - available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
United States government obligations
|
|
|
|
|
|
|
|
|
|
|
|
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and authorities
|
|
$
|
45,255
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|
|
$
|
850
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|
|
$
|
111
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$
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3
|
|
|
$
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45,366
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|
|
$
|
853
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Obligations of states and political subdivisions
|
|
103,724
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|
|
2,066
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|
|
1,007
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|
|
1
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|
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104,731
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|
|
2,067
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Corporate
|
|
59,970
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|
|
864
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|
|
2,427
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|
|
31
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|
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62,397
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|
|
895
|
|
International
|
|
5,925
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|
|
119
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|
|
5
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|
|
—
|
|
|
5,930
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|
|
119
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|
|
|
214,874
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|
|
3,899
|
|
|
3,550
|
|
|
35
|
|
|
218,424
|
|
|
3,934
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
4,701
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|
|
253
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|
|
434
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|
|
35
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|
|
5,135
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|
|
288
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total investments
|
|
$
|
219,575
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|
|
$
|
4,152
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|
|
$
|
3,984
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|
|
$
|
70
|
|
|
$
|
223,559
|
|
|
$
|
4,222
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|
As of
December 31, 2017
, the Company held a total of
866
debt and equity securities that were in an unrealized loss position, of which
73
securities were in an unrealized loss position continuously for
12 months
or more. As of
December 31, 2016
, the Company held a total of
1,132
debt and equity securities that were in an unrealized loss position, of which
36
securities were in an unrealized loss position continuously for 12 months or more. The unrealized losses associated with these securities consisted primarily of losses related to corporate securities.
The Company holds its equity securities and some of its debt securities as available-for-sale and as such, these securities are recorded at fair value. The Company continually monitors the difference between cost and the estimated fair value of its investments, which involves uncertainty as to whether declines in value are temporary in nature. If the decline of a particular investment is deemed temporary, the Company records the decline as an unrealized loss in shareholders’ equity. If the decline is deemed to be other than temporary, the Company will write the security’s cost-basis or amortized cost-basis down to the fair value of the investment and recognizes an OTTI loss in the Company’s consolidated statement of operations. Additionally, any portion of such decline related
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2017
to debt securities that is believed to arise from factors other than credit will be recorded as a component of other comprehensive income rather than charged against income.
The Company’s assessment of equity securities initially involves an evaluation of all securities that are in an unrealized loss position, regardless of the duration or severity of the loss, as of the applicable balance sheet date. Such initial review consists primarily of assessing whether: (i) there has been a negative credit or news event with respect to the issuer that could indicate the existence of an OTTI; and (ii) the Company has the ability and intent to hold an equity security for a period of time sufficient to allow for an anticipated recovery (generally considered to be one year from the balance sheet date).
To the extent that an equity security in an unrealized loss position is not impaired based on the initial review described previously, the Company then evaluates such equity security by considering qualitative and quantitative factors. These factors include but are not limited to facts and circumstances specific to individual securities, asset classes, the financial condition of the issuer, changes in dividend payment, the length of time fair value had been less than cost, the severity of the decline in fair value below cost, industry outlook and the Company’s ability and intent to hold each position until its forecasted recovery.
The determination that unrealized losses on such securities were other-than-temporary was primarily based on the duration of the decline in the fair value of such securities relative to their cost as of the balance sheet date. OTTI losses were
$0
,
$0.3 million
and
$0.4 million
for the years ended
December 31, 2017
,
2016
and
2015
, respectively.
Collateral Deposits
Investments, the majority of which were debt securities, with fair values of approximately
$12.9 million
and $
7.9 million
were deposited with governmental authorities and into custodial bank accounts as required by law or contractual obligations as of
December 31, 2017
and
2016
, respectively.
5. REINSURANCE
Overview
Reinsurance is used to mitigate the exposure to losses, manage capacity and protect capital resources. The Company reinsures (cedes) a portion of written premiums on an excess of loss or a quota share basis in order to limit the Company’s loss exposure. To the extent that reinsuring companies are unable to meet their obligations assumed under these reinsurance agreements, the Company remain primarily liable to its policyholders.
The Company is selective in choosing reinsurers and consider numerous factors, the most important of which is the financial stability of the reinsurer or capital specifically pledged to uphold the contract, its history of responding to claims and its overall reputation. In an effort to minimize the Company’s exposure to the insolvency of a reinsurer, the Company evaluates the acceptability and review the financial condition of the reinsurer at least annually with the assistance of the Company’s reinsurance broker.
Significant Reinsurance Contracts
2016-2017 Reinsurance Programs
FNIC’s 2016-2017 reinsurance programs, costing
$179.5 million
, included
$125.6 million
for the private reinsurance for FNIC’s Florida exposure, including prepaid automatic premium reinstatement protection on all layers, along with
$53.9 million
payable to the Florida Hurricane Catastrophe Fund (“FHCF”). The combination of private and FHCF reinsurance treaties afforded FNIC with
$2.2 billion
of aggregate coverage with a maximum single event coverage totaling
$1.6 billion
, exclusive of retentions. FNIC maintained its FHCF participation at
75%
for the 2016 hurricane season. FNIC’s single event pre-tax retention for a catastrophic event in Florida was
$18.5 million
. In addition, FNIC purchased separate underlying reinsurance layers in Louisiana, Texas, South Carolina and Alabama to cover losses and LAE outside of Florida for each catastrophic event from
$8.0 million
to
$18.5 million
. Depending on the characteristics of the catastrophic event, and the states involved, FNIC’s single event pre-tax retention could have been as low as
$8.0 million
. The maximum pre-tax retention was
$18.5 million
.
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2017
Additionally, our private market excess of loss treaties became effective June 1, 2016 and July 1, 2016, and all private layers, except the FHCF supplemental layer reinsurance contract, have prepaid automatic reinstatement protection, which afforded us with additional coverage against multiple catastrophic events in the same hurricane season. We obtained multiple year protection for a portion of its program; as a result, some of the coverage expired on June 30, 2017, and a portion of the coverage will remain in-force one additional treaty year until June 30, 2018. These private market excess of loss treaties structure coverage into layers, with a cascading feature such that substantially all private layers attach after
$18.5 million
in losses for FNIC’s Florida exposure. If the aggregate limit of the preceding layer is exhausted, the next layer drops down (cascades) in its place. Additionally, any unused layer protection drops down for subsequent events until exhausted.
MNIC’s 2016-2017 catastrophe reinsurance program, which ran from either June 1 to May 31 or June 1 to June 30 (
13
month period), consisted of the FHCF and private market excess of loss treaties. All private layers had prepaid automatic reinstatement protection, which afforded MNIC additional coverage, and had a cascading feature such that substantially all layers attached at
$3.4 million
for MNIC’s Florida exposure.
2017-2018 Reinsurance Programs
FNIC’s 2017-2018 reinsurance programs costing
$173.9 million
, including
$124.0 million
for the private reinsurance for FNIC’s Florida exposure including prepaid automatic premium reinstatement protection on all layers, along with
$49.9 million
payable to the FHCF. The combination of private and FHCF reinsurance treaties will afford FNIC with
$2.2 billion
of aggregate coverage with a maximum single event coverage totaling
$1.5 billion
, exclusive of retentions. FNIC maintained its FHCF participation at
75%
for the 2017 hurricane season. FNIC’s single event pre-tax retention for a catastrophic event in Florida is
$18.0 million
, down slightly from the 2016-2017 reinsurance programs.
FNIC’s private market excess of loss treaties, covering both Florida and non-Florida exposures, became effective June 1, 2017 and July 1, 2017. All private layers have prepaid automatic reinstatement protection, except the FHCF supplemental layer reinsurance contract, which affords FNIC additional coverage for subsequent events. The reinsurance program includes multiple year protection with
$89.0 million
of new multiple year protection this year and
$156.0 million
of renewing multiple year protection from last year. As in our 2016-2017 program, these private market excess of loss treaties structure coverage into layers, with a cascading feature such that substantially all layers attach after
$25.1 million
in losses for FNIC’s exposure. FNIC purchased an underlying limit of protection for
$7.1 million
excess of
$18.0 million
with prepaid automatic reinstatement protection. These treaties are with reinsurers that currently have an A.M. Best Company (“A.M. Best”) or Standard & Poor’s rating of “A-” or better, or have fully collateralized their maximum potential obligations in dedicated trusts.
FNIC’s non-Florida excess of loss reinsurance treaties affords us up to an additional
$21.0 million
of aggregate coverage with first event coverage totaling
$5.0 million
and second event coverage up to
$16.0 million
. The non-Florida retention is lowered to
$13.0 million
for the first event and
$2.0 million
for the second event (for hurricane losses only) on a gross basis, though the retention is reduced to
$6.5 million
and to
$1.0 million
on a net basis after taking into account the profit share agreement that FNIC has with our non-affiliated managing general underwriter that writes our non-Florida property business. FNIC’s non-Florida reinsurance program cost includes
$1.7 million
for this private reinsurance, including prepaid automatic premium reinstatement protection.
MNIC’s 2017-2018 reinsurance program costing
$5.0 million
, including
$3.2 million
for the private reinsurance for MNIC’s Florida exposure including prepaid automatic premium reinstatement protection on all layers, along with
$1.8 million
payable to the FHCF. The combination of private and FHCF reinsurance treaties affords MNIC with
$109.0 million
of aggregate coverage with a maximum single event coverage of
$64.9 million
, exclusive of retentions. MNIC maintained its FHCF participation at
75%
for the 2017 hurricane season.
MNIC’s private market excess of loss treaties became effective July 1, 2017, and all private layers have prepaid automatic reinstatement protection, which affords MNIC additional coverage for subsequent events, and have a cascading feature such that substantially all layers attach at
$3.4 million
for MNIC’s Florida exposure. These treaties are with reinsurers that currently have an A.M. Best or Standard & Poor’s rating of “A-” or better, or have fully collateralized their maximum potential obligations in dedicated trusts.
In addition to the excess of loss coverages described above, our reinsurance program also includes property quota-share treaties. One such treaty for
30%
became effective July 1, 2014, and another for
10%
became effective July 1, 2015 with each running for
two years
. The combined treaties provided up to a
40%
quota-share reinsurance on all non-catastrophe homeowners property insurance claims in Florida, and
40%
quota share coverage on the first
$100 million
of covered catastrophe losses for the homeowners property insurance program in Florida per occurrence;
$200 million
any one contract year. The treaties embodied an experience account and
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2017
are accounted for as retrospectively rated contracts whereby the estimated ultimate premium or commission is recognized over the period of the contracts.
On July 1, 2016, the
30%
property quota-share treaty expired on a cut-off basis, which means as of that date we retained
an incremental
30%
of the underlying unearned premiums and losses.
On July 1, 2017, the
10%
property quota-share treaty expired on a cut-off basis, which means as of that date we retained an incremental
10%
of the underlying unearned premiums and losses. The reinsurers remain liable for
30%
and
10%
of the paid losses occurring during the terms of the treaties, until each treaty is commuted.
On July 1, 2017, FNIC bound a new
10%
quota-share on its Florida homeowners book of business, which excludes named storms. This treaty is not subject to accounting as a retrospectively rated contract.
Our private passenger automobile quota share treaties are typically
one year
programs which become effective at different points in the year and cover automobile policies across several states. These automobile quota share treaties cede approximately
75%
of all written premiums entered into by the Company, subject to certain limitations including but not limited to premium and other caps.
Certain reinsurance agreements require FNIC and MNIC to secure the credit, regulatory and business risk. Fully funded trust agreements securing these risks for FNIC were
$2.6 million
as of
December 31, 2017
and
2016
. Fully funded trust agreements securing these risks for MNIC were
$0.3 million
as of
December 31, 2017
and
2016
.
Reinsurance Recoverable, Net
Amounts recoverable from reinsurers are recognized in a manner consistent with the claims liabilities associated with the reinsurance placement and presented on the consolidated balance sheet as reinsurance recoverables. Reinsurance recoverable, net consisted of the following:
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|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2017
|
|
2016
|
|
|
(In thousands)
|
|
|
|
|
|
Reinsurance recoverable on paid losses
|
|
$
|
26,256
|
|
|
$
|
7,451
|
|
Reinsurance recoverable on unpaid losses
|
|
98,345
|
|
|
40,412
|
|
Reinsurance recoverable, net
|
|
$
|
124,601
|
|
|
$
|
47,863
|
|
As of December 31, 2017, the Company has
$88.0 million
in reinsurance recoverables as a result of Hurricane Irma. Hurricane Irma made landfall in the United States as a Category 4 hurricane on September 10, 2017. Approximately
15%
of the reinsurance recoverable at December 31, 2017, was concentrated in
one
reinsurer related to Hurricane Irma. This
one
reinsurer and all other reinsurers in our excess-of-loss reinsurance programs have an A.M. Best or Standard & Poor’s rating of “A-“ or better, or have fully collateralized their maximum potential obligations in dedicated trusts.
Net Premiums Written and Net Premiums Earned
Net premiums written and net premiums earned consisted of the following:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
(In thousands)
|
Net premiums written:
|
|
|
|
|
|
|
Direct
|
|
$
|
603,417
|
|
|
$
|
605,485
|
|
|
$
|
493,770
|
|
Ceded
|
|
(260,524
|
)
|
|
(285,986
|
)
|
|
(268,516
|
)
|
Net premiums written
|
|
$
|
342,893
|
|
|
$
|
319,499
|
|
|
$
|
225,254
|
|
|
|
|
|
|
|
|
Net premiums earned:
|
|
|
|
|
|
|
Direct
|
|
$
|
603,193
|
|
|
$
|
565,423
|
|
|
$
|
432,233
|
|
Ceded
|
|
(269,712
|
)
|
|
(304,054
|
)
|
|
(219,213
|
)
|
Net premiums earned
|
|
$
|
333,481
|
|
|
$
|
261,369
|
|
|
$
|
213,020
|
|
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2017
6. LOSS AND LOSS ADJUSTMENT RESERVES
The liability for loss and LAE reserves is determined on an individual-case basis for all claims reported. The liability also includes amounts for unallocated expenses, anticipated future claim development and IBNR.
Activity in the liability for loss and LAE reserves is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
(In thousands)
|
Gross reserves, beginning of period
|
|
$
|
158,110
|
|
|
$
|
97,706
|
|
|
$
|
78,330
|
|
Less: reinsurance recoverable (1)
|
|
(40,412
|
)
|
|
(7,496
|
)
|
|
(10,394
|
)
|
Net reserves, beginning of period
|
|
117,698
|
|
|
90,210
|
|
|
67,936
|
|
|
|
|
|
|
|
|
Incurred loss, net of reinsurance, related to:
|
|
|
|
|
|
|
Current year
|
|
245,545
|
|
|
201,704
|
|
|
120,005
|
|
Prior year loss development (2)
|
|
13,926
|
|
|
13,156
|
|
|
(9,466
|
)
|
Ceded losses subject to offsetting experience account adjustments (3)
|
|
(11,914
|
)
|
|
(17,050
|
)
|
|
2,171
|
|
Prior years
|
|
2,012
|
|
|
(3,894
|
)
|
|
(7,295
|
)
|
Total incurred loss and LAE, net of reinsurance
|
|
247,557
|
|
|
197,810
|
|
|
112,710
|
|
|
|
|
|
|
|
|
Paid loss, net of reinsurance, related to:
|
|
|
|
|
|
|
Current year
|
|
160,945
|
|
|
123,364
|
|
|
54,710
|
|
Prior years
|
|
72,140
|
|
|
46,958
|
|
|
35,726
|
|
Total paid loss and LAE, net of reinsurance
|
|
233,085
|
|
|
170,322
|
|
|
90,436
|
|
|
|
|
|
|
|
|
Net reserves, end of period
|
|
132,170
|
|
|
117,698
|
|
|
90,210
|
|
Plus: reinsurance recoverable (1)
|
|
98,345
|
|
|
40,412
|
|
|
7,496
|
|
Gross reserves, end of period
|
|
$
|
230,515
|
|
|
$
|
158,110
|
|
|
$
|
97,706
|
|
|
|
(1)
|
Reinsurance recoverable in this table includes only ceded loss and LAE reserves.
|
|
|
(2)
|
Reflects loss development from prior accident years impacting pre-tax net income. Excludes losses ceded under retrospective reinsurance treaties to the extent there is an offsetting experience account adjustment.
|
|
|
(3)
|
Reflects losses ceded under retrospective reinsurance treaties to the extent there is an offsetting experience account adjustment, such that there is no impact on pre-tax net income.
|
The establishment of loss reserves is an inherently uncertain process and changes in loss reserve estimates are expected as such estimates are subject to the outcome of future events. The factors influencing changes in claim costs are often difficult to isolate or quantify and developments in paid and incurred losses from historical trends are frequently subject to multiple interpretations. Changes in estimates, or differences between estimates and amounts ultimately paid, are reflected in the operating results of the period during which such adjustments are made.
During the year ended
December 31, 2017
, the Company experienced
$13.9 million
of unfavorable loss and LAE reserve development on prior accident years primarily in its personal automobile and homeowners lines of businesses. The adverse development in personal automobile of approximately
$8.0 million
was driven primarily by adjustments to cession percentages in certain auto reinsurance treaties. Additionally, the adverse development in homeowners of approximately
$8.0 million
was primarily caused by the continued impact of assignment of benefits (“AOB”) and related ligation costs in 2015 and other accident years.
As previously disclosed, the Company entered into
30%
and
10%
retrospectively-rated Florida-only property quota share treaties, which ended on July 1, 2016 and 2017, respectively. These agreements included a profit share (experience account) provision, under which the Company will receive ceded premium adjustments at the end of the treaty to the extent there is a positive balance in the experience account. This experience account is based on paid losses rather than incurred losses. Due to the retrospectively-rated nature of this treaty, when the experience account is positives the Company cedes losses under these treaties as the claims are paid with an equal and offsetting adjustment to ceded premiums (in recognition of the related change to the experience account receivable),
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2017
with no impact on net income. Conversely, when the experience account is negative, the Company cedes losses on an incurred basis with no offsetting adjustment to ceded premiums, which impacts net income. Loss development can be either favorable or unfavorable regardless of whether the experience account is in a positive or negative position.
Beginning in 2017, for purposes of the total incurred loss, net of reinsurance line within this disclosure, the Company has classified paid losses related to these retrospectively rated quota share treaties which were ceded during the indicated year but relating to a prior accident year in a separate line. The related amounts in the previous year have been adjusted to conform to this presentation. Prior to 2017, these amounts were included in the current year incurred line item in the table above. Total amounts of incurred losses presented for 2016 and 2015 remain unchanged.
During the year ended
December 31, 2016
, the Company experienced unfavorable loss and LAE reserve development on prior accident years primarily in its all other peril homeowners coverage in Florida. In the first half of 2016, the Company began to experience a new and higher level of AOB claims both in frequency and severity in our homeowners business in Florida, which caused adverse experience on the loss activity in accident years 2015 and 2016. This increased level of AOB claims was the significant driver in the Company’s decision to increase the Company’s 2015 accident year reserves related to the Company’s homeowners Florida policies.
AOB is a legal construct that allows a third party to step into the shoes of the insured and is then paid directly by an insurance company for services rendered on behalf of the insured for a covered loss. Absent an AOB, the insured would pay the third party and those costs would be reimbursed by the insurance company to the insured. AOB is commonly used when a homeowner experiences a water loss, for example a leaky pipe, an overflow from a sink, or a damaged appliance, and contacts a contractor or water remediation company.
Misuse of this legal construct has led to contractors over inflating costs of claims and/or submitting improper claims, causing insurance companies to have to either pay the overinflated claim, fight the claim in court, or both. In all cases, AOB claims cost the insurance company, on average, more than five times the cost to settle non-AOB claims, which has been a primary driver the increase to our overall loss and loss adjustment in comparison to historical severity averages.
Although the concept of AOB had been around for several years prior to 2016, the Company had a relatively low level of AOB claims in the accident years prior to 2016 and the related adverse impact of AOB claims had a marginal impact on the Company’s overall loss experience. Given the nature of AOB claims, it is difficult to identify the number of outstanding or expected AOB claims as the third parties may not step into the shoes of the insured or may not identify itself to the Company until later on in the claim processing cycle. This delay in identifying AOB claims creates a challenge in estimating the Company’s loss reserves, as capturing the incremental costs to settle AOB claims as part of the Company’s calculation of estimated loss reserves at the end of the year.
Accordingly, the challenge described above together with the change in the Company’s historical trend on AOB claims were the main drivers of the prior year development in 2016.
During the year ended
December 31, 2015
, the Company experienced a redundancy on prior year accident years primarily a result of continued favorable loss experience (mostly caused by severity in reported claims) in the Company’s all other peril homeowners coverage caused in part by the absence of severe weather in Florida. Specifically, the Company has experienced better severity than expected in 2013 and 2014 accident years.
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2017
The following tables provide incurred losses and ALAE and cumulative paid losses and ALAE, net of reinsurance, for the prior 10 accident years, and the total of IBNR reserves plus expected development on reported claims and the cumulative number of reported claims (in thousands, except number of reported claims and severity), as of the most recent reporting period, by the Company’s significant lines of business, which are Homeowners, Commercial General Liability and Automobile.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IBNR & Expected
|
Cumulative
|
|
|
|
Homeowners Incurred Losses and ALAE, Net of Reinsurance
|
Development on
|
Number of
|
|
|
|
For the Years Ended December 31,
|
Reported Claims
|
Reported Claims
(1)
|
Severity
(2)
|
|
|
(Unaudited)
|
|
|
|
|
Accident Year
|
|
2008
|
2009
|
2010
|
2011
|
2012
|
2013
|
2014
|
2015
|
2016
|
2017
|
2017
|
2017
|
2017
|
2008
|
|
18,305
|
|
15,784
|
|
15,811
|
|
15,977
|
|
15,659
|
|
16,021
|
|
15,661
|
|
15,604
|
|
15,609
|
|
15,608
|
|
5
|
|
1,710
|
|
9,125
|
|
2009
|
|
|
26,228
|
|
25,618
|
|
25,955
|
|
26,482
|
|
27,015
|
|
27,041
|
|
27,119
|
|
27,163
|
|
27,173
|
|
104
|
|
2,334
|
|
11,598
|
|
2010
|
|
|
|
24,825
|
|
25,056
|
|
26,151
|
|
27,895
|
|
28,968
|
|
29,407
|
|
29,945
|
|
30,459
|
|
35
|
|
2,389
|
|
12,735
|
|
2011
|
|
|
|
|
20,492
|
|
21,344
|
|
23,007
|
|
23,932
|
|
24,582
|
|
25,957
|
|
26,143
|
|
27
|
|
2,423
|
|
10,778
|
|
2012
|
|
|
|
|
|
23,032
|
|
23,301
|
|
24,186
|
|
24,468
|
|
25,889
|
|
26,356
|
|
14
|
|
2,677
|
|
9,840
|
|
2013
|
|
|
|
|
|
|
43,807
|
|
42,021
|
|
35,834
|
|
35,859
|
|
37,185
|
|
402
|
|
3,415
|
|
10,771
|
|
2014
|
|
|
|
|
|
|
|
64,312
|
|
63,300
|
|
61,770
|
|
62,206
|
|
1,730
|
|
7,564
|
|
7,995
|
|
2015
|
|
|
|
|
|
|
|
|
99,497
|
|
92,411
|
|
95,129
|
|
6,260
|
|
13,292
|
|
6,686
|
|
2016
|
|
|
|
|
|
|
|
|
|
171,264
|
|
162,043
|
|
18,842
|
|
26,562
|
|
5,391
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
202,844
|
|
81,261
|
|
54,717
|
|
2,222
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
685,146
|
|
|
|
|
(1) The cumulative number of reported claims is measured by individual claimant at a coverage level.
(2) Calculated severity amounts by accident year are based on inception-to-date incurred less IBNR and expected development dollars on reported claims. Note the older accident years are more developed than recent accident years.
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homeowners Cumulative Paid Losses and ALAE, Net of Reinsurance
|
|
|
For the Years Ended December 31,
|
|
|
(Unaudited)
|
|
Accident Year
|
|
2008
|
2009
|
2010
|
2011
|
2012
|
2013
|
2014
|
2015
|
2016
|
2017
|
2008
|
|
9,477
|
|
13,832
|
|
14,689
|
|
15,190
|
|
15,308
|
|
15,445
|
|
15,595
|
|
15,583
|
|
15,587
|
|
15,587
|
|
2009
|
|
|
15,047
|
|
23,095
|
|
24,657
|
|
26,007
|
|
26,462
|
|
26,831
|
|
26,927
|
|
26,982
|
|
27,049
|
|
2010
|
|
|
|
14,052
|
|
21,350
|
|
24,730
|
|
26,886
|
|
27,984
|
|
29,092
|
|
29,739
|
|
30,376
|
|
2011
|
|
|
|
|
|
11,119
|
|
19,250
|
|
21,323
|
|
22,723
|
|
24,047
|
|
25,580
|
|
25,982
|
|
2012
|
|
|
|
|
|
13,693
|
|
20,728
|
|
23,120
|
|
23,923
|
|
25,186
|
|
26,113
|
|
2013
|
|
|
|
|
|
|
|
19,986
|
|
31,606
|
|
33,867
|
|
35,123
|
|
35,803
|
|
2014
|
|
|
|
|
|
|
|
37,033
|
|
53,831
|
|
57,891
|
|
59,722
|
|
2015
|
|
|
|
|
|
|
|
|
|
52,214
|
|
79,359
|
|
86,647
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
102,556
|
|
142,716
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
135,589
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
585,584
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All outstanding liabilities for unpaid claims and ALAE prior to 2008, net of reinsurance
|
|
88
|
|
Total outstanding liabilities for unpaid claims and ALAE, net of reinsurance
|
|
$
|
99,650
|
|
The following table provides supplementary information about the average annual percentage payout of incurred losses and ALAE, net of reinsurance, for Homeowners policies, as of December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Annual Payout of Losses and ALAE, Net of Reinsurance
|
|
|
(Unaudited)
|
|
|
Year 1
|
Year 2
|
Year 3
|
Year 4
|
Year 5
|
Year 6
|
Year 7
|
Year 8
|
Year 9
|
Year 10
|
Homeowners
|
|
55.8
|
%
|
25.2
|
%
|
6.9
|
%
|
3.8
|
%
|
2.8
|
%
|
3.0
|
%
|
1.2
|
%
|
0.9
|
%
|
0.2
|
%
|
—
|
%
|
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IBNR & Expected
|
Cumulative
|
|
|
|
Commercial General Liability Incurred Losses and ALAE, Net of Reinsurance
|
Development on
|
Number of
|
|
|
|
For the Years Ended December 31,
|
Reported Claims
|
Reported Claim
|
Severity
|
|
|
(Unaudited)
|
|
|
|
|
Accident Year
|
|
2008
|
2009
|
2010
|
2011
|
2012
|
2013
|
2014
|
2015
|
2016
|
2017
|
2017
|
2017
|
2017
|
2008
|
|
16,615
|
|
17,448
|
|
17,271
|
|
17,260
|
|
16,083
|
|
15,584
|
|
16,297
|
|
16,839
|
|
18,453
|
|
20,039
|
|
—
|
|
1,553
|
|
12,903
|
|
2009
|
|
|
13,297
|
|
12,397
|
|
12,220
|
|
11,943
|
|
9,270
|
|
10,192
|
|
10,466
|
|
11,081
|
|
11,621
|
|
—
|
|
899
|
|
12,927
|
|
2010
|
|
|
|
8,552
|
|
7,582
|
|
7,474
|
|
7,045
|
|
7,535
|
|
7,597
|
|
7,645
|
|
7,809
|
|
—
|
|
673
|
|
11,603
|
|
2011
|
|
|
|
|
6,436
|
|
5,854
|
|
4,749
|
|
4,603
|
|
4,760
|
|
5,409
|
|
6,254
|
|
136
|
|
856
|
|
7,147
|
|
2012
|
|
|
|
|
|
5,279
|
|
4,952
|
|
4,801
|
|
4,700
|
|
4,658
|
|
4,346
|
|
127
|
|
452
|
|
9,334
|
|
2013
|
|
|
|
|
|
|
7,095
|
|
5,069
|
|
5,221
|
|
5,502
|
|
5,704
|
|
129
|
|
523
|
|
10,660
|
|
2014
|
|
|
|
|
|
|
|
7,475
|
|
7,709
|
|
6,384
|
|
6,620
|
|
178
|
|
578
|
|
11,145
|
|
2015
|
|
|
|
|
|
|
|
|
8,082
|
|
7,008
|
|
6,020
|
|
260
|
|
660
|
|
8,727
|
|
2016
|
|
|
|
|
|
|
|
|
|
10,727
|
|
5,809
|
|
658
|
|
617
|
|
8,348
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
8,289
|
|
4,038
|
|
391
|
|
10,872
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
82,511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial General Liability Paid Losses and ALAE, Net of Reinsurance
|
|
|
For the Years Ended December 31,
|
|
|
(Unaudited)
|
|
Accident Year
|
|
2008
|
2009
|
2010
|
2011
|
2012
|
2013
|
2014
|
2015
|
2016
|
2017
|
2008
|
|
2,324
|
|
6,491
|
|
8,856
|
|
10,980
|
|
12,768
|
|
14,662
|
|
15,389
|
|
16,122
|
|
17,716
|
|
19,693
|
|
2009
|
|
|
|
2,253
|
|
4,236
|
|
6,466
|
|
7,384
|
|
8,046
|
|
8,593
|
|
10,130
|
|
10,454
|
|
11,308
|
|
2010
|
|
|
|
|
|
1,187
|
|
2,279
|
|
3,855
|
|
5,553
|
|
6,363
|
|
7,238
|
|
7,382
|
|
7,631
|
|
2011
|
|
|
|
|
|
|
|
764
|
|
2,763
|
|
3,366
|
|
3,673
|
|
4,246
|
|
4,866
|
|
5,831
|
|
2012
|
|
|
|
|
|
|
871
|
|
1,714
|
|
2,632
|
|
3,342
|
|
3,686
|
|
3,841
|
|
2013
|
|
|
|
|
|
|
|
|
882
|
|
2,233
|
|
3,366
|
|
3,867
|
|
4,606
|
|
2014
|
|
|
|
|
|
|
|
|
717
|
|
2,593
|
|
3,855
|
|
4,375
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
798
|
|
2,296
|
|
3,249
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
1,515
|
|
3,657
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
1,592
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
65,783
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All outstanding liabilities for unpaid claims and ALAE prior to 2008, net of reinsurance
|
|
383
|
|
Total outstanding liabilities for unpaid claims and ALAE, net of reinsurance
|
|
$
|
17,111
|
|
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2017
The following table provides supplementary information about the average annual percentage payout of incurred losses and ALAE, net of reinsurance, for Commercial General Liability policies, as of December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Annual Payout of Losses and ALAE, Net of Reinsurance
|
|
|
(Unaudited)
|
|
|
Year 1
|
Year 2
|
Year 3
|
Year 4
|
Year 5
|
Year 6
|
Year 7
|
Year 8
|
Year 9
|
Year 10
|
Commercial General Liability
|
|
13.9
|
%
|
20.3
|
%
|
14.3
|
%
|
9.6
|
%
|
7.8
|
%
|
7.3
|
%
|
6.5
|
%
|
2.9
|
%
|
6.9
|
%
|
8.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IBNR & Expected
|
Cumulative
|
|
|
|
Automobile Incurred Losses and ALAE, Net of Reinsurance
|
Development on
|
Number of
|
|
|
|
For the Years Ended December 31,
|
Reported Claims
|
Reported Claims
|
Severity
|
|
|
(Unaudited)
|
|
|
|
|
Accident Year
|
|
2008
|
2009
|
2010
|
2011
|
2012
|
2013
|
2014
|
2015
|
2016
|
2017
|
2017
|
2017
|
2017
|
2008
|
|
752
|
|
615
|
|
562
|
|
561
|
|
572
|
|
554
|
|
554
|
|
554
|
|
554
|
|
554
|
|
—
|
|
170
|
|
3,259
|
|
2009
|
|
|
272
|
|
267
|
|
259
|
|
264
|
|
258
|
|
243
|
|
243
|
|
243
|
|
243
|
|
—
|
|
63
|
|
3,857
|
|
2010
|
|
|
|
2,823
|
|
2,963
|
|
3,111
|
|
3,088
|
|
3,044
|
|
3,035
|
|
3,059
|
|
3,041
|
|
—
|
|
1,139
|
|
2,670
|
|
2011
|
|
|
|
|
3,580
|
|
3,350
|
|
2,954
|
|
2,912
|
|
2,762
|
|
2,848
|
|
2,796
|
|
—
|
|
918
|
|
3,046
|
|
2012
|
|
|
|
|
|
1,735
|
|
1,741
|
|
1,717
|
|
1,424
|
|
1,455
|
|
1,491
|
|
—
|
|
918
|
|
1,624
|
|
2013
|
|
|
|
|
|
|
1,517
|
|
1,863
|
|
1,826
|
|
1,829
|
|
2,161
|
|
61
|
|
3,533
|
|
594
|
|
2014
|
|
|
|
|
|
|
|
2,038
|
|
3,213
|
|
3,551
|
|
4,315
|
|
—
|
|
6,109
|
|
706
|
|
2015
|
|
|
|
|
|
|
|
|
3,045
|
|
2,882
|
|
2,781
|
|
49
|
|
6,883
|
|
397
|
|
2016
|
|
|
|
|
|
|
|
|
|
13,414
|
|
20,205
|
|
1,258
|
|
40,384
|
|
469
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
20,411
|
|
8,912
|
|
23,557
|
|
488
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
57,998
|
|
|
|
|
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile Paid Losses and ALAE, Net of Reinsurance
|
|
|
For the Years Ended December 31,
|
|
|
(Unaudited)
|
|
Accident Year
|
|
2008
|
2009
|
2010
|
2011
|
2012
|
2013
|
2014
|
2015
|
2016
|
2017
|
2008
|
|
442
|
|
513
|
|
519
|
|
541
|
|
554
|
|
554
|
|
554
|
|
554
|
|
554
|
|
554
|
|
2009
|
|
|
|
61
|
|
218
|
|
220
|
|
225
|
|
241
|
|
243
|
|
243
|
|
243
|
|
243
|
|
2010
|
|
|
|
|
|
1,713
|
|
2,482
|
|
2,715
|
|
2,863
|
|
2,942
|
|
2,978
|
|
2,984
|
|
3,035
|
|
2011
|
|
|
|
|
|
|
|
1,417
|
|
2,381
|
|
2,562
|
|
2,644
|
|
2,726
|
|
2,755
|
|
2,755
|
|
2012
|
|
|
|
|
|
|
867
|
|
1,293
|
|
1,333
|
|
1,384
|
|
1,393
|
|
1,430
|
|
2013
|
|
|
|
|
|
|
|
|
907
|
|
1,609
|
|
1,906
|
|
2,069
|
|
2,109
|
|
2014
|
|
|
|
|
|
|
|
|
1,455
|
|
3,120
|
|
3,678
|
|
4,122
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
1,393
|
|
2,293
|
|
2,670
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
8,084
|
|
17,258
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
12,821
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
46,997
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All outstanding liabilities for unpaid claims and ALAE prior to 2008, net of reinsurance
|
|
29
|
|
Total outstanding liabilities for unpaid claims and ALAE, net of reinsurance
|
|
$
|
11,030
|
|
The following table provides supplementary information about the average annual percentage payout of incurred losses and ALAE, net of reinsurance, for Automobile policies, as of December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Annual Payout of Losses and ALAE, Net of Reinsurance
|
|
|
(Unaudited)
|
|
|
Year 1
|
Year 2
|
Year 3
|
Year 4
|
Year 5
|
Year 6
|
Year 7
|
Year 8
|
Year 9
|
Year 10
|
Automobile
|
|
45.4
|
%
|
35.6
|
%
|
8.8
|
%
|
5.6
|
%
|
2.1
|
%
|
1.2
|
%
|
0.1
|
%
|
1.2
|
%
|
—
|
%
|
—
|
%
|
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2017
The reconciliation of the net incurred and paid development tables to the liability for unpaid losses and LAE in the consolidated balance sheets is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
2017
|
|
2016
|
|
|
(In thousands)
|
Liabilities for unpaid losses and LAE:
|
|
|
|
|
Homeowners
|
|
$
|
99,650
|
|
|
$
|
87,955
|
|
Commercial general liability
|
|
17,111
|
|
|
21,790
|
|
Automobile
|
|
11,030
|
|
|
7,792
|
|
Flood
|
|
—
|
|
|
—
|
|
Total liabilities for unpaid losses and LAE, net of reinsurance
|
|
127,791
|
|
|
117,537
|
|
|
|
|
|
|
Reinsurance recoverables:
|
|
|
|
|
Homeowners
|
|
81,852
|
|
|
20,968
|
|
Commercial general liability
|
|
—
|
|
|
35
|
|
Automobile
|
|
15,360
|
|
|
19,201
|
|
Flood
|
|
1,133
|
|
|
208
|
|
Total reinsurance recoverables
|
|
98,345
|
|
|
40,412
|
|
|
|
|
|
|
Unallocated loss adjustment expenses
|
|
4,379
|
|
|
161
|
|
Gross liability for unpaid losses and LAE
|
|
$
|
230,515
|
|
|
$
|
158,110
|
|
Management establishes a liability on an aggregate basis to provide for the estimated IBNR. The estimates of the liability for loss and LAE reserves are subject to the effect of trends in claims severity and frequency and are continually reviewed. As part of this process, we review historical data and consider various factors, including known and anticipated legal developments, inflation and economic conditions. As experience develops and other data become available, these estimates are revised, as required, resulting in increases or decreases to the existing liability for loss and LAE reserves. Adjustments are reflected in results of operations in the period in which they are made and the liabilities may deviate substantially from prior estimates.
Various actuarial methods are utilized to determine the reserves that are booked to our financial statements. Weightings of tests and methods at a detailed level may change from evaluation to evaluation based on a number of observations, measures and time elements. On an overall basis, changes to methods and/or assumptions underlying reserve estimations and selections as of December 31, 2017 and 2016, were not considered material.
IBNR reserves are established for the quarter and year-end based on a quarterly reserve analysis by our actuarial staff. Various standard actuarial tests are applied to subsets of the business at a line of business and coverage basis. Included in the analyses are the following:
|
|
•
|
Reported Loss Development Method
:
A reported loss development pattern is calculated based on historical loss development data, and this pattern is then used to project the latest evaluation of cumulative reported losses for each accident year or underwriting year, as appropriate, to ultimate levels;
|
|
|
•
|
Paid Development Method
:
A paid loss development pattern is calculated based on historical paid loss development data, and this pattern is then used to project the latest evaluation of cumulative paid losses for each accident year or underwriting year, as appropriate, to ultimate levels;
|
|
|
•
|
Expected Loss Ratio Method
:
Expected loss ratios are applied to premiums earned, based on historical company experience, or historical insurance industry results when company experience is deemed not to be sufficient; and
|
|
|
•
|
Bornhuetter-Ferguson Method
:
The results from the Expected Loss Ratio Method are essentially blended with either the Reported Loss Development Method or the Paid Development Method.
|
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2017
7. LONG-TERM DEBT
Long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2017
|
|
2016
|
|
(In thousands)
|
Senior Unsecured Floating Rate Notes, due December 31, 2027, net of deferred financing
|
|
|
|
costs of $377
|
$
|
24,623
|
|
|
$
|
—
|
|
Senior Unsecured Fixed Rate Notes, due December 31, 2022, net of deferred financing
|
|
|
|
costs of $302
|
19,698
|
|
|
—
|
|
Debt from consolidated VIE, due March 17, 2021, net of deferred financing costs of
|
|
|
|
$70 and $91, respectively
|
4,930
|
|
|
4,909
|
|
Total long-term debt, net
|
$
|
49,251
|
|
|
$
|
4,909
|
|
Senior Unsecured Notes
On December 28, 2017, the Company completed a private offering and issued
$25.0 million
principal amount of Senior Unsecured Floating Rate Notes due 2027 (the “2027 Notes”), pursuant to an indenture dated as of December 28, 2017 (the “Indenture”), as supplemented by a supplemental indenture dated as of December 28, 2017 (“Supplemental Indenture No. 1”).
The 2027 Notes bear interest, payable quarterly in arrears, at
7%
above
three-month LIBOR
, on March 31, June 30, September 30 and December 31 of each year, commencing on March 31, 2018. Principal will be payable in full at maturity on December 31, 2027. The interest rate payable on the 2027 Notes will increase to
8%
above the three-month LIBOR during the occurrence of certain events as defined in the Indenture (generally, non-compliance with certain covenants for more than
60 days
, or the occurrence of an event of default). The 2027 Notes may be redeemed in whole or in part at a price in cash equal to
102%
of the principal amount thereof, plus any accrued and unpaid interest, in the first
two years
after issuance,
101%
of the principal amount thereof, plus any accrued and unpaid interest, in the third through fifth years after issuance, and at
100%
of the principal amount thereof, plus any accrued and unpaid interest, after the fifth year after issuance.
On December 29, 2017, the Company closed an additional tranche of
$20.0 million
of Senior Unsecured Fixed Rate Notes due 2022 (the “2022 Notes”), pursuant to the Indenture, as supplemented by a supplemental indenture dated as of December 29, 2017 (“Supplemental Indenture No. 2”). The 2022 Notes bear interest payable quarterly in arrears at
8.375%
, on March 31, June 30, September 30 and December 31 of each year, commencing on March 31, 2018. The interest rate payable on the 2022 Notes will increase by an additional
50
basis points for each notch downgrade of the Company below “BBB” by Egan Jones Rating Company or successor rating agency. Principal on the 2022 Notes will be payable in full at maturity on December 31, 2022. The 2022 Notes may not be early-redeemed by the Company.
If a change in control of the Company, as defined in the Indenture, occurs, the holders of the 2027 Notes and 2022 Notes will have the right to require the Company to purchase all or a portion of their notes at a price in cash equal to
102%
of the principal amount thereof, plus any accrued but unpaid interest.
The 2027 Notes and 2022 Notes are senior unsecured obligations of the Company and will rank equally with all of the Company’s other future senior unsecured indebtedness. The Indenture, as supplemented by Supplemental Indenture No. 1 and Supplemental Indenture No. 2, includes customary covenants and events of default. Among other things, the covenants: (a) restrict the ability of the Company and its subsidiaries to incur additional indebtedness or make restricted payments under certain circumstances; (b) limit the Company and its subsidiaries from creating, incurring or assuming liens other than permitted liens as defined in the indenture; (c) require the Company to maintain certain levels of reinsurance coverage while the notes remain outstanding; and (d) maintain certain financial covenants.
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2017
Other Long-Term Debt
On March 17, 2015, Monarch Holding, a wholly owned subsidiary of Monarch Delaware, the Company’s consolidated VIE, issued a promissory note with a principal amount of
$5.0 million
bearing
6%
annual interest, due
March 17, 2021
, with interest payable on an annual basis due
March 17
each year. The debt was issued to TransRe and is being carried at the unpaid principal balance net of deferred financing costs; any accrued and unpaid interest is recognized in other liabilities in the consolidated statement of operations.
The Company’s estimated annual aggregate amount of debt maturities includes the following:
|
|
|
|
|
|
|
|
Aggregate
|
For the Years Ending December 31,
|
|
Debt Maturities
|
|
|
(In thousands)
|
2018
|
|
$
|
—
|
|
2019
|
|
—
|
|
2020
|
|
—
|
|
2021
|
|
5,000
|
|
2022
|
|
20,000
|
|
Thereafter
|
|
25,000
|
|
Total debt maturities
|
|
50,000
|
|
Less: Deferred financing costs
|
|
(749
|
)
|
Total debt maturities, net
|
|
$
|
49,251
|
|
8. INCOME TAXES
The components of income tax expense include the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
(In thousands)
|
Federal:
|
|
|
|
|
|
|
Current
|
|
$
|
2,431
|
|
|
$
|
5,076
|
|
|
$
|
15,523
|
|
Deferred
|
|
810
|
|
|
(4,714
|
)
|
|
5,515
|
|
Federal income tax expense
|
|
3,241
|
|
|
362
|
|
|
21,038
|
|
State:
|
|
|
|
|
|
|
Current
|
|
494
|
|
|
674
|
|
|
2,489
|
|
Deferred
|
|
(150
|
)
|
|
(494
|
)
|
|
562
|
|
State income tax expense
|
|
344
|
|
|
180
|
|
|
3,051
|
|
Total income tax expense
|
|
$
|
3,585
|
|
|
$
|
542
|
|
|
$
|
24,089
|
|
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2017
The actual income tax expense differs from the “expected” income tax expense (computed by applying the combined applicable effective federal and state tax rates to income before income tax expense) as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
(In thousands)
|
Computed expected tax expense provision, at federal rate
|
|
$
|
3,124
|
|
|
$
|
631
|
|
|
$
|
22,031
|
|
State tax, net of federal tax benefit
|
|
187
|
|
|
50
|
|
|
2,222
|
|
Tax-exempt interest
|
|
(429
|
)
|
|
(571
|
)
|
|
(445
|
)
|
Income subject to dividends-received deduction
|
|
(76
|
)
|
|
(219
|
)
|
|
(109
|
)
|
Return to provision
|
|
329
|
|
|
183
|
|
|
119
|
|
Rate changes
|
|
297
|
|
|
(38
|
)
|
|
—
|
|
Executive compensation
|
|
185
|
|
|
382
|
|
|
203
|
|
Meals and entertainment
|
|
76
|
|
|
130
|
|
|
—
|
|
Other
|
|
(108
|
)
|
|
(6
|
)
|
|
68
|
|
Total income tax expense
|
|
$
|
3,585
|
|
|
$
|
542
|
|
|
$
|
24,089
|
|
The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to reducing the U.S. federal corporate tax rate from
35%
to
21%
. SAB No. 118 provides guidance on accounting for the tax effects of the Tax Act and a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under the FASB’s Accounting Standard Codification (“ASC”) 740 — Income Taxes (“ASC 740”). In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act. In connection with the Company’s analysis of the impact of the Tax Act, the Company recorded a discrete provisional net tax expense of
$0.3 million
for the year ended December 31, 2017. This estimated net expense primarily consists of the U.S. federal rate reduction from
35%
to
21%
applied to the net deferred tax asset.
The Company does not have a valuation allowance as of
December 31, 2017
and
2016
.
The Company recognizes accrued interest and penalties related to unrecognized tax benefits in income tax expense in the consolidated statements of operations and statements of comprehensive income (loss). For the years ended
December 31, 2017
,
2016
and
2015
, the Company did not recognize any expense for accrued interest and penalties related to unrecognized tax benefits. For the years ended
December 31, 2017
,
2016
and
2015
, the Company recognized income tax expense related to an uncertain tax position of
$0
,
$0.4 million
and
$0.2 million
, respectively.
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2017
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s net deferred tax asset (liability) include the following:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
|
|
(In thousands)
|
Deferred tax assets:
|
|
|
|
|
Unearned premiums
|
|
$
|
9,543
|
|
|
$
|
13,975
|
|
Unpaid losses and loss adjustment expenses
|
|
1,050
|
|
|
1,869
|
|
Accrued expenses
|
|
689
|
|
|
692
|
|
Net operating loss carryforwards
|
|
1,567
|
|
|
7
|
|
Deferred revenue
|
|
—
|
|
|
2,637
|
|
Share-based compensation
|
|
255
|
|
|
—
|
|
Other
|
|
123
|
|
|
152
|
|
Total deferred tax assets
|
|
13,227
|
|
|
19,332
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
Deferred acquisition costs
|
|
(11,742
|
)
|
|
(17,493
|
)
|
Depreciation and amortization
|
|
(548
|
)
|
|
(718
|
)
|
Unrealized gains on investment securities
|
|
(600
|
)
|
|
(1,277
|
)
|
Other
|
|
(30
|
)
|
|
(97
|
)
|
Total deferred tax liabilities
|
|
(12,920
|
)
|
|
(19,585
|
)
|
|
|
|
|
|
Deferred tax asset (liability), net
|
|
$
|
307
|
|
|
$
|
(253
|
)
|
The Company files a federal income tax return and various state and local tax returns. The Company’s consolidated federal and state income tax returns for
2014
-
2016
are open for review by the Internal Revenue Service (“IRS”) and other state taxing authorities. Monarch Holding, a wholly owned subsidiary of Monarch Delaware, the Company’s consolidated VIE, was audited by the IRS for the tax year
2016
and there were no findings.
9. COMMITMENTS AND CONTINGENCIES
Litigation and Legal Proceedings
In the ordinary course of business, the Company is involved in various legal proceedings, specifically claims litigation. The Company’s insurance subsidiaries participate in most of these proceedings by either defending third-party claims brought against insureds or litigating first-party coverage claims. The Company accounts for such activity through the establishment of loss and LAE reserves. The Company’s management believes that the ultimate liability, if any, with respect to such ordinary-course claims litigation, after consideration of provisions made for potential losses and costs of defense, is immaterial to the Company’s consolidated financial statements. The Company is also occasionally involved in other legal and regulatory proceedings, some of which may assert claims for substantial amounts, making the Company party to individual actions in which extra contractual damages, punitive damages or penalties, such as claims alleging bad faith in the handling of insurance claims, are sought.
The Company reviews the outstanding matters, if any, on a quarterly basis. The Company accrues for estimated losses and contingent obligations in the consolidated financial statements if and when the obligation or potential loss from any litigation, legal proceeding or claim is considered probable and the amount of the potential exposure is reasonably estimable. The Company records such probable and estimable losses, through the establishment of legal expense reserves. As events evolve, facts concerning litigation and contingencies become know and as additional information becomes available, the Company’s management reassesses its potential liabilities related to pending claims and litigation and may revise its previous estimates and make appropriate adjustment to the financial statements. Estimates that require judgment are subject to change and are based on management’s assessment, including the advice of legal counsel, the expected outcome of litigation and legal proceedings or other dispute resolution proceedings or the expected resolution of contingencies. The Company’s management believes that the Company’s accruals for probable and estimable losses are reasonable and that the amounts accrued do not have a material effect on the Company’s consolidated financial statements.
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2017
The Company is a party to a Co-Existence Agreement effective as of August 30, 2013 (the “Co-Existence Agreement”) with Federated Mutual Insurance Company (“Mutual”) pursuant to which we agreed to certain restrictions on its use of the word “FEDERATED” without the word “NATIONAL” when referring to the Company and FNIC. In response to Mutual’s allegations that our use of the word “FED” as part of our federally registered “FEDNAT” trademark infringes on Mutual’s federal and common law trademark rights, in July 2016 we filed a declaratory judgment action for non-infringement of trademark in the U.S. District Court for the Southern District of Florida seeking a declaration that our federally registered trademark “FEDNAT” does not infringe any alleged trademark rights of Mutual and that Mutual does not own any trademark rights to the name or mark “FED” in connection with insurance services outside of Owatonna, Minnesota. In response to Mutual’s demand for arbitration against us alleging a breach of the Co-Existence Agreement, on February 16, 2018 the arbitrator agreed that our “FEDNAT” trademark does not infringe on Mutual’s federal or common law trademark rights. As a result, we have begun the process of re-branding the Company to use the FEDNAT name. The arbitrator also required us to cease using the Federated National name within 90 days. Unless the Company is able to reach agreement with Mutual regarding the timing of the name change, the Company intends to challenge that portion of the arbitration award in federal court.
On March 2, 2017, the Company filed a complaint in Broward County, Florida court to enforce the terms of the restrictive covenants set forth in the Amended and Restated Non-Competition, Non-Disclosure and Non-Solicitation Agreement dated August 5, 2013, as amended, entered into between Peter J. Prygelski, III and our company during Mr. Prygelski’s employment with us and set forth in the separation agreement he entered into in connection with his separation from our company. We believe that he accepted employment with a competitor in contravention of these restrictive covenants and therefore we are seeking injunctive relief, declaratory relief and damages. Prygelski has also filed an arbitration seeking declaratory relief as to his obligations under the above-referenced agreements and to recover the remainder of his severance and health insurance premium reimbursements. Because we are seeking monetary relief, we have filed a counterclaim in the arbitration seeking damages and recovery of separation payments. The litigation seeking injunctive relief and the companion arbitration related to damages are ongoing. The final hearing on the arbitration is scheduled for May 14, 2018. There can be no assurances as to the outcome of this matter.
Assessment Related Activity
The Company operates in a regulatory environment where certain entities and organizations have the authority to require us to participate in assessments. Currently these entities and organizations include: Florida Insurance Guaranty Association (“FIGA”), Citizens Property Insurance Corporation (“Citizens”), FHCF, Florida Joint Underwriters Insurance Association (“JUA”), Georgia Insurers Insolvency Pool (“GIIP”), Special Insurance Fraud Fund (“SIIF”), Fair Access to Insurance Requirements Plan (“FAIRP”), Georgia Automobile Insurance Plan (“GAIP”), Property Insurance Association of Louisiana (“PIAL”), Louisiana Automobile Insurance Plan (“LAIP”), South Carolina Property & Casualty Insurance Guaranty Association (“SCPCIGA”), Texas Property and Casualty Insurance Guaranty Association (“TPCIGA”), Texas Windstorm Insurance Association (“TWIA”), Texas Automobile Insurance Plan Association (“TAIPA”), Alabama Insurance Guaranty Association (“AIGA”), and Alabama Insurance Underwriters Association (“AIUA”). As a direct premium writer in Florida, we are required to participate in certain insurer solvency associations under Florida law, administered by FIGA.
FNIC is also required to participate in an insurance apportionment plan under Florida law, which is referred to as a JUA Plan. The JUA Plan provides for the equitable apportionment of any profits realized, or losses and expenses incurred, among participating automobile insurers. In the event of an underwriting deficit incurred by the JUA Plan, which is not recovered through the policyholders in the JUA Plan, such deficit shall be recovered from the companies participating in the JUA Plan in the proportion that the net direct written premiums of each such member during the preceding calendar year bear to the aggregate net direct premiums written in this state by all members of the JUA Plan. There were no material assessments by the JUA Plan as of
December 31, 2017
. Future assessments by the JUA and the JUA Plan are indeterminable at this time.
Leases
The Company is committed under various operating lease agreements for office space. FNHC and its subsidiaries lease certain facilities, furniture and equipment under long-term lease agreements. Rental expense for the years ended
December 31, 2017
,
2016
and
2015
was
$0.6 million
,
$0.6 million
and
$0.7 million
, respectively.
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2017
Future minimum lease payments under these agreements are as follows:
|
|
|
|
|
|
|
|
Aggregate Minimum
|
Year Ended December 31,
|
|
Lease Payments
|
|
|
(in thousands)
|
2018
|
|
$
|
780
|
|
2019
|
|
1,443
|
|
2020
|
|
1,488
|
|
2021
|
|
1,532
|
|
2022
|
|
1,579
|
|
Thereafter
|
|
5,938
|
|
Total
|
|
$
|
12,760
|
|
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2017
10. SHAREHOLDERS’ EQUITY
Common Stock Repurchases
The Company may repurchase shares in open market transaction or under Rule 10b5-1 trading plans from time to time in its discretion, based on ongoing assessments of the Company’s capital needs, the market price of its common stock and general market conditions. The amount and timing of all repurchase transactions are contingent upon market conditions, applicable legal requirements and other factors.
In November 2016, the Company’s Board of Directors authorized a program, which program may be modified, suspended or terminated by the Company at any time without notice, to repurchase shares of common stock of FNHC, at such times and at prices as management determines advisable, up to an aggregate of
$10.0 million
through March 1, 2017.
In March 2017, the Company’s Board of Directors authorized an additional
$10.0 million
share buyback program to repurchase shares of common stock through March 31, 2018.
During the year ended
December 31, 2017
, the Company repurchased
654,250
shares of its common stock at a total cost of
$10.6 million
, which is an average price per share of $
16.23
. The remaining availability for future repurchases of the Company’s common stock from the March 2017 Board of Directors’ authorization was
$0.8 million
as of
December 31, 2017
.
In December 2017, the Company’s Board of Directors authorized an additional share repurchase program under which the Company may repurchase up to
$10.0 million
of its outstanding shares of common stock through December 31, 2018. Together with the
$0.8 million
remaining as of December 31, 2017 from the Company’s previous stock repurchase authorization, the Company has available to it an aggregate of
$10.8 million
for future repurchases of its common stock.
Stock Compensation Plan
In April 2012, the Company’s Board of Directors adopted, and in September 2012 the Company’s shareholders approved, the Company’s 2012 Stock Incentive Plan (the “2012 Plan”). The 2012 Plan permits the issuance of up to
1,000,000
shares of the Company’s common stock, subject to adjustment as provided for in the 2012 Plan, in connection with the grant of a variety of equity incentive awards, such as stock options and restricted stocks. Officers, directors, executive management and all other employees of the Company and its subsidiaries are eligible to participate in the 2012 Plan. Awards may be granted singly, in combination, or in tandem. The 2012 Plan will expire on
April 5, 2022
.
Share-Based Compensation Expense
Share-based compensation arrangements include the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
(In thousands)
|
Restricted stock
|
|
$
|
2,846
|
|
|
$
|
3,831
|
|
|
$
|
2,930
|
|
Stock options
|
|
—
|
|
|
—
|
|
|
33
|
|
Total share-based compensation expense
|
|
$
|
2,846
|
|
|
$
|
3,831
|
|
|
$
|
2,963
|
|
|
|
|
|
|
|
|
Intrinsic value of options exercised
|
|
$
|
3,714
|
|
|
$
|
13,732
|
|
|
$
|
1,124
|
|
Fair value of restricted stock vested
|
|
$
|
23,278
|
|
|
$
|
41,495
|
|
|
$
|
2,303
|
|
The intrinsic value of options exercised represents the difference between the stock option exercise price and the weighted average closing stock price of FNHC common stock on the exercise dates, as reported on the NASDAQ Global Market.
The unamortized share-based compensation expense is
$4.3 million
for the year ended
December 31, 2017
, which will be recognized over the remaining weighted average vesting period of approximately
1.35
years.
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2017
Stock Option Awards
A summary of the Company’s stock option activity includes the following:
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
Weighted Average
Option
Exercise Price
|
Outstanding at January 1, 2015
|
|
219,285
|
|
|
$
|
3.79
|
|
Granted
|
|
—
|
|
|
$
|
—
|
|
Exercised
|
|
(44,652
|
)
|
|
$
|
3.81
|
|
Canceled
|
|
—
|
|
|
$
|
—
|
|
Outstanding at December 31, 2015
|
|
174,633
|
|
|
$
|
3.79
|
|
Granted
|
|
—
|
|
|
$
|
—
|
|
Exercised
|
|
(94,249
|
)
|
|
$
|
3.85
|
|
Canceled
|
|
(900
|
)
|
|
$
|
4.40
|
|
Outstanding at December 31, 2016
|
|
79,484
|
|
|
$
|
3.70
|
|
Granted
|
|
—
|
|
|
$
|
—
|
|
Exercised
|
|
(29,133
|
)
|
|
$
|
3.68
|
|
Canceled
|
|
—
|
|
|
$
|
—
|
|
Outstanding at December 31, 2017
|
|
50,351
|
|
|
$
|
3.72
|
|
Stock options outstanding and exercisable in a select price range is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding and Exercisable
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
|
|
|
|
Shares Outstanding
|
|
Contractual Life
|
|
Weighted Average
|
|
Aggregate
|
Range of Exercise Price
|
|
and Exercisable
|
|
(years)
|
|
Exercise Price
|
|
Intrinsic Value
|
$2.45 - $4.40
|
|
50,351
|
|
3.79
|
|
$3.72
|
|
647,010
|
Restricted Stock Awards
The Company recognizes share-based compensation expense for all restricted stock awards (“RSAs”) held by the Company’s directors, executives and other key employees. The accounting charge is measured at the grant date as the fair value of FNHC common stock and expensed as non-cash compensation over the vesting term using the straight-line basis for service awards and the accelerated basis for performance‑based awards with graded vesting. Certain cliff vesting awards contain performance criteria which are tied to the achievement of certain market conditions. This value is recognized as expense over the service period using the straight‑line recognition method.
During the years ended
December 31, 2017
and
2016
, the Board of Directors granted
106,454
and
128,472
RSAs, respectively, vesting over
three
or
five
years, to the Company’s directors, executives and other key employees.
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2017
RSA activity includes the following:
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
Weighted Average
Grant Date
Fair Value
|
Outstanding at January 1, 2015
|
|
447,801
|
|
|
$
|
16.84
|
|
Granted
|
|
116,140
|
|
|
$
|
27.53
|
|
Vested
|
|
(145,134
|
)
|
|
$
|
15.87
|
|
Canceled
|
|
—
|
|
|
$
|
—
|
|
Outstanding at December 31, 2015
|
|
418,807
|
|
|
$
|
20.14
|
|
Granted
|
|
128,472
|
|
|
$
|
19.16
|
|
Vested
|
|
(204,916
|
)
|
|
$
|
20.25
|
|
Canceled
|
|
(5,160
|
)
|
|
20.58
|
|
Outstanding at December 31, 2016
|
|
337,203
|
|
|
$
|
19.69
|
|
Granted
|
|
106,454
|
|
|
$
|
17.95
|
|
Vested
|
|
(140,514
|
)
|
|
$
|
16.57
|
|
Canceled
|
|
(5,600
|
)
|
|
$
|
19.80
|
|
Outstanding at December 31, 2017
|
|
297,543
|
|
|
$
|
20.54
|
|
The weighted average grant date fair value is measured at the closing price of FNHC common stock on the grant date, as reported on the NASDAQ Global Market.
Accumulated Other Comprehensive Income
Accumulated other comprehensive income consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
|
|
Before
Tax
|
|
Income
Tax
|
|
Net
|
|
Before
Tax
|
|
Income
Tax
|
|
Net
|
|
|
(In thousands)
|
Accumulated other comprehensive income (loss),
|
|
|
|
|
|
|
|
|
|
|
|
|
beginning of period
|
|
$
|
3,324
|
|
|
$
|
(1,201
|
)
|
|
$
|
2,123
|
|
|
$
|
6,110
|
|
|
$
|
(2,247
|
)
|
|
$
|
3,863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) before reclassifications
|
|
7,511
|
|
|
(2,640
|
)
|
|
4,871
|
|
|
259
|
|
|
(111
|
)
|
|
148
|
|
Reclassification adjustment for realized gains included
|
|
|
|
|
|
|
|
|
|
|
|
|
in net income
|
|
(8,548
|
)
|
|
3,248
|
|
|
(5,300
|
)
|
|
(3,045
|
)
|
|
1,157
|
|
|
(1,888
|
)
|
|
|
(1,037
|
)
|
|
608
|
|
|
(429
|
)
|
|
(2,786
|
)
|
|
1,046
|
|
|
(1,740
|
)
|
Accumulated other comprehensive income (loss),
|
|
|
|
|
|
|
|
|
|
|
|
|
end of period
|
|
$
|
2,287
|
|
|
$
|
(593
|
)
|
|
$
|
1,694
|
|
|
$
|
3,324
|
|
|
$
|
(1,201
|
)
|
|
$
|
2,123
|
|
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2017
11. EMPLOYEE BENEFIT PLAN
The Company sponsors a profit sharing plan under Section 401(K) of the Internal Revenue Code, which is a defined contribution plan that allows employees to defer compensation through contributions to the 401(K) Plan. This plan covers substantially all employees who meet specified service requirements and includes a
100%
match up to the first
6%
of an employee’s salary, not to exceed statutory limits. Additionally, the Company may make additional profit-sharing contributions.
For the years ended
December 31, 2017
and
2016
, the Company made no additional profit-sharing contribution.
The Company’s total contributions to the 401(K) Plan were
$0.8 million
,
$0.9 million
and
$0.6 million
for the years ended
December 31, 2017
,
2016
and
2015
, respectively.
12. RELATED PARTY TRANSACTIONS
The Company paid investment fees to Crosswinds AUM, a wholly owned subsidiary of Crosswinds Holdings, of
$0.3 million
,
$0.2 million
and
$0.2 million
, for the years ended
December 31, 2017
,
2016
and
2015
, respectively.
The Company entered into catastrophe excess of loss and quota share reinsurance agreements with TransRe. For the years ended
December 31, 2017
,
2016
and
2015
, the Company ceded premiums related to these agreements of
$11.3 million
,
$5.0 million
and
$4.3 million
, respectively. In connection with Hurricane Irma in 2017, Hurricane Matthew in 2016 and the quota share agreements, the Company ceded losses of
$16.1 million
,
$0.8 million
and
$0.1 million
for the years ended
December 31, 2017
,
2016
and
2015
, relating to these agreements, respectively.
Bruce F. Simberg, the Company’s Chairman of the Board, is a partner of the Hollywood, Florida law firm of Conroy Simberg, which specializes in insurance defense and coverage matters. The Company paid legal fees to Conroy Simberg for services rendered in the amount of
$0
,
$72,198
and
$26,286
for the years ended
December 31, 2017
,
2016
and
2015
, respectively. We believe that the fees charged for services provided by Conroy Simberg are on terms as those that we could secure from a non-affiliated law firm. The firm has handled only a limited number of matters for the Company. Mr. Simberg has not been personally involved in any of the legal matters handled by the firm for the Company and he received
de minimis
direct personal benefit from the fees paid to the firm by the Company. The firm is no longer working any current cases for the Company and we do not, at this time, anticipate retaining the firm for future matters.
The Company recorded claims adjustment service fees and other expenses to SECCC, our
33%
owned subsidiary, of
$17.0 million
,
$3.1 million
and
$0.1 million
for the years ended
December 31, 2017
,
2016
and
2015
, respectively. Additionally, the Company recognized partnership income (loss), which is recognized in other income in the consolidated statements of operations, of
2.0 million
,
$0.2 million
and greater than
$(0.1) million
for the years ended
December 31, 2017
,
2016
and
2015
, respectively.
Refer to Note
7
. Long-Term Debt, in the notes to consolidated financial statements, for additional information regarding the note payable to TransRe.
13. EARNINGS PER SHARE
Basic earnings per share (“EPS”) is computed by dividing net income by the weighted average number of common shares outstanding for the period, including outstanding unvested restricted stock awards and vested restricted stock awards during the period. Diluted EPS is computed by dividing net income by the weighted average number of shares outstanding, noted above, adjusted for the dilutive effect of stock options. Dilutive securities are common stock equivalents that are freely exercisable into common stock at less than market prices or otherwise dilute earnings if converted. The net effect of common stock equivalents is based on the incremental common stock that would be issued upon the assumed exercise of common stock options and the vesting of RSAs using the treasury stock method. Common stock equivalents are not included in diluted earnings per share when their inclusion is antidilutive.
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2017
The computations of basic and diluted net income per share are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
(In thousands, except per share data)
|
Net income attributable to Federated National Holding Company shareholders
|
|
$
|
7,989
|
|
|
$
|
1,015
|
|
|
$
|
39,301
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding - basic
|
|
13,170
|
|
|
13,758
|
|
|
13,729
|
|
Net income per share - basic
|
|
|
$0.61
|
|
|
|
$0.07
|
|
|
|
$2.86
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding - basic
|
|
13,170
|
|
|
13,758
|
|
|
13,729
|
|
Dilutive effect of stock compensation plans
|
|
80
|
|
|
164
|
|
|
268
|
|
Weighted average number of common shares outstanding - diluted
|
|
13,250
|
|
|
13,922
|
|
|
13,997
|
|
Net income per share - diluted
|
|
$
|
0.60
|
|
|
$
|
0.07
|
|
|
$
|
2.81
|
|
|
|
|
|
|
|
|
Dividends per share
|
|
$
|
0.32
|
|
|
$
|
0.27
|
|
|
$
|
0.18
|
|
Dividends Declared
In March 2017, the Company’s Board of Directors declared a dividend of
$0.08
per common share, paid in June 2017, totaling
$1.1 million
.
In June 2017, the Company’s Board of Directors declared a dividend of
$0.08
per common share, paid in September 2017, totaling
$1.1 million
.
In September 2017, the Company’s Board of Directors declared a dividend of
$0.08
per common share, paid in December 2017, totaling
$1.1 million
.
In November 2017, the Company’s Board of Directors declared a dividend of
$0.08
per common share, paid in March 2018, totaling
$1.0 million
.
14. VARIABLE INTEREST ENTITY
FNHC, Crosswinds Holdings and TransRe own
42.4%
,
42.4%
, and
15.2%
, respectively, of Monarch Delaware as of
December 31, 2017
. Monarch Delaware owns
100%
of Monarch Holding, which owns
100%
of MNIC. MNIC entered into a Managing General Agency and Claims Administration Agreement (the “Monarch MGA Agreement”) with FedNat Underwriters, Inc. (“FNU”), a wholly-owned subsidiary of FNHC, to operate MNIC’s insurance operations. Additionally, the Monarch Entities entered into an Investment Management Agreement (“Investment Agreement”) with an affiliate of Crosswinds to perform as the Monarch Entities’ investment manager. Lastly, Monarch Holding entered into a
$5.0 million
debt agreement with TransRe.
We believe FNU, through the Monarch MGA Agreement, directs the activities which most significantly impact the Monarch Entities’ insurance operating company, MNIC. MNIC’s activities directed by FNU through the Monarch MGA Agreement include underwriting and claims. As a result, MNIC is a VIE because the equity holders, as a group, lack the characteristics of a controlling financial interest.
In addition to having power to direct the activities which most significantly impact MNIC, FNHC has the obligation to absorb the losses and/or the right to receive benefits that potentially could be significant through its
42.4%
indirect equity interests in MNIC through Monarch Delaware and Monarch Holding.
As a result, FNHC is the primary beneficiary of MNIC, resulting in Monarch Delaware, MNIC’s indirect parent company, consolidating into our financial statements.
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2017
The carrying amounts of Monarch Delaware, which can only be used to settle obligations of Monarch Delaware, and liabilities of Monarch Delaware for which creditors do not have recourse include the following:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2017
|
|
2016
|
|
|
(In thousands)
|
Assets:
|
|
|
Investments:
|
|
|
|
|
Debt securities, available-for-sale, at amortized cost
|
|
$
|
25,111
|
|
|
$
|
27,100
|
|
Equity securities, available-for-sale, at fair value
|
|
1,173
|
|
|
1,604
|
|
Total investments
|
|
26,284
|
|
|
28,704
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
14,211
|
|
|
15,668
|
|
Reinsurance recoverable
|
|
3,323
|
|
|
—
|
|
Prepaid reinsurance premiums
|
|
2,481
|
|
|
1,070
|
|
Premiums receivable, net
|
|
1,184
|
|
|
1,584
|
|
Deferred acquisition costs
|
|
1,722
|
|
|
1,539
|
|
Other assets
|
|
2,322
|
|
|
371
|
|
Total assets
|
|
$
|
51,527
|
|
|
$
|
48,936
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
Loss and loss adjustment expense reserves
|
|
6,356
|
|
|
1,659
|
|
Unearned premiums
|
|
8,752
|
|
|
8,406
|
|
Reinsurance payable
|
|
1,802
|
|
|
864
|
|
Debt
|
|
4,930
|
|
|
4,909
|
|
Other liabilities
|
|
1,825
|
|
|
1,026
|
|
Total liabilities
|
|
$
|
23,665
|
|
|
$
|
16,864
|
|
Earned premiums and loss and LAE, attributable to Monarch Delaware, were
$9.4 million
and
$12.5 million
,
$4.7 million
and
$2.9 million
, and
$0.6 million
and
$0.3 million
, for the years ended
December 31, 2017
,
2016
and
2015
, respectively.
The net cash flows generated by Monarch Delaware are reflected in cash flows from operations in the consolidated statements of cash flows. Cash flows used in operating activities by Monarch Delaware were
$3.8 million
for the year ended
December 31, 2017
, as compared to cash flows provided by operating activities by Monarch Delaware of
$6.8 million
and
$4.7 million
for the years ended and
December 31, 2016
and
2015
, respectively.
15. STATUTORY ACCOUNTING AND DIVIDEND RESTRICTIONS
The Company’s insurance companies are subject to regulations and standards of the Florida OIR. These standards require that insurance companies prepare statutory-basis financial statements in accordance with the National Association of Insurance Commissioners (“NAIC”) Accounting Practices and Procedures Manual. The Company did not use any prescribed or permitted statutory accounting practices that differed from the NAIC’s statutory accounting practices as of
December 31, 2017
.
The Company’s insurance companies are required to report their risk-based capital (“RBC”) each December 31. Failure to maintain an adequate RBC could subject the Company to regulatory action and could restrict the payment of dividends. As of
December 31, 2017
, the RBC levels of the Company’s insurance companies did not subject them to any regulatory action.
Additionally, Florida Statutes require the Company’s insurance companies to maintain specified levels of statutory capital and restrict the timing and amount of dividends and other distributions that may be paid to the parent company. These standards require dividends to be paid only from statutory unassigned surplus. The maximum dividend that may be paid by the Company’s insurance companies to their parent company, without prior regulatory approval is limited to the lesser of statutory net income from operations of the
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2017
preceding calendar year, not including realized capital gains, plus a
2 years
carryforward or
10.0%
of statutory unassigned surplus as of the preceding year end. A dividend may also be taken without prior regulatory approval if (a) the dividend is equal to or less than the greater of (i)
10.0%
of the insurer’s surplus as to policyholders derived from realized net operating profits on its business and net realized capital gains; or (ii) the insurer’s entire net operating profits and realized net capital gains derived during the immediately preceding calendar year; (b) the insurer will have surplus as to policyholders equal to or exceeding
115 percent
of the minimum required statutory surplus as to policyholders after the dividend or distribution is made; and (c) the insurer has filed notice with the Florida OIR at least
10
business days prior to the dividend payment or distribution, or such shorter period of time as approved by the Florida OIR on a case-by-case basis. These dividends are referred to as “ordinary dividends.” However, if a dividend, together with other dividends paid within the preceding
12 months
, exceeds this statutory limit or is paid from sources other than earned surplus, the entire dividend is generally considered an “extraordinary dividend” and must receive prior regulatory approval before such dividend can be paid.
As of
December 31, 2017
and
2016
, on a combined statutory basis, the capital and surplus of the Company’s insurance companies was
$188.0 million
and
$172.1 million
, respectively. Combined statutory operational results of the Company’s insurance companies was a net loss of $
19.6 million
, net loss of
$37.0 million
and net income of
$23.9 million
for the years ended
December 31, 2017
,
2016
and
2015
, respectively. Statutory capital and surplus exceeds amounts necessary to satisfy regulatory requirements.
16. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following tables include the revisions as discussed on Note 1. Organization, Consolidation and Basis of Presentation in these notes to consolidated financial statements, set forth under the “Revisions to Previously Issued Financial Statements” to the Company’s previously reported consolidated statements of operations (unaudited) for each of the quarterly periods ended March 31, 2016 to September 30, 2017.
A summary of the Company’s unaudited quarterly results of operations includes the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
Second Quarter
|
|
Third Quarter
|
|
Fourth Quarter
|
|
|
|
|
As Reported
|
|
As Adjusted
|
|
As Reported
|
|
As Adjusted
|
|
As Reported
|
|
As Adjusted
|
|
|
|
|
|
|
(In thousands, except per share data)
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned
|
|
$
|
78,493
|
|
|
$
|
81,660
|
|
|
$
|
83,159
|
|
|
$
|
83,554
|
|
|
$
|
78,663
|
|
|
$
|
80,764
|
|
|
$
|
87,503
|
|
|
|
Total revenue
|
|
$
|
92,923
|
|
|
$
|
93,054
|
|
|
$
|
97,563
|
|
|
$
|
98,159
|
|
|
$
|
95,892
|
|
|
$
|
98,697
|
|
|
$
|
101,752
|
|
|
|
Losses and loss adjustment expenses
|
|
$
|
50,831
|
|
|
$
|
56,899
|
|
|
$
|
54,956
|
|
|
$
|
56,417
|
|
|
$
|
72,935
|
|
|
$
|
75,367
|
|
|
$
|
58,874
|
|
|
|
Total costs and expenses
|
|
$
|
87,813
|
|
|
$
|
89,170
|
|
|
$
|
90,311
|
|
|
$
|
92,504
|
|
|
$
|
107,300
|
|
|
$
|
108,876
|
|
|
$
|
92,185
|
|
|
|
Net income (loss) attributable to Federated National Holding Company shareholders
|
|
$
|
3,145
|
|
|
$
|
2,422
|
|
|
$
|
4,945
|
|
|
$
|
3,995
|
|
|
$
|
(5,511
|
)
|
|
$
|
(4,724
|
)
|
|
$
|
6,296
|
|
|
|
Net income (loss) per share - basic
|
|
$
|
0.23
|
|
|
$
|
0.18
|
|
|
$
|
0.38
|
|
|
$
|
0.30
|
|
|
$
|
(0.42
|
)
|
|
$
|
(0.36
|
)
|
|
$
|
0.48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
Second Quarter
|
|
Third Quarter
|
|
Fourth Quarter
|
|
|
As Reported
|
|
As Adjusted
|
|
As Reported
|
|
As Adjusted
|
|
As Reported
|
|
As Adjusted
|
|
As Reported
|
|
As Adjusted
|
|
|
(In thousands, except per share data)
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned
|
|
$
|
54,997
|
|
|
$
|
54,997
|
|
|
$
|
60,045
|
|
|
$
|
60,045
|
|
|
$
|
69,405
|
|
|
$
|
69,405
|
|
|
$
|
75,425
|
|
|
$
|
76,922
|
|
Total revenue
|
|
$
|
68,960
|
|
|
$
|
65,010
|
|
|
$
|
75,064
|
|
|
$
|
70,786
|
|
|
$
|
83,790
|
|
|
$
|
81,758
|
|
|
$
|
88,570
|
|
|
$
|
89,971
|
|
Losses and loss adjustment expenses
|
|
$
|
29,545
|
|
|
$
|
31,260
|
|
|
$
|
47,025
|
|
|
$
|
48,983
|
|
|
$
|
43,613
|
|
|
$
|
45,973
|
|
|
$
|
67,158
|
|
|
$
|
71,594
|
|
Total costs and expenses
|
|
$
|
53,562
|
|
|
$
|
51,770
|
|
|
$
|
73,249
|
|
|
$
|
71,090
|
|
|
$
|
82,250
|
|
|
$
|
78,914
|
|
|
$
|
104,590
|
|
|
$
|
103,948
|
|
Net income (loss) attributable to Federated National Holding Company shareholders
|
|
$
|
9,535
|
|
|
$
|
8,114
|
|
|
$
|
991
|
|
|
$
|
(405
|
)
|
|
$
|
1,394
|
|
|
$
|
2,099
|
|
|
$
|
(12,116
|
)
|
|
$
|
(8,793
|
)
|
Net income (loss) per share - basic
|
|
$
|
0.69
|
|
|
$
|
0.59
|
|
|
$
|
0.07
|
|
|
$
|
(0.03
|
)
|
|
$
|
0.10
|
|
|
$
|
0.15
|
|
|
$
|
(0.89
|
)
|
|
$
|
(0.65
|
)
|
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2017
The following tables summarize the impacts of the revisions on the Company’s previously reported consolidated statements of operations (unaudited) for each of the quarterly periods ended March 31, 2017 to September 30, 2017, the six months ended June 30, 2017, and the nine months ended September 30, 2017.
The revisions as follows will appear in the Company’s applicable 2018 quarterly financial statements in the Quarterly Reports, when filed.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
Nine Months Ended
|
|
June 30, 2017
|
|
September 30, 2017
|
|
As Reported
|
|
As Adjusted
|
|
As Reported
|
|
As Adjusted
|
Revenue:
|
(In thousands, except share and per share data)
|
Net premiums earned
|
$
|
161,652
|
|
|
$
|
165,214
|
|
|
$
|
240,315
|
|
|
$
|
245,978
|
|
Net investment income
|
4,878
|
|
|
4,878
|
|
|
7,481
|
|
|
7,481
|
|
Net realized investment gains
|
2,543
|
|
|
2,543
|
|
|
8,644
|
|
|
8,644
|
|
Direct written policy fees
|
9,571
|
|
|
9,519
|
|
|
13,222
|
|
|
13,617
|
|
Other income
|
9,637
|
|
|
9,059
|
|
|
14,511
|
|
|
14,190
|
|
Total revenue
|
188,281
|
|
|
191,213
|
|
|
284,173
|
|
|
289,910
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses
|
108,722
|
|
|
113,316
|
|
|
181,657
|
|
|
188,683
|
|
Commissions and other underwriting expenses
|
57,336
|
|
|
58,497
|
|
|
86,578
|
|
|
86,883
|
|
General and administrative expenses
|
9,695
|
|
|
9,695
|
|
|
14,737
|
|
|
14,737
|
|
Interest expense
|
166
|
|
|
166
|
|
|
247
|
|
|
247
|
|
Total costs and expenses
|
175,919
|
|
|
181,674
|
|
|
283,219
|
|
|
290,550
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
12,362
|
|
|
9,539
|
|
|
954
|
|
|
(640
|
)
|
Income taxes
|
4,573
|
|
|
3,423
|
|
|
350
|
|
|
(358
|
)
|
Net income (loss)
|
7,789
|
|
|
6,116
|
|
|
604
|
|
|
(282
|
)
|
Net loss attributable to non-controlling interest
|
(301
|
)
|
|
(301
|
)
|
|
(1,975
|
)
|
|
(1,975
|
)
|
Net income attributable to Federated National
|
|
|
|
|
|
|
|
Holding Company shareholders
|
$
|
8,090
|
|
|
$
|
6,417
|
|
|
$
|
2,579
|
|
|
$
|
1,693
|
|
|
|
|
|
|
|
|
|
Net income per share attributable to Federated National
|
|
|
|
|
|
|
|
Holding Company shareholders:
|
|
|
|
|
|
|
|
Basic
|
$
|
0.61
|
|
|
$
|
0.48
|
|
|
$
|
0.20
|
|
|
$
|
0.13
|
|
Diluted
|
$
|
0.60
|
|
|
$
|
0.48
|
|
|
$
|
0.19
|
|
|
$
|
0.13
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares of common stock
|
|
|
|
|
|
|
|
outstanding:
|
|
|
|
|
|
|
|
Basic
|
13,305
|
|
|
13,305
|
|
|
13,211
|
|
|
13,211
|
|
Diluted
|
13,405
|
|
|
13,405
|
|
|
13,302
|
|
|
13,302
|
|
|
|
|
|
|
|
|
|
Dividends declared per share of common stock
|
$
|
0.16
|
|
|
$
|
0.16
|
|
|
$
|
0.24
|
|
|
$
|
0.24
|
|
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Three Months Ended
|
|
Three Months Ended
|
|
March 31, 2017
|
|
June 30, 2017
|
|
September 30, 2017
|
|
As Reported
|
|
As Adjusted
|
|
As Reported
|
|
As Adjusted
|
|
As Reported
|
|
As Adjusted
|
Revenue:
|
(In thousands, except share and per share data)
|
Net premiums earned
|
$
|
78,493
|
|
|
$
|
81,660
|
|
|
$
|
83,159
|
|
|
$
|
83,554
|
|
|
$
|
78,663
|
|
|
$
|
80,764
|
|
Net investment income
|
2,318
|
|
|
2,318
|
|
|
2,560
|
|
|
2,560
|
|
|
2,603
|
|
|
2,603
|
|
Net realized investment gains
|
(105
|
)
|
|
(105
|
)
|
|
2,648
|
|
|
2,648
|
|
|
6,101
|
|
|
6,101
|
|
Direct written policy fees
|
5,085
|
|
|
4,712
|
|
|
4,486
|
|
|
4,807
|
|
|
3,651
|
|
|
4,098
|
|
Other income
|
7,132
|
|
|
4,469
|
|
|
4,710
|
|
|
4,590
|
|
|
4,874
|
|
|
5,131
|
|
Total revenue
|
92,923
|
|
|
93,054
|
|
|
97,563
|
|
|
98,159
|
|
|
95,892
|
|
|
98,697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses
|
50,831
|
|
|
56,899
|
|
|
54,956
|
|
|
56,417
|
|
|
72,935
|
|
|
75,367
|
|
Commissions and other underwriting expenses
|
32,279
|
|
|
27,568
|
|
|
30,197
|
|
|
30,929
|
|
|
29,242
|
|
|
28,386
|
|
General and administrative expenses
|
4,619
|
|
|
4,619
|
|
|
5,076
|
|
|
5,076
|
|
|
5,042
|
|
|
5,042
|
|
Interest expense
|
84
|
|
|
84
|
|
|
82
|
|
|
82
|
|
|
81
|
|
|
81
|
|
Total costs and expenses
|
87,813
|
|
|
89,170
|
|
|
90,311
|
|
|
92,504
|
|
|
107,300
|
|
|
108,876
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
5,110
|
|
|
3,884
|
|
|
7,252
|
|
|
5,655
|
|
|
(11,408
|
)
|
|
(10,179
|
)
|
Income taxes
|
1,938
|
|
|
1,435
|
|
|
2,635
|
|
|
1,988
|
|
|
(4,223
|
)
|
|
(3,781
|
)
|
Net income (loss)
|
3,172
|
|
|
2,449
|
|
|
4,617
|
|
|
3,667
|
|
|
(7,185
|
)
|
|
(6,398
|
)
|
Net income (loss) attributable to non-controlling interest
|
27
|
|
|
27
|
|
|
(328
|
)
|
|
(328
|
)
|
|
(1,674
|
)
|
|
(1,674
|
)
|
Net income (loss) attributable to Federated National
|
|
|
|
|
|
|
|
|
|
|
|
Holding Company shareholders
|
$
|
3,145
|
|
|
$
|
2,422
|
|
|
$
|
4,945
|
|
|
$
|
3,995
|
|
|
$
|
(5,511
|
)
|
|
$
|
(4,724
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share attributable to Federated
|
|
|
|
|
|
|
|
|
|
|
|
National Holding Company shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.23
|
|
|
$
|
0.18
|
|
|
$
|
0.38
|
|
|
$
|
0.30
|
|
|
$
|
(0.42
|
)
|
|
$
|
(0.36
|
)
|
Diluted
|
$
|
0.23
|
|
|
$
|
0.18
|
|
|
$
|
0.37
|
|
|
$
|
0.30
|
|
|
$
|
(0.42
|
)
|
|
$
|
(0.36
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares of common stock
|
|
|
|
|
|
|
|
|
|
|
|
outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
13,432
|
|
|
13,432
|
|
|
13,171
|
|
|
13,171
|
|
|
13,135
|
|
|
13,135
|
|
Diluted
|
13,559
|
|
|
13,559
|
|
|
13,256
|
|
|
13,256
|
|
|
13,135
|
|
|
13,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per share of common stock
|
$
|
0.08
|
|
|
$
|
0.08
|
|
|
$
|
0.08
|
|
|
$
|
0.08
|
|
|
$
|
0.08
|
|
|
$
|
0.08
|
|
Certain prior period line items in the consolidated statements of comprehensive income, consolidated statements of changes in shareholders’ equity and consolidated statements of cash flows, were affected by the revisions of previously issued financial statements. All of the changes in the consolidated statements of cash flows were included in cash flows from operating activities and all of the changes in the consolidated statements of comprehensive income were isolated to the net income line, which has been addressed through the preceding disclosures.
Federated National Holding Company and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2017
17. SUBSEQUENT EVENTS
On February 16, 2018, the Company announced that the Board of Directors declared a dividend of
$0.08
per share, payable in June 2018.
On February 21, 2018, FNIC closed on its acquisition of the interest in Monarch Delaware held by the Company's joint venture partners for the agreed upon terms contemplated by the purchase and sale agreement with Crosswinds Investor and TransRe dated November 27, 2017. FNIC purchased Crosswinds Investor’s
42.4%
Class A membership interest and
50%
voting interest for
$12.3 million
, and TransRe’s
15.2%
non-voting membership interest in Monarch Delaware for
$4.4 million
. The outstanding principal balance and interest due on the
$5.0 million
promissory note to TransRe was paid in full. Following the closing, Monarch Delaware and Monarch Holdings were merged into MNIC. With the completion of these transactions, FNIC owns 100% of MNIC.
On February 28, 2018, in connection with the Company’s review of its subsidiaries’ financial condition and capital resources as of the end of the 2017 fiscal year, the Company’s Board of Directors approved an infusion of
$30.0 million
of capital into FNIC, effective December 31, 2017 for statutory accounting purposes, to support FNIC’s book of business.
On March 1, 2018, FNIC and MNIC have each entered into a Reimbursement Contract (the “Contracts”) with the State Board of Administration of Florida (“SBA”) for the 2018-2019 hurricane season. The SBA is the agency that administers the FHCF. The Contracts will reimburse FNIC and MNIC for covered property losses under their respective homeowners insurance policies resulting from hurricanes that cause damage in the State of Florida, from June 1, 2018 through May 31, 2019.
On March 13, 2018, the Company announced that it has decided to undergo an orderly withdrawal from the commercial general liability line of business and will begin the appropriate steps to withdraw from the line of business, including obtaining all required regulatory approvals.
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of
Federated National Holding Company
Opinion on Internal Control over Financial Reporting
We have audited Federated National Holding Company and subsidiaries’ internal control over financial reporting as of
December 31, 2017
, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Federated National Holding Company and subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2017
, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of
December 31, 2017
and
2016
, the related consolidated statements of operations, comprehensive income (loss), changes in shareholders’ equity and cash flows for each of the three years in the period ended
December 31, 2017
, and the related notes and the financial statement schedules listed in the index at Item 15 and our report dated
March 13, 2018
expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Charlotte, North Carolina
March 13, 2018