Table of Contents

Exhibit 99.1

American Reliable Insurance Company

(A wholly owned subsidiary of

American Bankers Insurance Group, Inc.)

Consolidated Financial Statements

As of and for the year ended December 31, 2014

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Table of Contents

American Reliable Insurance Company

(A wholly owned subsidiary of American Bankers Insurance Group, Inc.)

Index

As of and for the year ended December 31, 2014

 

		Page(s)
Independent Auditor’s Report			1
Financial Statements
Consolidated Balance Sheets at December 31, 2014			2
Consolidated Statement of Operations for the year ended December 31, 2014			3
Consolidated Statement of Comprehensive Income for the year ended December 31, 2014			4
Consolidated Statement of Changes in Stockholders’ Equity for the year ended December 31, 2014			5
Consolidated Statement of Cash Flows for the year ended December 31, 2014			6
Notes to Consolidated Financial Statements as of and for the year ended December 31, 2014			7-32

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Independent Auditor’s Report

To Board of Directors of

American Reliable Insurance Company:

We have audited the accompanying consolidated financial statements of American Reliable Insurance Company and its subsidiary (together, the “Company”), which comprise the consolidated balance sheet as of December 31, 2014, and the related consolidated statements of operations, comprehensive income, changes in stockholders’ equity, and cash flows for the year then ended.

Management’s Responsibility for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditor’s Responsibility

Our responsibility is to express an opinion on the consolidated financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the Company’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company at December 31, 2014, and the results of its operations and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America.

 

/s/ PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP

Philadelphia, Pennsylvania

July 2, 2015

 

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American Reliable Insurance Company

(A wholly owned subsidiary of American Bankers Insurance Group, Inc.)

Consolidated Balance Sheets

As of December 31, 2014

 

		December 31, 2014
		(in thousands except number of shares and per share amounts)
Assets
Invested assets:
Fixed maturities available for sale, at fair value (amortized cost - $154,818 in 2014)		$	165,498
Equity Securities available for sale, at fair value (cost - $8,195)			8,960
Short-term investments			24,639
Total invested assets			199,097
Cash and cash equivalents			52,293
Premiums and accounts receivable (net of allowance for doubtful accounts of $927)			25,941
Receivables from parent, subsidiaries, and affiliates			5,848
Reinsurance recoverables			59,846
Prepaid reinsurance premiums			75,688
Accrued investment income			1,919
Deferred acquisition costs			18,650
Property and equipment (at cost less accumulated depreciation of $9,060)			9,356
Federal income tax recoverable			4,152
Other assets			529
Total assets			453,319
Liabilities
Unearned premiums			172,234
Claims and benefits payable			88,370
Commissions payable			4,321
Reinsurance balance payable			13,219
Funds held under reinsurance			54,941
Payable to parent, subsidiaries, and affiliates			2,299
Deferred tax liability			823
Cash overdraft			3,572
Accounts payable and other liabilities			5,242
Total liabilities			345,021
Commitments and contingencies (Note 11)
Stockholders’ Equity
Capital stock, $20.04 par value, 255,000 shares authorized and 209,580 shares issued and outstanding			4,200
Additional paid-in capital			97,405
Retained earnings			(746	)
Accumulated other comprehensive income			7,439
Total stockholders’ equity			108,298
Total liabilities and stockholders’ equity		$	453,319

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

 

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American Reliable Insurance Company

(A wholly owned subsidiary of American Bankers Insurance Group, Inc.)

Consolidated Statement of Operations

Year Ended December 31, 2014

 

		Year Ended December 31,
		(in thousands)
		2014
Revenues:
Net written premiums		$	181,769
Change in unearned premiums			(11,503	)
Net earned premiums			170,266
Net investment income			9,547
Net realized gains (losses) on investments			3,726
Fees and other income			1,448
Total revenues			184,987
Benefits, losses and expenses:
Losses and loss expense incurred			110,517
Underwriting, general and administrative expenses			76,024
Total benefits, losses and expenses			186,541
Income (loss) before provision for income taxes			(1,554	)
Provision (benefit) for income taxes			(808	)
Net income (loss)		$	(746	)

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

 

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American Reliable Insurance Company

(A wholly owned subsidiary of American Bankers Insurance Group, Inc.)

Consolidated Statement of Comprehensive Income

Year Ended December 31, 2014

 

		Year ended December 31,
		(in thousands)
		2014
Net income (loss)		$	(746	)
Other comprehensive (loss) income
Change in unrealized gains/(losses) on securities, net of tax of $(98)			182
Change in other-than-temporary impairment gains/(losses) recognized, net of tax $183			(339	)
Total other comprehensive gain/(loss), net of tax			(157	)
Total comprehensive income (loss)		$	(903	)

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

 

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American Reliable Insurance Company

(A wholly owned subsidiary of American Bankers Insurance Group, Inc.)

Consolidated Statement of Changes in Stockholders’ Equity

December 31, 2014

 

														Accumulated
						Additional								Other				Total
		Capital				Paid-in				Retained				Comprehensive				Shareholders’
		Stock				Capital				Earnings				Income				Equity
		(in thousands)
Balance, December 31, 2013			4,200				90,145				—				7,596				101,941
Net income (loss)			—				—				(746	)			—				(746	)
Additional paid in capital			—				7,260				—				—				7,260
Change in net unrealized capital losses, net of taxes			—				—				—				(157	)			(157	)
Balance, December 31, 2014		$	4,200			$	97,405			$	(746	)		$	7,439			$	108,298

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

 

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American Reliable Insurance Company

(A wholly owned subsidiary of American Bankers Insurance Group, Inc.)

Consolidated Statement of Cash Flows

Year Ended December 31, 2014

 

		Year Ended December 31,
		(in thousands)
		2014
Operating Activities
Net income		$	(746	)
Adjustments to reconcile net income to net cash provided by operating activities:
Change in reinsurance recoverable			(20,040	)
Change in premiums and account receivables			(393	)
Change in deferred acquisition costs			(2,397	)
Change in accrued investment income			303
Change in other assets			2,995
Change in unearned premiums			(6,084	)
Change in claim reserves			27,326
Change in commission payable			766
Change in reinsurance balance payable			6,412
Change in funds held under reinsurance			12,021
Change in payable/receivable to/from parent and affiliates			(582	)
Change in other liabilities			(4,982	)
Change in income taxes			(4,203	)
Other items: Depreciation and amortization			324
Net realized gain/losses on investments			(3,726	)
Change in intangibles			693
Goodwill			118
Net cash provided by operating activities			7,805
Investing Activities
Sales of:
Fixed maturities available for sale			32,128
Equity securities available for sale			6,598
Maturities, prepayments and scheduled redemption of:
Fixed maturities available for sale			26,618
Commercial Mortgage on real estate			19,243
Other investments			611
Purchases of:
Fixed maturities available for sale			(38,310	)
Equity securities available for sale			(3,264	)
Other investments			—
Property and equipment			(850	)
Change in short term investments net			(9,476	)
Net cash provided in investment activities			33,298
Financing Activities
Change in cash overdraft			(6,115	)
Dividend paid			—
Return of capital			—
Net cash provided by/(used in) financing activities			(6,115	)
Net change in cash and cash equivalents			34,988
Cash and cash equivalents at beginning of the year			17,305
Cash and cash equivalents at end of the year		$	52,293

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

 

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American Reliable Insurance Company

(A wholly owned subsidiary of American Bankers Insurance Group, Inc.)

Notes to Consolidated Financial Statements

Year Ended December 31, 2014

Note 1 — Background

Organization

American Reliable Insurance Company (the “Company”), incorporated in the State of Arizona, is a wholly owned subsidiary of American Bankers Insurance Group, Inc. (“ABIG”), an insurance holding company domiciled in the State of Florida, which was an indirect wholly owned subsidiary of Assurant, Inc. (the “Former Parent”). The Former Parent is a Delaware corporation, whose common stock trades on the New York Stock Exchange (“NYSE”) under the symbol AIZ. Assurant, Inc. is a holding company whose subsidiaries provide specialized insurance products and related services in North America and select worldwide markets. On January 1, 2015, the Former Parent completed the sale of its general agency business and primary associated insurance carrier, the Company, to Global Indemnity Group, Inc., a subsidiary of Global Indemnity plc (the “Current Parent”). See Note 14, Subsequent Events¸ for further details on this transaction.

In January 2010, the Company acquired 100% of the stock of US Insurance Services (“USIS”), a general agency engaged in the motorcycle insurance business, establishing goodwill of $118 and a contract based intangible of $3,200 to be amortized over five years through January 2015. The acquisition of USIS allowed the company to expand their business with distributors outside its general agency marketplace.

Nature of Business

The Company underwrites multiple lines of property and casualty insurance in the United States. The Company’s principal products include mobile home, dwelling and personal fire, homeowners, personal inland marine and farmowners. The Company actively writes business throughout the United States primarily through general and specialty agents. The Company is incorporated in Arizona and is licensed and writes premium in all 50 states and the District of Columbia.

Note 2 — Summary of Significant Accounting Policies

Basis of Presentation

The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Amounts are presented in United States of America (“U.S.”) dollars and all amounts are in thousands, except for number of shares and per share amounts.

Consolidation

The consolidated financial statements as of and for the year ended December 31, 2014 includes the accounts of the Company and its wholly owned subsidiary, USIS. All inter-company transactions and balances are eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities. The most significant items on the Company’s financial statements affected by the use of estimates are investments, reinsurance recoverables, deferred income taxes, claims and benefits payable, unearned premiums, deferred acquisition costs (“DAC”) and commitments and contingencies. The estimates are sensitive to market conditions, investment yields, commissions and other acquisition expenses and other factors. Actual results could differ from the estimates reported. The Company believes all amounts reported are reasonable and adequate.

 

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American Reliable Insurance Company

(A wholly owned subsidiary of American Bankers Insurance Group, Inc.)

Notes to Consolidated Financial Statements

Year Ended December 31, 2014

 

Comprehensive Income

Comprehensive income is comprised of net income, net unrealized gains and losses on securities classified as available for sale, net unrealized gains and losses on other-than-temporarily impaired securities, less deferred income taxes.

Revenue and Expense Recognition

Premiums written are recognized as earned on a monthly pro rata basis. Unearned premiums represent the unexpired portion of written premiums on the in-force contracts. The Company recognizes revenues in accordance with Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) Topic 944, Financial Services-Insurance.

The company derives fee income from installment based premium payments. These fees are recognized as invoiced.

Fair Value

The Company uses an exit price for its fair value measurements. An exit price is defined as the amount received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In measuring fair value, the Company gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. See Note 4 for further information.

Investments

Fixed maturity and equity securities are classified as available-for-sale, as defined in the investments guidance, and reported at fair value. If the fair value is higher than the amortized cost for fixed maturity securities or the purchase cost for equity securities, the excess is an unrealized gain; and if lower than cost, the difference is an unrealized loss. Net unrealized gains and losses on securities classified as available-for-sale, less deferred income taxes, are included in accumulated other comprehensive income.

Short-term investments include money market funds. These amounts are reported at cost, which approximates fair value. Other investments consist of investments in tax credits which are reported at amortized cost.

The Company monitors its investment portfolio to identify investments that may be other-than-temporarily impaired. See Note 3 for further information.

Realized gains and losses on sales of investments are recognized on the specific identification basis.

Investment income is reported as earned net of investment expenses. The Company uses the interest method to recognize interest income on its commercial mortgage loans.

The Company anticipates prepayments of principal in the calculation of the effective yield for mortgage-backed securities and structured securities. The retrospective method is used to adjust the effective yield.

Cash and Cash Equivalents

The Company considers cash on hand, all operating cash and working capital cash to be cash equivalents. These amounts are carried at cost, which approximates fair value. Cash balances are reviewed at the end of each reporting period to determine if negative cash balances exist. If negative cash balances do exist,

 

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American Reliable Insurance Company

(A wholly owned subsidiary of American Bankers Insurance Group, Inc.)

Notes to Consolidated Financial Statements

Year Ended December 31, 2014

 

the cash accounts are netted with other positive cash accounts of the same bank provided the right of offset exists between the accounts. If the right of offset does not exist, the negative cash balances are reclassified to accounts payable. Negative cash balances of $3,572 were reclassified to a liability under the caption cash overdraft as of December 31, 2014.

Premiums and Accounts Receivable

The Company records a receivable when premium is written but the cash has not been collected. These amounts represent premiums due from clients for contracts sold. The Company maintains allowances for doubtful accounts for probable losses resulting from the inability to collect payments.

Deferred Acquisition Costs

Only direct incremental costs associated with the successful acquisition of new or renewal insurance contracts are deferred, to the extent that such costs are deemed recoverable from future premiums or gross profits. Acquisition costs primarily consist of commissions and premium taxes. The deferred acquisition costs (“DAC”) asset is tested annually and reviewed quarterly to ensure that future premiums or gross profits are sufficient to support the amortization of the asset. Such testing involves the use of best estimate assumptions to determine if anticipated future policy premiums and investment income are adequate to cover all DAC and related claims, benefits and expenses. To the extent a deficiency exists, it is recognized immediately by a charge to the consolidated statements of operations and a corresponding reduction in the DAC asset. If the deficiency is greater than unamortized DAC, a liability will be accrued for the excess deficiency. See Note 9 for further information on deferred acquisition costs.

Reinsurance Recoverable

In the normal course of business, the company cedes business to other insurance companies primarily to limit losses from large exposures and to permit recovery of a portion of direct losses. The Company is liable for these amounts in the event reinsurers are unable to pay their portion of the claims. The Company evaluates the financial condition of the reinsurers and monitors concentration of credit risk from similar geographic regions, activities or economic attributes of the reinsurers to lessen its exposure to significant losses from reinsurer insolvencies. Ceded claim and policy liabilities are recorded as assets on the consolidated Balance Sheets under the caption reinsurance recoverable.

Estimated reinsurance recoverable is recognized in a manner consistent with the liabilities relating to the underlying insurance contracts. The Company recognizes the income (ceding fees) on reinsurance contracts principally on a pro rata basis over the life of the policies covered under the reinsurance agreements. Included in reinsurance recoverable is $32,886 recoverable from affiliated companies as of December 31, 2014. See Note 6 for further information.

Prepaid reinsurance premiums represent the unamortized balance of an insurance policy ceded to another affiliated or non-affiliated insurance company. Such amounts are deferred and amortized over the term of the underlying contracts in relation to premiums earned. The Company had prepaid reinsurance premiums of $75,688. See Note 6 for further information on prepaid premiums ceded to affiliated companies.

Funds Held Under Reinsurance Treaties

To mitigate the Company’s exposure to reinsurance insolvencies, the Company evaluates the financial condition of its reinsurers and holds substantial collateral (in the form of funds withheld, trusts, and letters of credit) as security under the reinsurance agreements. In relation to its ceded reinsurance contract with Bankers Atlantic Reinsurance Company (“BARC”), an affiliated entity, the Company withholds the cash balance representing ceded premiums written less ceded incurred losses, or $54,949 as of December 31, 2014.

 

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American Reliable Insurance Company

(A wholly owned subsidiary of American Bankers Insurance Group, Inc.)

Notes to Consolidated Financial Statements

Year Ended December 31, 2014

 

Property and Equipment

Property and equipment are reported at cost less accumulated depreciation. Depreciation is calculated on a straight-line basis over the estimated useful lives with a maximum of 39.5 years for buildings, a maximum of 7 years for furniture and a maximum of 5 years for equipment. Expenditures for maintenance and repairs are charged to income as incurred. Expenditures for improvements are capitalized and depreciated over the remaining useful life of the asset. Property and equipment also includes capitalized software costs, which represent costs directly related to obtaining, developing or upgrading internal use software. Such costs are capitalized and amortized using the straight-line method over their estimated useful lives, not to exceed 20 years. Property and equipment are assessed for impairment when impairment indicators exist. Depreciation expense was $85.

Claims and Benefits payable

Claim reserves are established according to GAAP using generally accepted actuarial methods. Factors used in their calculation include experience derived from historical claim payments and actuarial assumptions. Such assumptions and other factors include trends, the incidence of incurred claims, the extent to which all claims have been reported and internal claims processing charges. The process used in computing reserves cannot be exact, particularly for liability coverages, since actual claim costs are dependent upon such complex factors as inflation, changes in doctrines of legal liabilities and damage awards. The methods of making such estimates and establishing the related liabilities are periodically reviewed and updated.

Claim reserves do not represent an exact calculation of exposure, but instead represent our best estimates of what we expect the ultimate settlement and administration of a claim or group of claims will cost based on our assessment of facts and circumstances known at the time of calculation. The adequacy of reserves will be impacted by future trends in claims severity, frequency, judicial theories of liability and other factors. These variables are affected by both external and internal events, including but not limited to changes in the economic cycle, changes in the social perception of the value of work, inflation, judicial trends, legislative changes and claims handling procedures.

Many of these items are not directly quantifiable. Claim reserve estimates are refined as experience develops. Adjustments to claim reserves, both positive and negative, are reflected in the consolidated statements of operations in the period in which such estimates are updated. Because establishment of claim reserves is an inherently uncertain process involving estimates of future losses, there can be no certainty that ultimate losses will not exceed existing claims reserves. Future loss development could require reserves to be increased, which could have a material adverse effect on our earnings in the periods in which such increases are made. However, based on information currently available, we believe our claim reserve estimates are adequate.

With the exception of certain discontinued lines, the Company writes primarily property coverages, which are characterized by relatively short settlement periods and quick development of ultimate losses. Loss experience is principally dependent on the frequency and severity of claims.

Other Liabilities

Other liabilities as of December 31, 2014 includes claims suspense of $12 related to client claims, escheated checks totaling $1,701, employee related payables of $1,188 including accruals for bonuses and vacation time, taxes, licenses and fees of $1,170 and other general operating liabilities of $1,168.

 

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American Reliable Insurance Company

(A wholly owned subsidiary of American Bankers Insurance Group, Inc.)

Notes to Consolidated Financial Statements

Year Ended December 31, 2014

 

Credit and Other Risk

Financial instruments, which potentially subject the Company to concentration of credit risk, consist of cash and cash equivalents, accounts receivables, fixed maturity and equity securities, and other investments. The Company’s cash balances, short-term investments, and fixed maturity and equity securities are maintained with major financial institutions that the Company believes to be high credit quality institutions. While the balance exceeds insured limits, credit risk is considered minimal due to the high credit quality of the financial institutions. The Company routinely assesses the financial strength of its customers. The allowance for doubtful accounts was $927.

Commissions Payable

The Company’s accrued commissions includes contingent commissions of $3,876, payable to agents in January of each year based on their contracted percentage of earned premiums for the previous year plus or minus any additional negotiated bonuses or holdbacks. The remaining liability of $445 represents advanced commissions payable to brokers primarily for the month of December for each year.

Retirement and Other Employee Benefits

The Former Parent and its subsidiaries participate in a non-contributory, qualified defined benefit pension plan covering substantially all employees. This Plan is considered “qualified” because it meets the requirements of Internal Revenue Code Section 401(a) (“IRC 401(a)”) and the Employee Retirement Income Security Act of 1974 (“ERISA”). The qualified defined benefit pension plan is a pension equity plan with a grandfathered final average earnings plan for a certain group of employees. Benefits are based on certain years of service and the employee’s compensation during certain such years of service. The Former Parent’s funding policy is to contribute amounts to the plan sufficient to meet the minimum funding requirements set forth in ERISA, plus such additional amounts as the Former Parent may determine to be appropriate from time to time up to the maximum permitted. The funding policy considers several factors to determine such additional amounts including items such as the amount of service plus 15% of the Assurant Pension Plan deficit and the capital position of the Former Parent. Contributions are intended to provide not only for benefits attributed to service to date, but also for those expected to be earned in the future. Plan assets are maintained in a separate trust and as such are not included in the consolidated balance sheets of the Former Parent.

The Former Parent also has various non-contributory, non-qualified supplemental plans covering certain employees. Since these plans are “non-qualified” they are not subject to the laws and regulations of IRC 401(a) and ERISA. As such, the Former Parent is not required, and does not, fund these plans. The qualified and nonqualified plans are referred to as “Pension Benefits” unless otherwise noted. The Former Parent has the right to modify or terminate these benefits; however, the Former Parent will not be relieved of its obligation to plan participants for their vested benefits.

In addition, the Former Parent provides certain life and healthcare benefits (“Retirement Health Benefits”) for retired employees and their dependents. On July 1, 2011, the Former Parent terminated certain health care benefits for employees who did not qualify for “grandfathered” status and will no longer offer these benefits to new hires. The Former Parent contribution, plan design and other terms of the remaining benefits will not change for those grandfathered employees. The Former Parent has the right to modify or terminate these benefits. Plan assets and benefit obligations are measured as of December 31, 2011.

The Company has no legal obligation for benefits under these plans. The Company’s share of net expense for the qualified pension plan was $670. The Company’s share of net expense for post-retirement and other benefits was $27. Assurant, Inc. allocates post-retirement amounts to the Company based on headcount.

 

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American Reliable Insurance Company

(A wholly owned subsidiary of American Bankers Insurance Group, Inc.)

Notes to Consolidated Financial Statements

Year Ended December 31, 2014

 

The Former Parent also maintains a 401(k) plan for its employees. Prior to 1999, this plan was maintained on a contributory basis only. In April 1999, the Former Parent amended its 401(k) plan to include a matching contribution for employees contributing to the plan. Employees become eligible for the company match after one year of service in an eligible status and are fully vested after three years of service. For employees hired before January 1, 2001, the Company matches 200% of the first 3% of their contributions and 50% of the next 2%. For employees hired after December 31, 2000, the Company matches 100% of the first 3% of their contributions and 50% of the next 2%. These employees will become eligible for the higher company match once reaching five years of service. In order to receive the company match for a particular year, an employee must be employed on the last scheduled workday of that year. The Company incurred matching contributions of $1,027 for the 401(k) plan.

Effective January 1, 2013, the Former Parent amended its 401(k) plan to grant employees immediate eligibility, match contributions each pay period, rather than fourteen months after the first contribution in each calendar year, match 100% of the first 6% of employee’s contributions regardless of years of service, and reduce the vesting period from three to two years of service.

Income Taxes

The Company reports its taxable income in a consolidated federal income tax return along with other affiliated subsidiaries of the Former Parent. Income tax expense or credit is allocated among the affiliated subsidiaries by applying corporate income tax rates to taxable income or loss determined on a separate return basis according to a tax allocation agreement. Entities with losses record tax current benefits to the extent such losses are recognized in the consolidated federal tax return.

Current federal income taxes are charged to operations based upon amounts estimated to be payable or recoverable as a result of taxable operations for the current year. Deferred income taxes are recognized for temporary differences between the financial reporting basis and the income tax basis of assets and liabilities, based on enacted tax laws and statutory tax rates applicable to the periods in which we expect the temporary differences to reverse. The Company is required to establish a valuation allowance for any portion of the deferred tax assets that management believes will not be realized. In the opinion of management, it is more likely than not that the Company will realize the benefit of the deferred tax assets and, therefore, no valuation allowance has been established.

The Company classifies net interest expense and any applicable penalties related to income tax matters as a component of income tax expense.

Underwriting, General and Administrative Expenses

Underwriting, general and administrative expenses consist primarily of incurred commissions, salaries and personnel benefits, licenses, fees and other general operating expenses.

Contingencies

The Company follows the guidance on contingencies, which is included within ASC Topic 450, Contingencies, which requires the Company to evaluate each contingent matter separately. A loss contingency is recorded if reasonably estimable and probable. The Company establishes reserves for these contingencies at the best estimate, or if no one estimated number within the range of possible losses is more probable than any other, the Company records an estimated reserve at the low end of the estimated range. Contingencies affecting the Company primarily relate to litigation matters which are inherently difficult to evaluate and are subject to significant changes. The Company believes the contingent amounts recorded are adequate and reasonable.

 

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American Reliable Insurance Company

(A wholly owned subsidiary of American Bankers Insurance Group, Inc.)

Notes to Consolidated Financial Statements

Year Ended December 31, 2014

 

Leases

The Company records expenses for operating leases on a straight-line basis over the lease term.

Recent Accounting Pronouncements

Adopted

On January 1, 2014, the Company adopted the new guidance on presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The amendments in this guidance state that an unrecognized tax benefit, or a portion thereof, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. An exception to this guidance would be where a net operating loss carryforward or similar tax loss or credit carryforward would not be available under the tax law to settle any additional income taxes that would result from the disallowance of a tax position, or the tax law does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose. In such a case, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The adoption of this new presentation guidance did not impact the Company’s financial position or results of operations.

Not Yet Adopted

In May 2014, the Financial Accounting Standards Board (“FASB”) issued amended guidance on revenue recognition. The amended guidance affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards. Insurance contracts are within the scope of other standards and therefore are specifically excluded from the scope of the amended revenue recognition guidance. The core principle of the amended guidance is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve the core principle, the entity applies a five step process outlined in the amended guidance. The amended guidance also includes a cohesive set of disclosure requirements. The amended guidance is effective for interim and annual periods beginning after December 15, 2016 and early adoption is not permitted. Therefore, the Company is required to adopt the guidance on January 1, 2017. An entity can choose to apply the amended guidance using either the full retrospective approach or a modified retrospective approach. The Company is currently evaluating the requirements of the revenue recognition guidance as it relates to its non-insurance contract revenue and the potential impact on the Company’s financial position and results of operations.

On April 10, 2014, the FASB issued Accounting Standards Update No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (the revised standard). To qualify as a discontinued operation under the amended guidance, a component or group of components must represent a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. The amended guidance includes expanded disclosures for discontinued operations and requires comparative balance sheet presentation. New disclosures are also required for disposals of individually significant components that do not qualify as discontinued operations. The Company is currently evaluating the requirements of this guidance.

 

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American Reliable Insurance Company

(A wholly owned subsidiary of American Bankers Insurance Group, Inc.)

Notes to Consolidated Financial Statements

Year Ended December 31, 2014

 

Note 3 — Investments

The following tables show the cost or amortized cost, gross unrealized gains and losses, fair value and other-than-temporary impairment (“OTTI”) of our fixed maturity and equity securities as of December 31, 2014:

 

		December 31, 2014
		Cost or Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value				OTTI in AOCI (a)
Fixed maturity securities:
United States Government and government agencies and authorities		$	3,442			$	30			$	—			$	3,472			$	—
States, municipalities and political subdivisions			42,720				3,167				—				45,887				—
Foreign governments			300				25				—				325				—
Commercial mortgage-backed			2,473				51				—				2,524				—
Residential mortgage-backed			12,156				1,935				(2	)			14,089				1,311
Corporate			93,727				5,640				(166	)			99,201				—
Total fixed maturity securities		$	154,818			$	10,848			$	(168	)		$	165,498			$	1,311
Equity securities:
Non-redeemable preferred stocks		$	8,195			$	813			$	(48	)		$	8,960			$	—

 

(a)	Represents the amount of OTTI recognized in accumulated other comprehensive income (“AOCI”). Amount includes unrealized gains and losses on impaired securities relating to changes in the value of such securities subsequent to the impairment measurement date.

Our states, municipalities and political subdivisions holdings are highly diversified across the United States, with no individual state’s exposure (including both general obligation and revenue securities) exceeding 3% of the overall investment portfolio as of December 31, 2014. The securities include general obligation and revenue bonds issued by states, cities, counties, school districts and similar issuers, including $10,689, of advance refunded or escrowed-to-maturity bonds (collectively referred to as “pre-refunded bonds), which are bonds for which an irrevocable trust has been established to fund the remaining payments of principal and interest. As of December 31, 2014, revenue bonds account for 43% of the holdings. Excluding pre-refunded revenue bonds, the activities supporting the income streams of the Company’s revenue bonds are across a broad range of sectors, primarily water, higher education, specifically pledged tax revenues, and other miscellaneous sources such as bond banks, finance authorities and appropriations.

The Company’s largest European investment exposure in its corporate fixed maturity and equity securities are the countries of France and the United Kingdom. France and the United Kingdom both represent approximately 2% of our corporate securities as of December 31, 2014. No other European country represented more than 1% of our corporate securities. All the European investments are denominated in U.S. dollars. Our international investments are managed as part of our overall portfolio with the same approach to risk management and focus on diversification.

The cost or amortized cost and fair value of fixed maturity securities at December 31, 2014 by contractual maturity are shown below. Expected maturities may differ from contractual maturities because issuers of the securities may have the right to call or prepay obligations with or without call or prepayment penalties.

 

 

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American Reliable Insurance Company

(A wholly owned subsidiary of American Bankers Insurance Group, Inc.)

Notes to Consolidated Financial Statements

Year Ended December 31, 2014

 

		December 31, 2014
		Cost or Amortized Cost				Fair Value
Due in one year or less		$	13,645			$	13,775
Due after one year through five years			66,312				70,209
Due after five years through ten years			41,691				43,888
Due after ten years			18,541				21,013
Total			140,189				148,885
Commercial mortgage-backed			2,473				2,524
Residential mortgage-backed			12,156				14,089
Total		$	154,818			$	165,498

Major categories of net investment income were as follows:

 

		For the Year Ended December 31, 2014
Fixed maturity securities		$	8,101
Equity securities			803
Commercial mortgage loans on real estate			932
Other investments			114
Total investment income			9,950
Investment expenses			(403	)
Net investment income		$	9,547

No material investments of the Company were non-income producing for the years ended December 31, 2014.

The Company received gross proceeds of $36,171 from sales of available for sale securities. As a result of these sales, gross realized gains of $1,827 and gross realized losses of $156 have been included in earnings.

The following table sets forth the net realized gains recognized in the statement of operations as follows:

 

		Year Ended December 31
		2014
Net realized gains related to sales and other:
Fixed maturity securities		$	1,498
Equity securities			627
Commercial mortgage loans on real estate			1,601
Cash and cash equivalents			—
Total net realized gains		$	3,726

Other-Than-Temporary Impairments

The Company follows the OTTI guidance which requires entities to separate an OTTI of a debt security into two components when there are credit related losses associated with the impaired debt security for which the Company asserts that it does not have the intent to sell, and it is more likely than not that it will not be required to sell before recovery of its cost basis. Under the OTTI guidance, the amount of the OTTI related to a credit loss is recognized in earnings, and the amount of the OTTI related to other, non-credit factors

 

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American Reliable Insurance Company

(A wholly owned subsidiary of American Bankers Insurance Group, Inc.)

Notes to Consolidated Financial Statements

Year Ended December 31, 2014

 

(e.g., interest rates, market conditions, etc.) is recorded as a component of other comprehensive income. In instances where no credit loss exists but the Company intends to sell the security or it is more likely than not that the Company will have to sell the debt security prior to the anticipated recovery, the decline in market value below amortized cost is recognized as an OTTI in earnings. In periods after the recognition of an OTTI on debt securities, the Company accounts for such securities as if they had been purchased on the measurement date of the OTTI at an amortized cost basis equal to the previous amortized cost basis less the OTTI recognized in earnings. For debt securities for which OTTI was recognized in earnings, the difference between the new amortized cost basis and the cash flows expected to be collected will be accreted or amortized into net investment income.

The following table sets forth the amount of credit loss impairments recognized within the results of operations on fixed maturity securities held by the Company as of the dates indicated, for which a portion of the OTTI loss was recognized in AOCI, and the corresponding changes in such amounts.

 

		Year Ended
		December 31,
		2014
Balance, beginning of period		$	2,433
Reductions for increases in cash flows expected to be collected that are recognized over the remaining life of the security			(554	)
Recoveries (reductions) for credit loss impairments previously recognized on securities which matured, paid down, prepaid or were sold during the period			(630	)
Balance, end of period		$	1,249

We regularly monitor our investment portfolio to ensure investments that may be other-than-temporarily impaired are identified in a timely fashion, properly valued, and charged against earnings in the proper period. The determination that a security has incurred an other-than-temporary decline in value requires the judgment of management. Assessment factors include, but are not limited to, the length of time and the extent to which the market value has been less than cost, the financial condition and rating of the issuer, whether any collateral is held, the intent and ability of the Company to retain the investment for a period of time sufficient to allow for recovery for equity securities and the intent to sell or whether it is more likely than not that the Company will be required to sell for fixed maturity securities. Inherently, there are risks and uncertainties involved in making these judgments. Changes in circumstances and critical assumptions such as a continued weak economy, a more pronounced economic downturn or unforeseen events which affect one or more companies, industry sectors, or countries could result in additional impairments in future periods for other-than-temporary declines in value. Any equity security whose price decline is deemed other-than-temporary is written down to its then current market value with the amount of the impairment reported as a realized loss in that period. The impairment of a fixed maturity security that the Company has the intent to sell or that it is more likely than not that the Company will be required to sell is deemed other-than-temporary and is written down to its market value at the balance sheet date with the amount of the impairment reported as a realized loss in that period. For all other-than-temporarily impaired fixed maturity securities that do not meet either of these two criteria, the Company is required to analyze its ability to recover the amortized cost of the security by calculating the net present value of projected future cash flows. For these other-than-temporarily impaired fixed maturity securities, the net amount recognized in earnings is equal to the difference between the amortized cost of the fixed maturity security and its net present value.

The Company considers different factors to determine the amount of projected future cash flows and discounting methods for corporate debt and residential and commercial mortgage-backed securities. For corporate debt securities, the split between the credit and non-credit losses is driven principally by assumptions regarding the amount and timing of projected future cash flows. The net present value is

 

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American Reliable Insurance Company

(A wholly owned subsidiary of American Bankers Insurance Group, Inc.)

Notes to Consolidated Financial Statements

Year Ended December 31, 2014

 

calculated by discounting the Company’s best estimate of projected future cash flows at the effective interest rate implicit in the security at the date of acquisition. For residential and commercial mortgage-backed securities, cash flow estimates, including prepayment assumptions, are based on data from widely accepted third-party data sources or internal estimates. In addition to prepayment assumptions, cash flow estimates vary based on assumptions regarding the underlying collateral including default rates, recoveries and changes in value. The net present value is calculated by discounting the Company’s best estimate of projected future cash flows at the effective interest rate implicit in the fixed maturity security prior to impairment at the balance sheet date. The discounted cash flows become the new amortized cost basis of the fixed maturity security.

In periods subsequent to the recognition of an OTTI, the Company generally accretes the discount (or amortizes the reduced premium) into net investment income, up to the non-discounted amount of projected future cash flows, resulting from the reduction in cost basis, based upon the amount and timing of the expected future cash flows over the estimated period of cash flows.

The investment category and duration of the Company’s gross unrealized losses on fixed maturity securities and equity securities at December 31, 2014 were as follows:

 

		December 31, 2014
		Less than 12 months								12 Months or More								Total
		Fair Value				Unrealized Losses				Fair Value				Unrealized Losses				Fair Value				Unrealized Losses
Fixed maturity securities:
Residential mortgage-backed		$	43			$	(2	)		$	—			$	—			$	43			$	(2	)
Corporate			8,115				(131	)			2,911				(35	)			11,026				(166	)
Total fixed maturity securities		$	8,158			$	(133	)		$	2,911			$	(35	)		$	11,069			$	(168	)
Equity securities:
Non-redeemable preferred stocks		$	1,323			$	(44	)		$	84			$	(4	)		$	1,407			$	(48	)

Total gross unrealized losses represent approximately 2% of the aggregate fair value of the related securities. Approximately 82% of these gross unrealized losses have been in a continuous loss position for less than twelve months. The total gross unrealized losses are comprised of 28 individual securities at December 31, 2014. In accordance with its policy described above, the Company concluded that for these securities an adjustment to its results of operations for other-than-temporary impairments of the gross unrealized losses was not warranted at December 31, 2014. These conclusions were based on a detailed analysis of the underlying credit and expected cash flows of each security. The gross unrealized losses that have been in a continuous loss position for twelve month or more were concentrated in the Company’s corporate fixed maturities. Within the Company’s corporate fixed maturity securities, the majority of the loss position relates to securities in the utilities sector. The utilities sector’s gross unrealized losses of twelve months or more were $16, or 46%, of the corporate fixed maturity securities total.

The non-redeemable preferred stocks are perpetual preferred securities that have characteristics of both debt and equity securities. To evaluate these securities, we apply an impairment model similar to that used for our fixed maturity securities. As of December 31, 2014, the Company did not intend to sell these securities and it was not more likely than not that the Company would be required to sell them and no underlying cash flow issues were noted. Therefore, the Company did not recognize an OTTI on those perpetual preferred securities that had been in a continuous unrealized loss position for twelve months or more. As of December 31, 2014, the Company did not intend to sell the fixed maturity securities and it was not more likely than not that the Company would be required to sell the securities before the anticipated recovery of their amortized cost basis. The gross unrealized losses are primarily attributable to widening credit spreads associated with an underlying shift in overall credit risk premium.

 

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American Reliable Insurance Company

(A wholly owned subsidiary of American Bankers Insurance Group, Inc.)

Notes to Consolidated Financial Statements

Year Ended December 31, 2014

 

The cost or amortized cost and fair value of available-for-sale fixed maturity securities in an unrealized loss position at December 31, 2014, by contractual maturity, are shown below:

 

December 31, 2014
		Cost or Amortized Cost				Fair Value
Due after one year through five years		$	5,855			$	5,815
Due after five years through ten years			5,245				5,126
Due after ten years			136				128
Total			11,236				11,069

The Company has entered into commercial mortgage loans, collateralized by the underlying real estate, on properties located throughout the United States. At December 31, 2014, the Company did not hold any investments in commercial mortgage loans.

Credit quality indicators for commercial mortgage loans are loan-to-value and debt-service coverage ratios. Loan-to-value and debt-service coverage ratios are measures commonly used to assess the credit quality of commercial mortgage loans. The loan-to-value ratio compares the principal amount of the loan to the fair value of the underlying property collateralizing the loan, and is commonly expressed as a percentage. The debt-service coverage ratio compares a property’s net operating income to its debt-service payments and is commonly expressed as a ratio. The loan-to-value and debt-service coverage ratios are generally updated annually in the third quarter.

The Company sold all of its commercial mortgage loans in 2014.

The Company has short term investments and fixed maturities of $6,933, on deposit with various governmental authorities as required by law.

Note 4 — Fair Value Disclosures

Fair Values, Inputs and Valuation Techniques for Financial Assets Disclosures

The fair value measurements and disclosures guidance defines fair value and establishes a framework for measuring fair value. Fair value is defined as 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. In accordance with this guidance, the Company has categorized its recurring basis financial assets into a three-level fair value hierarchy based on the priority of the inputs to the valuation technique.

The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets (Level 1) and the lowest priority to unobservable inputs (Level 3). The inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset.

 

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American Reliable Insurance Company

(A wholly owned subsidiary of American Bankers Insurance Group, Inc.)

Notes to Consolidated Financial Statements

Year Ended December 31, 2014

 

The levels of the fair value hierarchy are described below:

 

•

Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets that the Company can access.

 

•

Level 2 inputs utilize other than quoted prices included in Level 1 that are observable for the asset, either directly or indirectly, for substantially the full term of the asset. Level 2 inputs include quoted prices for similar assets in active markets, quoted prices for identical or similar assets in markets that are not active and inputs other than quoted prices that are observable in the marketplace for the asset. The observable inputs are used in valuation models to calculate the fair value for the asset.

 

•

Level 3 inputs are unobservable but are significant to the fair value measurement for the asset, and include situations where there is little, if any, market activity for the asset. These inputs reflect management’s own assumptions about the assumptions a market participant would use in pricing the asset.

A review of fair value hierarchy classifications is conducted on a quarterly basis. Changes in the observability of valuation inputs may result in a reclassification of levels for certain securities within the fair value hierarchy.

The following table presents the Company’s fair value hierarchy for assets measured at fair value on a recurring basis as of December 31, 2014. The amounts presented below for Cash equivalents differ from the amounts presented in the consolidated balance sheets because only certain investments or certain assets within these line items are measured at estimated fair value.

 

		December 31, 2014
Financial Assets		Total				Level 1				Level 2				Level 3
Fixed maturity securities:
United States Government and government agencies and authorities		$	3,472			$	—			$	3,472			$	—
States, municipalities and political subdivisions			45,887				—				45,887				—
Foreign government			325				—				325				—
Commercial mortgage-backed			2,524				—				2,524				—
Residential mortgage-backed			14,089				—				14,089				—
Corporate			99,201				—				98,375				826
Equity securities:
Non-redeemable preferred stocks			8,960				—				8,960				—
Short-term investments			24,639				24,639	a			—				—
Cash equivalents			52,000				—				52,000	b			—
Total financial assets		$	251,097			$	24,639			$	225,632			$	826

 

a	Mainly includes money market funds.

b	Mainly includes fixed maturity securities.

There were no transfers between Level 1 and Level 2 financial assets during the year ended December 31, 2014. However, there were transfers between Level 2 and Level 3 financial assets which are reflected in the “Transfers out” column below. Transfers between Level 2 and Level 3 most commonly occur from changes in the availability of observable market information and re-evaluation of the observability of pricing inputs. Any remaining unpriced securities are submitted to independent brokers who provide non-binding broker quotes or are priced by other qualified sources.

 

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American Reliable Insurance Company

(A wholly owned subsidiary of American Bankers Insurance Group, Inc.)

Notes to Consolidated Financial Statements

Year Ended December 31, 2014

 

The following table summarizes the change in balance sheet carrying value associated with Level 3 financial assets carried at fair value:

 

		Year Ended December 31, 2014
		Balance, beginning of period				Total gains (realized / unrealized)				Purchases				Sales				Transfers out (1)				Balance, end of period
Fixed maturity securities
States, municipalities and political subdivisions		$	539			$	—			$	—			$	—			$	(539	)		$	—
Corporate			1,503				542				248				(1,216	)			(251	)			826
Total level 3 assets		$	2,042			$	542			$	248			$	(1,216	)		$	(790	)		$	826

 

(1)	Transfers are primarily attributable to changes in the avilability of observable market information and re-evaluation of the observability of pricing inputs.

Three different valuation techniques can be used in determining fair value for financial assets: the market, income or cost approaches. The three valuation techniques described in the fair value measurements and disclosures guidance are consistent with generally accepted valuation methodologies.

The market approach valuation techniques use prices and other relevant information generated by market transactions involving identical or comparable assets. When possible, quoted prices (unadjusted) in active markets are used as of the period-end date (such as for money market funds). Otherwise, valuation techniques consistent with the market approach including matrix pricing and comparables are used. Matrix pricing is a mathematical technique employed principally to value debt securities without relying exclusively on quoted prices for those securities but rather by relying on the securities’ relationship to other benchmark quoted securities. Market approach valuation techniques often use market multiples derived from a set of comparables. Multiples might lie in ranges with a different multiple for each comparable. The selection of where within the range the appropriate multiple falls requires judgment, considering both qualitative and quantitative factors specific to the measurement.

Income approach valuation techniques convert future amounts, such as cash flows or earnings, to a single present amount, or a discounted amount. These techniques rely on current market expectations of future amounts as of the period-end date. Examples of income approach valuation techniques include present value techniques, option-pricing models, binomial or lattice models that incorporate present value techniques and the multi-period excess earnings method.

Cost approach valuation techniques are based upon the amount that would be required to replace the service capacity of an asset at the period-end date, or the current replacement cost. That is, from the perspective of a market participant (seller), the price that would be received for the asset is determined based on the cost to a market participant (buyer) to acquire or construct a substitute asset of comparable utility, adjusted for obsolescence.

While not all three approaches are applicable to all financial assets, where appropriate, one or more valuation techniques may be used. For all the classes of financial assets included in the above hierarchy, the market valuation technique is generally used. For the period ended December 31, 2014, the application of the valuation technique applied to the Company’s classes of financial assets has been consistent.

Level 1 Securities

The Company’s investments classified as Level 1 as of December 31, 2014 consist of money market funds that are publicly listed and/or actively traded in an established market.

 

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American Reliable Insurance Company

(A wholly owned subsidiary of American Bankers Insurance Group, Inc.)

Notes to Consolidated Financial Statements

Year Ended December 31, 2014

 

Level 2 Securities

The Company’s Level 2 securities are valued using various observable market inputs obtained from a pricing service. The pricing service prepares estimates of fair value measurements for our Level 2 securities using proprietary valuation models based on techniques such as matrix pricing which include observable market inputs. The fair value measurements and disclosures guidance defines observable market inputs as the assumptions market participants would use in pricing the asset developed on market data obtained from sources independent of the Company. The extent of the use of each observable market input for a security depends on the type of security and the market conditions at the balance sheet date. Depending on the security, the priority of the use of observable market inputs may change as some observable market inputs may not be relevant or additional inputs may be necessary. The following observable market inputs (“standard inputs”), listed in the approximate order of priority, are utilized in the pricing evaluation of Level 2 securities: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data including market research data. Further details for level 2 investment types follow:

United States Government and government agencies and authorities: U.S. government and government agencies and authorities securities are priced by our pricing service utilizing standard inputs. Included in this category are U.S. Treasury securities which are priced using vendor trading platform data in addition to the standard inputs.

State, municipalities and political subdivisions: State, municipalities and political subdivisions securities are priced by our pricing service utilizing material event notices and new issue data inputs in addition to the standard inputs.

Foreign governments: Foreign government securities are priced by our pricing service utilizing standard inputs. The pricing service also evaluates each security based on relevant market information including relevant credit information, perceived market movements and sector news.

Commercial mortgage-backed and residential mortgage-backed: Commercial mortgage-backed and residential mortgage-backed securities are priced by our pricing service utilizing monthly payment information and collateral performance information in addition to the standard inputs. Additionally, commercial mortgage-backed securities utilize new issue data while residential mortgage-backed securities utilize vendor trading platform data.

Corporate: Corporate securities are priced by our pricing service utilizing standard inputs. Non-investment grade securities within this category are priced by our pricing service utilizing observations of equity and credit default swap curves related to the issuer in addition to the standard inputs.

Non-redeemable preferred stocks: Non-redeemable preferred stocks are priced by our pricing service utilizing observations of equity and credit default swap curves related to the issuer in addition to the standard inputs.

Cash equivalents: To price the fixed maturity securities in this category, the pricing service utilizes the standard inputs.

Valuation models used by the pricing service can change period to period, depending on the appropriate observable inputs that are available at the balance sheet date to price a security. When market observable inputs are unavailable to the pricing service, the remaining unpriced securities are submitted to independent brokers who provide non-binding broker quotes or are priced by other qualified sources. If the Company cannot corroborate the non-binding broker quotes with Level 2 inputs, these securities are categorized as Level 3 securities.

 

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American Reliable Insurance Company

(A wholly owned subsidiary of American Bankers Insurance Group, Inc.)

Notes to Consolidated Financial Statements

Year Ended December 31, 2014

 

Level 3 Securities

The Company’s investments classified as Level 3 as of December 31, 2014 consisted of fixed maturity securities. All of the Level 3 fixed maturity securities are priced using non-binding broker quotes which cannot be corroborated with Level 2 inputs. The Level 3 fixed maturity securities were priced by a pricing service using single broker quotes due to insufficient information to provide an evaluated price as of December 31, 2014. The single broker quotes are provided by market makers or broker-dealers who are recognized as market participants in the markets in which they are providing the quotes. The inputs factoring into the broker quotes include trades in the actual bond being priced, trades of comparable bonds, quality of the issuer, optionality, structure and liquidity. Significant changes in interest rates, issuer credit, liquidity, and overall market conditions would result in a significantly lower or higher broker quote. The prices received from both the pricing service and internally are reviewed for reasonableness by management and if necessary, management works with the pricing service or broker to further understand how they developed their price.

Management evaluates the following factors in order to determine whether the market for a financial asset is inactive. The factors include, but are not limited to:

 

•

There are few recent transactions,

 

•

Little information is released publicly,

 

•

The available prices vary significantly over time or among market participants,

 

•

The prices are stale (i.e., not current), and

 

•

The magnitude of the bid-ask spread.

Illiquidity did not have a material impact in the fair value determination of the Company’s financial assets.

The Company generally obtains one price for each financial asset. The Company performs a monthly analysis to assess if the evaluated prices represent a reasonable estimate of their fair value. This process involves quantitative and qualitative analysis and is overseen by investment and accounting professionals. Examples of procedures performed include, but are not limited to, initial and on-going review of pricing service methodologies, review of the prices received from the pricing service, review of pricing statistics and trends, and comparison of prices for certain securities with two different appropriate price sources for reasonableness. Following this analysis, the Company generally uses the best estimate of fair value based upon all available inputs. On infrequent occasions, a non-pricing service source may be more familiar with the market activity for a particular security than the pricing service. In these cases the price used is taken from the non-pricing service source. The pricing service provides information to indicate which securities were priced using market observable inputs so that the Company can properly categorize our financial assets in the fair value hierarchy. As of December 31, 2014, the Company corroborated investment security prices received from its pricing vendors by obtaining pricing from a second pricing vendor for all of the securities.

Fair Value of Financial Instruments Disclosures

The financial instruments guidance requires disclosure of fair value information about financial instruments, as defined therein, for which it is practicable to estimate such fair value. Therefore, it requires fair value disclosure for financial instruments that are not recognized or are not carried at fair value in the consolidated balance sheet.

 

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American Reliable Insurance Company

(A wholly owned subsidiary of American Bankers Insurance Group, Inc.)

Notes to Consolidated Financial Statements

Year Ended December 31, 2014

 

For the financial instruments included within the following financial assets, the carrying value in the consolidated balance sheet equals or approximates fair value. Please refer to the Fair Values Inputs and Valuation Techniques for Financial Assets Disclosures section above for more information on the financial instruments included within the following financial assets and the methods and assumptions used to estimate fair value:

 

•

Cash and cash equivalents

 

•

Fixed maturity securities

 

•

Equity securities

 

•

Short-term investments

Note 5 — Income Taxes

During the year ended December 31, 2014, the Company paid funds to the Former Parent of $3,197.

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 liabilities and assets are as follows:

 

		December 31,
		2014
Gross deferred tax assets
Furniture and equipment		$	77
Bad debt reserve			324
Capital loss carryforward			—
Accrued expenses			422
Investment adjustments			976
Loss reserves			1,114
Unearned premium reserves			6,758
Other			109
Total gross deferred tax assets			9,780
Gross deferred tax liabilities
Deferred policy acquisition costs			(6,527	)
Accrued expenses			—
Accrued dividends			(35	)
Net unrealized investment gains			(4,041	)
Other			—
Total gross deferred tax liabilities			(10,603	)
Net deferred tax liability		$	(823	)

The Company has not established a valuation allowance against deferred tax assets because it is management’s assessment that it is more likely than not that deferred tax assets of $9,780 will be realized.

The Company’s ability to realize deferred tax assets depends on its ability to generate sufficient taxable income of the same character within the carryback or carryforward periods. In assessing future GAAP taxable income, the Company has considered all sources of taxable income available to realize the deferred tax asset, including the future reversal of existing temporary differences, future taxable income exclusive of reversing temporary differences and carry forwards, taxable income in carry back years and tax-planning strategies. If changes occur in the assumptions underlying the Company’s tax planning strategies or in the scheduling of the reversal of the Company’s deferred tax liabilities, the valuation allowance may need to be adjusted in the future.

 

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American Reliable Insurance Company

(A wholly owned subsidiary of American Bankers Insurance Group, Inc.)

Notes to Consolidated Financial Statements

Year Ended December 31, 2014

 

Significant components of the provision for income taxes attributable to continuing operations are as follows.

 

		Year ended December 31,
		2014
Federal — current income tax expense (benefit)		$	(599	)
Federal — deferred income tax expense (benefit)			(209	)
Total federal income tax expense (benefit)		$	(808	)

Total income tax expense varies from amounts computed by applying current federal income tax rates to income before income taxes. The reasons for these differences and the approximate tax effects for the year ended December 31, 2014 are as follows:

 

		Year Ended December 31,
		2014
Statutory tax rate			35.0	%
Tax-exempt interest			30.9
Dividends received deduction			8.9
Change in liability for prior year taxes			(18.1	)
State income tax			—
Other			(4.7	)
Effective tax rate			52.0	%

The Company files income tax returns in the U.S. and various state jurisdictions. As of December 31, 2014, the Company has substantially concluded all U.S. federal income tax matters for years through 2008.

The Company will file a consolidated return with affiliates of the Former Parent as of December 31, 2014.

At December 31, 2014, the Company had no federal net operating loss or capital loss carryforwards.

The Company has not recorded any unrecognized tax benefits for uncertain tax positions that, if recognized, would matertially affect the effective tax rate as of December 31, 2014.

Note 6 — Related Party Transactions

In the normal course of business, the Company has substantial transactions with its Former Parent and other subsidiaries of the Former Parent. The receivable from or payable to affiliates results primarily from premiums collected or claims paid by the Company on behalf of its affiliates. The payable is non-interest bearing and is due on demand.

The Company is included in consolidated income tax return of Assurant, Inc. and its affiliates. Income tax expenses are settled through inter-company transactions. As of December 31, 2014, the income tax recoverable from the Former Parent was $4,152.

 

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American Reliable Insurance Company

(A wholly owned subsidiary of American Bankers Insurance Group, Inc.)

Notes to Consolidated Financial Statements

Year Ended December 31, 2014

 

The Former Parent allocated management fees and other expenses to the Company of $1,150.

During 2014, the Company received a capital contribution of $7,260 in the form of internally developed policy management software from the Former Parent. The value represents $13,669 cost of the software less $6,409 of accumulated depreciation at the time of contribution.

Related party transactions resulting from ceded and assumed reinsurance contracts with affiliated companies are included in the various balance sheet line items as follows:

 

		2014
		(in thousands)
Balance Sheet Impact
Assets
Reinsurance recoverable		$	56,253
Prepaid reinsurance premiums			73,847
Deferred Acquisition Costs			(15,679	)
			114,421
Liabilities
Loss and loss adjustment expenses			28,499
Unearned premiums			46,229
Ceded reinsurance premiums and losses payable			12,429
Funds held by company under reinsurance treaties			54,949
			142,106
Net Assets (Liabilities)		$	(27,685	)
Statement of Operations Impact
Net earned premium			(84,386	)
Losses and loss expense incurred			16,885
Underwriting, general and administrative expenses			33,547
Income (loss) before taxes			(33,954	)

 

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American Reliable Insurance Company

(A wholly owned subsidiary of American Bankers Insurance Group, Inc.)

Notes to Consolidated Financial Statements

Year Ended December 31, 2014

 

Note 7 — Claims and Benefits Payable

The following table provides a reconciliation of beginning and ending liability balances for claim reserves for 2014.

Reconciliation of Liability for Claim Reserves

 

		2014
		(in thousands)
Balance at beginning of year, gross of reinsurance		$	61,044
Effect of reinsurance			(20,825	)
Balance at beginning of year, net of reinsurance			40,219
Incurred losses related to:
Current year			99,931
Prior years			10,586
Total incurred losses			110,517
Paid losses related to:
Current year			67,259
Prior years			22,028
Total paid losses			89,287
Balance at end of year, net of reinsurance			61,449
Effect of reinsurance			26,921
Balance at end of year, gross of reinsurance		$	88,370
Split of Net Loss & Expense Unpaid
Current Year			32,673
Prior Year			28,776
			61,449

Incurred losses and LAE attributable to insured events of prior years have increased by $10,586. The increase is primarily due to increased severity in the Company’s personal liability and agriculture lines. Based on the current evaluation of historical loss experience, the expected loss ratios used in prior years were determined to be too low and the loss ratios were increased in 2014. No additional or return premiums have been accrued as a result of the prior year effects.

ARIC participated in certain excess of loss reinsurance programs in the London market and, as a result, reinsured certain personal accident, ransom and kidnap insurance risks from 1995 to 1997. ARIC and a foreign affiliate ceded a portion of these risks to retrocessionaires. ARIC ceased reinsuring such business in 1997. However, certain risks continued beyond 1997 due to the nature of the reinsurance contracts written. As of December 31, 2009, ARIC and some of the other reinsurers involved in the programs are seeking to avoid certain treaties on various grounds, including material misrepresentation and non-disclosure by the ceding companies and intermediaries involved in the programs. Similarly, some of the retrocessionaires are seeking avoidance of certain treaties with ARIC and the other reinsurers and some reinsureds are seeking collection of disputed balances under some of the treaties. The disputes generally involve multiple layers of reinsurance, and allegations that the reinsurance programs involved interrelated claims “spirals” devised to disproportionately pass claims losses to higher-level reinsurance layers.

Many of the companies involved in these programs, including ARIC, are currently involved in negotiations, arbitrations and/or litigation in an effort to resolve these disputes. The disputes involving ARIC and an affiliate, Assurant General Insurance Limited (formerly Bankers Insurance Company Limited), for the 1995 and 1997 program year are subject to working group settlements negotiated with other market participants. Negotiations, arbitrations and litigation are still ongoing or will be scheduled for the remaining disputes.

 

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American Reliable Insurance Company

(A wholly owned subsidiary of American Bankers Insurance Group, Inc.)

Notes to Consolidated Financial Statements

Year Ended December 31, 2014

 

In the last several years, settlements have been made relating to the 1995-1997 programs which have reduced ARIC’s liabilities significantly. The gross carried case and IBNR reserves as of December 31, 2014 are $2,200. The Company believes, based on information currently available, that the existing loss accruals related to these programs are adequate. However, the inherent uncertainty of resolving these matters, including the uncertainty of estimating whether any settlements the Company may enter into in the future would be on favorable terms, makes it difficult to predict the outcomes with certainty. In December 2014, ARIC entered into a 100% quota share agreement with its affiliate, American Bankers Insurance Company, to cede all of its losses on this project.

Note 8 — Reinsurance Recoverable

In the ordinary course of business the company is involved in both the assumption and cession of reinsurance with affiliated and non-affiliated companies. The following table provides details of the reinsurance recoverable balance as of December 31, 2014:

 

		As of December 31, 2014
		Non-Affiliated				Affiliated
		Companies				Companies				Total
Ceded unpaid loss and LAE reserves		$	3,554			$	23,367			$	26,921
Ceded paid losses ad LAE recoverable			39				1,004				1,043
Assumed premiums receivable			—				31,882				31,882
		$	3,593			$	56,253			$	59,846

Credit Risk

The Company is not relieved of its primary obligation to the policyholders in a reinsurance transaction, therefore a credit exposure exists to the extent that any reinsurer is unable to meet the obligation assumed in the reinsurance agreements. To mitigate this exposure to reinsurance insolvencies, the Company evaluates the financial condition of its reinsurers and holds substantial collateral (in the form of funds withheld, trusts, and letters of credit) as security under the reinsurance agreements.

A key credit quality indicator for reinsurance is the A.M. Best financial strength ratings of the reinsurer. The A.M. Best ratings are an independent opinion of a reinsurer’s ability to meet ongoing obligations to policyholders. The A.M. Best ratings for new reinsurance agreements where there is material credit exposure are reviewed at the time of execution. The A.M. Best ratings for existing reinsurance agreements are reviewed on a periodic basis, at least annually

 

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American Reliable Insurance Company

(A wholly owned subsidiary of American Bankers Insurance Group, Inc.)

Notes to Consolidated Financial Statements

Year Ended December 31, 2014

 

The following table provides the reinsurance balances recoverable and reserve credits taken as of December 31, 2014 grouped by A.M. Best rating:

 

		December 31, 2014
AM Best Ratings of Reinsurers		Ceded Unpaid Losses and LAE				Ceded Paid Losses and LAE				Assumed Premiums Receivable
A++ or A+		$	3,545			$	31			$	—
A or A-			8,135				1,012				31,882
Not Rated			15,241				—				—
Total			26,921				1,043				31,882
Less: Allowance			—				—				—
Net Reinsurance Recoverable		$	26,921			$	1,043			$	31,882

The Company had no invested assets held in trusts or by custodians as of December 31, 2014 for the benefit of others related to certain reinsurance arrangements.

The balances in the not rated category are primarily related to transactions with an affiliate, Bankers Atlantic Reinsurance Company. The Company has funds held of $54,941 to collateralize reinsurance recoverables with Bankers Atlantic Reinsurance Company.

The balances in the ‘A or A-’ category predominately relate to balances due from an affiliate, American Bankers Insurance Company (ABIC). The other reinsurance recoverables of $31,882 relate to balances due from ABIC from a 100% quota share treaty entered into on December 1, 2014.

The effect of reinsurance on written and earned premiums and policyholder benefits incurred was as follows:

 

		Year ended December 31, 2014
		Written Premiums				Earned Premiums				Policyholder Benefits Incurred
Direct		$	237,967			$	258,035			$	125,296
Assumed			81,586				67,601				35,600
Ceded			(137,784	)			(155,370	)			(50,379	)
Net		$	181,769			$	170,266			$	110,517

As a result of the sale of American Reliable Insurance Company to Global Indemnity Group, Inc. changes were made to internal reinsurance programs between the Company and various Assurant, Inc. insurance entities, as follows:

 

•

Intercompany reinsurance contracts were commuted and replaced with new contracts which mainly resulted in change in ceding commissions effective December 1, 2014.

 

•

Effective December 1, 2014 the Company entered into four treaties to cede 100% of its liabilities of approximately $2,500 to American Bankers Insurance Company related to certain business not included in the acquisition of the Company.

 

•

Effective December 1, 2014 the Company entered into a new treaty to assume 100% of its liabilities of approximately $28,000 from American Bankers Insurance Company for business included in the acquisition but not written directly by the Company.

 

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American Reliable Insurance Company

(A wholly owned subsidiary of American Bankers Insurance Group, Inc.)

Notes to Consolidated Financial Statements

Year Ended December 31, 2014

 

Note 9 — Deferred Acquisition Costs

Policy acquisition costs consist primarily of commissions and premium taxes, which are deferred and amortized over the term of the contracts in relation to premiums earned. In 2014, amortization and capitalization of acquisition costs were $34,990 and $37,387, respectively, as shown by the following table.

 

		Year ended December 31, 2014
		Commissions				Premium Taxes				Total
Balance at beginning of year		$	13,521				2,732			$	16,253
Capitalization			31,957				5,430				37,387
Amortization			(29,259	)			(5,731	)			(34,990	)
Balance at end of year		$	16,219			$	2,431			$	18,650

Note 10 — Property and Equipment

Property and equipment are reported at cost less accumulated depreciation. Depreciation is calculated on a straight-line basis over the estimated useful lives with a maximum of lease term for buildings, a maximum of 7 years for furniture and a maximum of 5 years for equipment. Expenditures for maintenance and repairs are charged to income as incurred. Expenditures for improvements are capitalized and depreciated over the remaining useful life of the asset. Property and equipment also includes capitalized software costs, which represent costs directly related to obtaining, developing or upgrading internal use software. Such costs are capitalized and amortized using the straight-line method over their estimated useful lives, not to exceed 10 years. Property and equipment are assessed for impairment when impairment indicators exist.

Internally developed policy management software was contributed to the Company by the Former Parent in the form of a capital contribution in the net amount of $7,260 in December 2014. The cost and accumulated depreciation at the time of contribution was $13,669 and $6,409, respectively. The contribution is included in additions in the table below.

 

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American Reliable Insurance Company

(A wholly owned subsidiary of American Bankers Insurance Group, Inc.)

Notes to Consolidated Financial Statements

Year Ended December 31, 2014

 

Details of the total property and equipment balance as of December 31, 2014 $9,356 are as follows:

 

		Cost
		December 31, 2013				Additions / Contributions				Disposals				December 31, 2014
Leasehold improvements		$	657			$	—			$	—			$	657
Internal developed software			—				13,669				—				13,669
Software			1,371				850				—				2,221
Furniture, fixtures and equipment			3,492				—				—				3,492
Total			5,520				14,519				—				20,039
		Accumulated Depreciation
		December 31, 2013				Additions / Contributions				Disposals				December 31, 2014
Leasehold improvements		$	(657	)		$	—			$	—			$	(657	)
Internal developed software			—				(6,409	)			—				(6,409	)
Software			(100	)			(51	)			—				(151	)
Furniture, fixtures and equipment			(3,432	)			(34	)			—				(3,466	)
Total			(4,189	)			(6,494	)			—				(10,683	)
		Net
		December 31, 2013				Additions / Contributions				Disposals				December 31, 2014
Leasehold improvements		$	—			$	—			$	—			$	—
Internal developed software			—				7,260				—				7,260
Software			1,271				799				—				2,070
Furniture, fixtures and equipment			60				(34	)			—				26
Total			1,331				8,025				—				9,356

Note 11 — Commitments and Contingencies:

Legal Proceedings

The Company follows the guidance on contingencies, which is included within ASC Topic 450, Contingencies, which requires the Company to evaluate each contingent matter separately. A loss contingency is recorded if reasonably estimable and probable. The Company establishes reserves for these contingencies at the best estimate, or if no one estimated number within the range of possible losses is more probable than any other, the Company records an estimated reserve at the low end of the estimated range. Contingencies affecting the Company primarily relate to litigation matters which are inherently difficult to evaluate and are subject to significant changes. The Company believes the contingent amounts recorded are adequate and reasonable. As of December 31, 2014, the Company had no reserves for pending litigation.

 

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American Reliable Insurance Company

(A wholly owned subsidiary of American Bankers Insurance Group, Inc.)

Notes to Consolidated Financial Statements

Year Ended December 31, 2014

 

Operating Leases

The Company leases office facilities and equipment under various non-cancelable operating leases that expire through November 30, 2018. Rental expense for the year ended December 31, 2014 is approximately $1,355 and future minimum rental payments are as follows:

 

Year		Amount
2015		$	921
2016			823
2017			782
2018			787
2019			—
Total		$	3,313

The Company has no lessor leasing arrangements or leveraged leases.

Guaranty Fund Assessments

The Company has received notification of the insolvency of various insurance companies. It is expected that these insolvencies will result in guaranty fund assessments against the Company based on premiums already written. As a result, the Company has accrued a guaranty fund liability of $167 at December 31, 2014. The Company established a guaranty fund asset of $2, representing premium tax credits related to this liability plus remaining credits for paid assessments.

Note 12 — Stockholders’ Equity:

Capital

In 2014, the Company received $7,260 of additional paid in capital from its Former Parent in the form of contributed internally developed software.

Dividends

The Company did not pay a dividend in 2014.

Note 13 — Statutory Information

The Company prepares financial statements on the basis of statutory accounting practices (“SAP”) prescribed or permitted by the insurance departments of their states of domicile. Prescribed SAP includes the Accounting Practices and Procedures Manual of the National Association of Insurance Commissioners (“NAIC”) as well as state laws, regulations and administrative rules. The principal differences between SAP and GAAP are: 1) policy acquisition costs are expensed as incurred under SAP, but are deferred and amortized under GAAP; 2) the value of business acquired is not capitalized under SAP but is under GAAP; 3) the classification and carrying amounts of investments in certain securities are different under SAP than under GAAP; 4) the criteria for providing asset valuation allowances, and the methodologies used to determine the amounts thereof, are different under SAP than under GAAP; 5) the timing of establishing certain reserves, and the methodologies used to determine the amounts thereof, are different under SAP than under GAAP; 6) certain assets are not admitted for purposes of determining surplus under SAP; 7) methodologies used to determine the amounts of deferred taxes, intangible assets and goodwill are different under SAP than under GAAP; and 8) the criteria for obtaining reinsurance accounting treatment is different under SAP than under GAAP.

The combined statutory net income and capital and surplus of the Company was $(3,905) and $71,197, respectively, as of December 31, 2014 compared to GAAP income and stockholders’ equity of $(746) and $108,298, respectively.

 

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American Reliable Insurance Company

(A wholly owned subsidiary of American Bankers Insurance Group, Inc.)

Notes to Consolidated Financial Statements

Year Ended December 31, 2014

 

Note 14 — Subsequent Events

On January 1, 2015, the Former Parent closed a transaction to sell its general agency business and primary associated insurance carrier, American Reliable Insurance Company (“ARIC”) to Global Indemnity Group, Inc., a subsidiary of Global Indemnity plc. The sale price is based on GAAP book value of the business as of the date of the closing transaction subject to the re-measurement of unpaid loss and loss adjustment expenses as of December 31, 2014. This re-measurement will occur on December 31, 2017 and could result in either and increase or decrease in the ultimate sale price.

On January 1, 2015, the Company terminated and commuted all balances related to its quota share reinsurance agreement with Bankers Atlantic Reinsurance Company. The impact of the transaction resulted in an increase of $15.2 million of net loss reserves, an increase of $32.2 million of net unearned premium, and a decrease of $54.9 million of funds held by reinsurers.

The Company determined that there were no additional subsequent events impacting the accompanying financial statements as of July 2, 2015.

 

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