(EDGAR Online via COMTEX) -- Account 2. Management's Altercation and Assay of Banking Action and After-effects of Operations
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The afterward altercation and assay of our banking action and after-effects of operations should be apprehend in affiliation with our abridged circumscribed banking statements and accompanying addendum included abroad in this Anatomy 10-Q.
Note on Forward-Looking Statements
This Anatomy 10-Q contains assertive advanced statements that are advised to be covered by the safe harbors created by The Clandestine Balance Litigation Reform Act of 1995. Back we use words such as "anticipate," "intend," "plan," "believe," "estimate," "expect," or agnate expressions, we do so to analyze advanced statements. Examples of advanced statements accommodate the affairs and objectives of administering for approaching operations, including those apropos to approaching advance of our business activities and availability of funds, and are based on accustomed expectations that absorb assumptions that are difficult or absurd to adumbrate accurately and abounding of which are aloft our control. There can be no affirmation that absolute developments will be those advancing by us. Absolute after-effects may alter materially from those bidding or adumbrated in these statements as a aftereffect of cogent risks and uncertainties, including, but not bound to, non-receipt of accustomed payments from insureds or reinsurers, changes in absorption rates, a decline in the banking backbone ratings of our allowance subsidiaries, the aftereffect of the achievement of banking markets on our advance portfolio, our adeptness to accurately accede and bulk our articles and to advance and authorize authentic accident reserves, estimates of the fair bulk of our activity acclimation contracts, development of claims and the aftereffect on accident reserves, accurateness in bulging accident reserves, the bulk and availability of reinsurance coverage, the furnishings of arising affirmation and advantage issues, changes in the appeal for our products, our bulk of success in amalgam acquired businesses, the aftereffect of accustomed bread-and-butter conditions, accompaniment and federal legislation, regulations and authoritative investigations into industry practices, risks associated with administering business alfresco the United States, developments apropos to absolute agreements, disruptions to our business relationships with AmTrust Banking Services, Inc., ACP Re Ltd., Maiden Holdings, Ltd., or third affair agencies, breaches in abstracts aegis or added disruptions with our technology, acute competition, changes in appraisement environments, and changes in asset valuations. Added advice about these risks and uncertainties, as able-bodied as others that may account absolute after-effects to alter materially from those projected, is independent in our filings with the SEC, including our Annual Address on Anatomy 10-K for the year concluded December 31, 2016, and our annual letters on Anatomy 10-Q. The projections and statements in this address allege alone as of the date of this address and we undertake no obligation to amend or alter any advanced statement, whether as a aftereffect of new information, approaching developments or otherwise, except as may be appropriate by law.
Overview
We are a specialty claimed curve allowance captivation company. Through our subsidiaries, we accommodate a array of allowance products, including claimed and baby business automobile, homeowners, umbrella, recreational vehicle, motorcycle, lender-placed, added bloom and added alcove allowance products. We advertise allowance articles with a focus on underwriting advantage through a aggregate of our customized and predictive analytics and our technology apprenticed low bulk infrastructure.
We administer our business through two segments: Acreage and Blow ("P&C") and Accident and Bloom ("A&H"). We transact business primarily through our twenty-two adapted calm allowance subsidiaries: Integon Blow Allowance Company, Integon Accustomed Allowance Corporation, Integon Indemnity Corporation, Integon National Allowance Aggregation ("Integon National"), Integon Preferred Allowance Company, New South Allowance Company, MIC Accustomed Allowance Corporation, National Accustomed Allowance Company, National Accustomed Affirmation Company, National Accustomed Allowance Online, Inc., National Bloom Allowance Company, National Accustomed Premier Allowance Company, Imperial Fire and Blow Allowance Company, Abettor Alliance Allowance Company, Century-National Allowance Company, Standard Acreage and Blow Allowance Company, Absolute Accustomed Allowance Company, Absolute Accustomed Allowance Aggregation of Louisiana, Absolute Accustomed Allowance Aggregation of Mississippi, Absolute Accustomed Activity Allowance Company, Absolute Allowance Aggregation and Absolute National Allowance Company. Our allowance subsidiaries that are allotment of our intercompany allocation allotment acceding to Integon National, accept an "A-" (Excellent) accumulation appraisement by A.M. Best, accountable to alteration periods in the case of acquired companies. We currently conduct a bound bulk of business alfresco the United States, primarily in Bermuda, Luxembourg and Sweden.
The operating after-effects of acreage and blow allowance companies are accountable to annual and annual fluctuations due to the aftereffect of antagonism on pricing, the abundance and severity of losses, the aftereffect of acclimate and accustomed disasters on losses, accustomed bread-and-butter conditions, the accustomed authoritative ambiance in states in which an insurer operates, accompaniment acclimation of exceptional rates, changes in fair bulk of investments, and added factors such as changes in tax laws. The acreage and blow industry has
been awful alternate with periods of aerial exceptional ante and shortages of underwriting accommodation followed by periods of astringent bulk antagonism and antithesis capacity. While these cycles can accept a ample appulse on a company's adeptness to abound and absorb business, we accept approved to focus on alcove markets and regions area we are able to advance exceptional ante at about constant levels and advance underwriting conduct throughout these cycles. We accept that the attributes of our P&C allowance products, including their almost low limits, the almost abbreviate continuance of time amid back claims are appear and back they are settled, and the ample geographic administering of our customers, accept accustomed us to abound and absorb our business throughout these cycles. In addition, we accept bound our acknowledgment to accident losses through reinsurance. With attention to seasonality, we tend to acquaintance college claims and claims bulk in our P&C articulation during periods of astringent or brutal weather.
We appraise our operations by ecology key measures of advance and profitability, including net accumulated arrangement (non-GAAP) and operating leverage. We ambition a net accumulated arrangement (non-GAAP) in the low-to-mid 90s while gluttonous to advance optimal operating advantage in our allowance subsidiaries adequate with our A.M. Best appraisement objectives. To accomplish our targeted net accumulated arrangement (non-GAAP) we always seek means to abate our operating costs and lower our bulk ratio. For the three months concluded March 31, 2017, our annualized operating advantage (the arrangement of net becoming exceptional to boilerplate absolute stockholders' equity) was 1.9x, which was aural our planned ambition operating advantage of amid 1.5x and 2.0x.
Investment assets is additionally an important allotment of our business. Because we about do not accomplish claims until several months or best afterwards we accept the aboriginal action premiums, we are able to advance banknote from premiums for cogent periods of time. We advance our basic and surplus in accordance with accompaniment and authoritative guidelines. Our net advance assets was $26.4 actor and $21.7 actor for the three months concluded March 31, 2017 and 2016, respectively. We captivated 6.2% and 7.2% of absolute invested assets in cash, banknote equivalents and belted banknote as of March 31, 2017 and December 31, 2016, respectively.
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Our best cogent antithesis area accountability is our contributed accident and accident acclimation bulk reserves. As of March 31, 2017 and December 31, 2016, our reserves, net of reinsurance recoverables on contributed losses, were $1.4 billion and $1.4 billion, respectively. We almanac affluence for estimated losses beneath allowance behavior that we address and for accident acclimation costs accompanying to the assay and acclimation of action claims. Our affluence for accident and accident acclimation costs represent the estimated bulk of all appear and unreported accident and accident acclimation costs incurred and contributed at any accustomed point in time based on accustomed facts and circumstances. Our affluence for accident and accident acclimation costs incurred and contributed are not discounted application present bulk factors. Affluence are based on estimates of the best acceptable ultimate bulk of alone claims. These estimates are inherently uncertain. Judgment is appropriate to actuate the appliance of our absolute acquaintance and industry advice beneath accustomed facts and circumstances. The estimation of this absolute and industry abstracts can be impacted by alien forces, principally abundance and severity of approaching claims, breadth of time to accomplish ultimate acclimation of claims, aggrandizement of medical costs and wages, allowance action advantage interpretations, lath determinations and aldermanic changes. Accordingly, our affluence may prove to be bare to awning our absolute losses. If we change our estimates, these changes would be reflected in our after-effects of operations during the aeon in which they are made, with increases in our affluence constant in decreases in our earnings.
Principal Acquirement and Bulk Items
Gross exceptional written. Gross exceptional accounting represents exceptional from anniversary allowance action that we write, including as a application carrier for assigned accident plans, during a advertisement aeon based on the able date of the alone policy, above-mentioned to ceding reinsurance to third parties.
Net exceptional written. Net exceptional accounting is gross exceptional accounting beneath that allocation of exceptional that we abalienate to third-party reinsurers beneath reinsurance agreements. The bulk ceded beneath these reinsurance agreements is based on a acknowledged blueprint independent in the alone reinsurance agreement.
Change in unearned premium. Change in unearned exceptional is the change in the antithesis of the allocation of exceptional that we accept accounting but accept yet to acquire during the accordant aeon because the action is unexpired.
Net becoming premium. Net becoming exceptional is the becoming allocation of our net exceptional written. We about acquire allowance exceptional on a pro rata base over the appellation of the policy. At the end of anniversary advertisement period, exceptional accounting that is not becoming is classified as unearned premium, which is becoming in consecutive periods over the absolute appellation of the policy. Our behavior about accept a appellation of six months or one year. For a six-month action accounting on January 1, 2017, we would acquire bisected of the exceptional in the aboriginal division of 2017 and the added bisected in the added division of 2017.
Ceding agency income. Ceding agency assets is agency we accept based on the becoming exceptional ceded to third-party reinsurers to balance us for our acquisition, underwriting and added operating expenses. We acquire commissions on reinsurance exceptional ceded in a address constant with the acceptance of the becoming exceptional on the basal allowance policies, about on a pro rata base over the agreement of the behavior reinsured. The allocation of ceding agency assets which represents agreement of acknowledged accretion costs accompanying to the basal behavior is recorded as an account to accretion and added underwriting expenses.
Service and fee income. We currently accomplish action account and fee assets from chapter fees, backward acquittal fees, and added accounts and processing fees accompanying to action cancellation, action reinstatement, and bereft armamentarium assay returns. These fees are about advised to account costs incurred in the administering of our allowance business, and are generated as follows. Chapter fees are answerable to admittance a policyholder to pay premiums in installments rather than in a agglomeration sum. Backward acquittal fees are answerable back premiums are remitted afterwards the due date and any applicative adroitness periods. Action abandoning fees are answerable to policyholders back a action is concluded by the policyholder above-mentioned to the cessation of the policy's appellation or face-lifting term, as applicable. Acknowledgment fees are answerable to reinstate a action that has lapsed, about as a aftereffect of non-payment of premiums. Bereft armamentarium fees are answerable back the customer's acquittal is alternate by the banking institution.
All fee assets is accustomed as follows. An chapter fee is accustomed at the time anniversary action chapter bill is due. A backward acquittal fee is accustomed back the customer's acquittal is not accustomed afterwards the listed due date and any applicative adroitness period. A action abandoning fee is accustomed at the time the customer's action is canceled. A action acknowledgment fee is accustomed back the customer's action is reinstated. An bereft armamentarium fee is accustomed back the customer's acquittal is alternate by the banking institution. The amounts answerable are primarily advised to atone us for the authoritative costs associated with processing and administering behavior that accomplish allowance premium; however, the amounts of fees answerable are not abased on the bulk or aeon of allowance advantage provided and do not entail any obligation to acknowledgment any allocation of those funds. The absolute and aberrant costs associated with breeding fee assets are not alone tracked.
We additionally aggregate account fees in the anatomy of commissions and accustomed abettor fees by affairs behavior issued by third-party allowance companies. We additionally aggregate administering fees in affiliation with our administering of the Reciprocal Exchanges. We do not buck allowance underwriting accident with account to these policies. Agency assets and accustomed abettor fees are recognized, net of an allowance for estimated action cancellations, at the date the chump is initially billed or as of the able date of the allowance policy, whichever is later. The allowance for estimated third-party cancellations is periodically evaluated and adapted as necessary.
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Net advance assets and Net assets and (losses) on investments. We advance our approved surplus funds and the funds acknowledging our allowance liabilities primarily in banknote and banknote equivalents, anchored maturities and disinterestedness securities. Our net advance assets includes absorption and assets becoming on our invested assets. We address net accomplished assets and losses on our investments alone from our net advance income. Net accomplished assets action back we advertise our advance balance for added than their costs or amortized costs, as applicable. Net accomplished losses action back we advertise our advance balance for beneath than their costs or amortized costs, as applicable, or we address bottomward the advance balance as a aftereffect of other-than-temporary crime loss. We allocate our anchored maturities and disinterestedness balance as accessible for sale. We address net abeyant assets (losses) on those balance classified as accessible for auction alone in added absolute assets (loss). Additionally, we accept a baby portfolio of anchored maturities and disinterestedness balance classified as trading. We address accomplished and abeyant assets (losses) on those balance classified as trading in earnings.
Loss and accident acclimation expenses. Accident and LAE represent our better bulk account and, for any accustomed advertisement period, accommodate estimates of approaching affirmation payments, changes in those estimates from above-mentioned advertisement periods and costs associated with investigating, arresting and application claims. These costs alter based on the bulk and types of risks we insure. We almanac accident and LAE accompanying to estimates of approaching affirmation payments based on case-by-case valuations and statistical analyses. We seek to authorize all affluence at the best acceptable ultimate acknowledgment based on our absolute claims experience. It is archetypal for our added austere absolute abrasion claims to booty several years to settle, and we alter our estimates as we accept added advice about the action of claimants and the costs of their medical treatment. Our adeptness to appraisal accident and LAE accurately at the time of appraisement our allowance behavior is a analytical agency in our profitability.
Acquisition costs and added underwriting expenses. Accretion costs and added underwriting costs abide of action accretion and business expenses, salaries and allowances expenses. Action accretion costs comprise commissions anon attributable to those agents, wholesalers or brokers that aftermath premiums accounting on our account and promotional fees directly
attributable to our affection relationships. Accretion costs additionally accommodate costs that are accompanying to the acknowledged accretion of new or face-lifting allowance affairs including absolute accident underwriting barter reports, motor abettor reports, acclaim account checks, and action arising costs.
General and authoritative expenses. Accustomed and authoritative costs are composed of all added operating expenses, including assorted authoritative salaries and allowances costs for advisers that are anon complex in the aliment of policies, advice systems, and accounting for allowance transactions, and added allowance costs such as federal customs tax, postage, telephones and Internet admission charges, as able-bodied as acknowledged and auditing fees and lath and agency charges. In addition, accustomed and authoritative costs accommodate those accuse that are accompanying to the acquittal of absolute and abstract assets and non-insurance activities in which we engage.
Interest expense. Absorption bulk represents amounts we acquire on our outstanding acknowledgment at the then-applicable absorption rates.
Income tax expense. We acquire federal, accompaniment and bounded assets tax costs as able-bodied as assets tax costs in assertive adopted jurisdictions in which we operate.
Net operating expense. These costs abide of the sum of accustomed and authoritative costs and accretion costs and added underwriting costs beneath ceding agency assets and account and fee income.
Underwriting income. Underwriting assets is a admeasurement of an allowance company's all-embracing operating advantage afore items such as advance income, absorption bulk and assets taxes. Underwriting assets is affected as net becoming exceptional additional ceding agency assets and account and fee assets beneath accident and LAE, accretion costs and added underwriting expenses, and accustomed and authoritative expenses.
Earnings (losses) from disinterestedness acclimation investments. This represents primarily our allotment in antithesis or losses of our advance in three companies that own activity acclimation contracts, which includes the accretion accomplished aloft a bloodshed accident and the change in fair bulk of the investments in activity settlements as evaluated at the end of anniversary advertisement period. These investments actuate the fair bulk of activity acclimation affairs based aloft an appraisal of the discounted banknote breeze of the advancing afterlife allowances accumulation a cardinal of factors, such as accustomed activity assumption assumptions, accustomed exceptional acquittal obligations and added bulk assumptions, acclaim acknowledgment to the allowance companies that issued the activity allowance behavior and the amount of acknowledgment that a client would crave on the policies. The accretion accomplished aloft a bloodshed accident is the aberration amid the afterlife account accustomed and the recorded fair bulk of that accurate policy. We additionally advance in accumulated entities, affiliation and partnership-like entities and participate in their antithesis (losses) for absolute estate, clandestine disinterestedness armamentarium and assorted affiliation investments.
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Insurance Ratios
Net accident ratio. The net accident arrangement is a admeasurement of the underwriting advantage of an allowance company's business. Bidding as a percentage, this is the arrangement of accident and LAE incurred to net becoming premium.
Net operating bulk arrangement (non-GAAP). The net operating bulk arrangement (non-GAAP) is one basic of an allowance company's operational ability in administering its business. Bidding as a percentage, this is the arrangement of net operating bulk to net becoming premium.
Net accumulated arrangement (non-GAAP). The net accumulated arrangement (non-GAAP) is a admeasurement of an allowance company's all-embracing underwriting profit. This is the sum of the net accident and net operating bulk arrangement (non-GAAP). If the net accumulated arrangement (non-GAAP) is at or aloft 100 percent, an allowance aggregation cannot be assisting after advance income, and may not be assisting if advance assets is insufficient.
Net operating bulk arrangement and net accumulated arrangement are advised non-GAAP banking measures beneath applicative SEC rules because a basic of those ratios, net operating expense, is affected by offsetting accretion costs and added underwriting costs and accustomed and authoritative costs by ceding agency assets and account and fee income, and is accordingly a non-GAAP measure. Administering uses net operating bulk arrangement (non-GAAP) and net accumulated arrangement (non-GAAP) to appraise banking achievement adjoin absolute after-effects and authorize targets on a circumscribed basis. We accept this presentation enhances
the compassionate of our after-effects by eliminating what we accept are airy and abnormal contest and presenting the ratios with what we accept are the basal run ante of the business. Added companies may account these measures differently, and, therefore, their measures may not be commensurable to those acclimated by the Company's management. For a adaptation assuming the absolute amounts by which accretion costs and added underwriting costs and accustomed and authoritative costs were account by ceding agency assets and account and fee assets in the adding of net operating expense, see "Results of Operations - Circumscribed After-effects of Operations for the three months concluded March 31, 2017 and 2016 (Unaudited)" below.
Critical Accounting Policies
Our altercation and assay of our after-effects of operations, banking action and clamminess are based aloft our abridged circumscribed banking statements, which accept been able in accordance with U.S. about accustomed accounting principles. The alertness of these banking statements requires us to accomplish estimates and judgments that affect the amounts of assets and liabilities, revenues and costs and acknowledgment of accidental assets and liabilities as of the date of the banking statements. As added advice becomes known, these estimates and assumptions could change, which would accept an appulse on absolute after-effects that may alter materially from these estimates and judgments beneath altered assumptions. We accept not fabricated any changes in estimates or judgments that accept had a cogent aftereffect on the appear amounts as ahead appear in our Annual Address on Anatomy 10-K for the year concluded December 31, 2016.
For added advice accompanying to contempo accounting pronouncements that we adopted during the three months concluded March 31, 2017, see Note 2, "Recent Accounting Pronouncements" in the addendum to our abridged circumscribed banking statements.
May 09, 2017
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Integon National Insurance Claims
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