Summary of Significant Accounting Policies

9 Months Ended

Sep. 30, 2017

Summary of Significant Accounting Policies

Summary of Significant Accounting Policies

1. Summary of Significant Accounting Policies

Description of Business

State National Companies, Inc. (the “Company”) refers to a group of companies that conducts insurance-related activities along two major segments. The Company’s Program Services segment generates fee income, in the form of ceding fees, by offering issuing carrier capacity to both specialty general agents and other producers (“GAs”), who sell, control, and administer books of insurance business that are supported by third parties that assume reinsurance risk. Substantially all of the underwriting risk associated with the Program Services segment is ceded to unaffiliated, highly rated reinsurance companies or other reinsurers that provide collateral. The Company’s Lender Services segment generates premiums primarily from the sale of collateral protection insurance (“CPI”), which insures automobiles or other vehicles held as collateral for loans made by credit unions, banks and specialty finance companies.

Principles of Consolidation

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

Basis of Presentation

The unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and include the accounts of the Company and all subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial reporting. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the years ended December 31, 2016 and 2015.

The interim financial data as of September 30, 2017 and 2016 is unaudited. However, in the opinion of the Company’s management (“Management”), the interim data includes all adjustments, consisting of normal recurring adjustments, necessary to fairly state the results for the interim period. The results of operations for the period ended September 30, 2017 and 2016 are not necessarily indicative of the operating results to be expected for the full year.

Refer to “Summary of Significant Accounting Policies” in the consolidated financial statements for the three years in the period ended December 31, 2016 for information on accounting policies that we consider critical in preparing consolidated financial statements.

Estimates

The preparation of financial statements in conformity with GAAP requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ materially from these estimates.

Earnings Per Share

The computation of earnings per share is based upon the weighted average number of common shares outstanding during the period plus the effect of common shares potentially issuable (in periods in which they have a dilutive effect).

Income Taxes

For any uncertain tax positions not meeting the “more likely than not” recognition threshold, accounting standards require recognition, measurement, and disclosure in the financial statements. There were no uncertain tax positions at September 30, 2017 and December 31, 2016.

Stock-Based Compensation

Compensation expense for stock-based payments is recognized based on the measurement-date fair value for awards that will settle in shares. Compensation expense for restricted stock grants and stock option awards that contain a service condition are recognized on a straight line pro rata basis over the vesting period. For restricted stock awards that contain a performance condition, the expense is recognized based on the awards expected to vest and the cumulative expense is adjusted whenever the estimate of the number of awards to vest changes. An estimation of future forfeitures of stock-based awards is incorporated into the determination of compensation expense. See Note 8 — “Stock-based Payments” for related disclosures.

Recent Accounting Pronouncements

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

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

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

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

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

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

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

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

In January 2016, the FASB issued ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities” (Sub-Topic 825-10). The amendment in this update supersedes the guidance to classify equity securities with readily determinable fair value into different categories (either trading or available-for-sale) and requires equity securities to be measured at fair value and changes in the fair value to be recognized through net income instead of other comprehensive income. This ASU is effective for annual and interim reports beginning after December 15, 2017. Since the Company’s current position in equities is less than 1% of our current investment portfolio as of September 30, 2017, the Company does not anticipate that the guidance will have a material impact to the Company’s financial statements or cash flows.

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

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

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

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

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

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

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

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

State National Companies, Inc. 10-Q