State National Companies, Inc.

On July 26, 2017, the Company entered into a definitive agreement with Markel Corporation (“Markel”) to acquire all of the outstanding shares of the Company’s common stock for $21.00 per share cash.  Upon the completion of the transaction, the Company will be a direct, wholly-owned subsidiary of Markel.  The transaction is subject to the approval of relevant state insurance regulators and other customary closing conditions.  The transaction is expected to close in the fourth quarter of 2017. 

Realized net investment gains.  Realized net investment gains decreased by $1.1 million from $2.1 million for the three months ended September 30, 2016 to $1.0 million for the three months ended September 30, 2017.  This decrease was partially the result of the liquidation of fixed maturity securities for the purchase of CNIC and gains on a sale of common stock in the three months ending September 30, 2016.

Losses and loss adjustment expenses.  Losses and loss adjustment expenses incurred in the run-off of the retained business decreased by $1.0 million compared to the nine months ended September 30, 2016.  The decrease is due to changes in the ultimate expected reserve development between periods on the run-off of the retained business.

Net cash used in investing activities increased $66.9 million for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016, primarily due to investing earnings in fixed maturity securities.  The increase also included $32.0 million related to the acquisition of ISIC, net of cash obtained.

Allowance for policy cancellations.  As of September 30, 2017, the allowance for policy cancellations increased by $2.2 million from December 31, 2016, primarily due to the increase in the current quarter volume when compared to the last three months of 2016.  The third and fourth quarters have generated the greatest amount of written premium resulting in an increase in the allowance.  On a quarterly basis, we review our estimates for allowance for policy cancellations to determine whether further adjustments are appropriate.  Any resulting adjustments are included in the current period’s operating results.  The allowance for policy cancellations for the nine months ended September 30, 2017 and 2016 included upward revisions to prior year estimates of $0.4 million and $1.5 million, respectively.  Because of the interplay between the allowance for policy cancellations and the related unearned premium reserve, changes in the allowance for policy cancellations are partially offset by related changes in the unearned premium reserve and amounts ceded to reinsurers.  After taking into account the associated changes in unearned premium and amounts ceded to reinsurers, the net impact to the balance sheet and the corresponding reduction in net income from the revised estimates for the nine months ended September 30, 2017 and 2016 was approximately $0.3 million and $0.7 million, respectively.